Straight-Line vs. Accelerated Depreciation

Overview

Two primary methods used to calculate Depreciation & Amortization (D&A) expense for tangible Assets over their Useful Life. While total depreciation is the same over the asset’s life under both methods, the timing differs significantly.

Methods

1. Straight-Line Depreciation:
   • Allocates an equal amount of depreciation expense in each period of the asset’s useful life.
   • Formula: $(AssetHistoricalCost-SalvageValue)/UsefulLife$
2. Accelerated Depreciation:
   • Allocates higher depreciation expense in the earlier years and lower expense in the later years.
   • Examples include Double Declining Balance (DDB) and Sum-of-the-Years’ Digits (SYD).

Reporting Preferences

• US GAAP Financial Reporting: Most companies prefer Straight-Line.
  • Reason: Results in lower expense initially, boosting reported Net Income and Earnings Per Share (EPS) in the short term.
• Tax Reporting: Companies often use Accelerated methods for tax purposes where allowed.
  • Reason: Higher depreciation expense initially reduces taxable income, thus deferring tax payments (creating Deferred Tax Liabilities (DTLs)).

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See also: Depreciation & Amortization (D&A), Useful Life, Salvage Value