Group depreciation is an approach to calculation of depreciation expense which lumps together a number of related assets and depreciate them using a weighted average useful life.
Group depreciation is easier to apply as compared to more refined depreciation calculation approaches such as component depreciation or unit depreciation. It is because under this approach, you don’t need to keep track of date of acquisition, accumulated depreciation, remaining useful life, etc. of each individual asset. Group depreciation makes most sense in case of a large number of very similar low-value assets.
Group depreciation is not very appropriate for high-value assets due to a number of reasons:
- Due to averaging-out, it is not exactly in line with the matching concept because it doesn’t correctly allocate depreciation expense between different periods.
- Because separate accumulated depreciation and carrying amount are not available for each asset, no gain or loss on disposal of assets can be accurately determined.
- Because the number of high-value assets is low, adopting group depreciation doesn’t make sense from the perspective of cost-benefit and materiality more so in an increasingly computerized accounting environment.
Accounting standards show clear preference (an in most cases, requirement) for adopting unit depreciation or even component depreciation. Unit depreciation is a depreciation approach which works out depreciation expense for each asset separately and component depreciation is a depreciation method which involves breaking an asset to ‘sub-asset’ components if they have significantly different residual values and useful lives and charging depreciation on each component.
No gain or loss is recognized on retirement of fixed assets accounted for under the group depreciation because carrying values for individual assets can't be worked out. Retirement of an asset contained in a group of assets which are depreciated together is recorded by debiting the cash received, crediting the whole cost of the asset and debiting accumulated depreciation for the difference.
Calculating Group Depreciation Rate
The annual group depreciation rate equals total annual depreciation expense divided by total cost of the group of assets which are depreciated. Total annual depreciation is calculated by dividing the cost of each asset in the group by its useful life and summing annual depreciation expense of all assets in the group.
The weighted-average useful life of the group of assets can be calculated as 1 divided by the group depreciation rate.
You work for King Fort Transit Commission as a financial accountant. You must come up with depreciation policy for the access control and revenue collection system.
The following table shows the assets that form an integral part of the system, their residual values, useful lives and annual depreciation:
|Asset||Cost||Residual Value||Depreciable Cost||Useful Life||Depreciation|
|Ticket vending machines||$5,000||$500.00||$4,500||5||$900|
The group depreciation rate is 19.07% ($3,147/$16,500). The average useful life is 5.24 (1/19.07%). This is the rate that can be applied to each asset that is added to the system to work out its depreciation.
Let's say an asset costing $20,000 is sold for $8,000, it would be recorded using the following journal entry: