Depreciation

A simplistic example of this relating to depreciation would be as follows. Two companies invest in a new computer system costing £100,000. One company may have a policy to depreciate this over five years, while the other may depreciate it over four years. In the third year this could mean the following.

The costs in company A in the third year would be 20,000 compared with 25,000 in company B and the balance sheet value of the fixed asset would be 40,000 in company A and 25,000 in company B. This would make company A appear more profitable and worth more. Both these options would be acceptable under the guidelines of the financial reporting standards. Although the information on depreciation policy has to be disclosed in the published accounts, the complexity of this information on all fixed assets can make true competitor comparisons difficult. The recommended website gives information on the impact of depreciation and the different methods of calculation.