Method of Depreciation

The basic requirement is that the method of depreciation selected for assigning depreciation costs to cost accounting periods must reflect the pattern of consumption services over the estimated service life. With certain exceptions the method used for financial accounting purposes must be used for contract cost accounting. If this method does not reasonably reflect expected consumption or is unacceptable for financial tax purposes then another method may be selected.

Factors to be taken into account for estimating the consumption of asset services are the same ones used for estimating service life discussed above e.g. quantity and quality of expected output, costs of repairs and maintenance. Examples of how these factors of output may be measured include hours of operation, number of operations, number of units or number of miles. An acceptable surrogate measurement for output or activity might be a monetary measurement of output such as estimated labor dollars, total cost incurred or total revenues. Contractors are often concerned about the evidence they should have available to support their depreciation method but CAS 409 offers no guidelines. Absent reliable data for measuring asset services, the expected consumption of services may be represented by the passage of time.

Though many accounting texts provide for many different types of depreciation methods the standard provides for three categories of methods: both straight-lie and accelerated methods are mentioned by name and though not mentioned by name but alluded to in concept is the units-of-production method. When a contractor chooses to associate depreciation with a group of assets rather than individual assets, the standard permits contractors to group assets in either of two ways: group depreciation – two or more assets with similar useful life are treated as a single group or composite depreciation – same as group except the assets in the group have varying useful lives.

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