Interpretation No. 10 of the Accounting Standards for Business Enterprises

Depreciation Methods Based on Income Generated from Fixed Assets

1. Key Principles

This issue primarily relates to "Accounting Standards for Business Enterprises No. 4 — Fixed Assets" (Cai Kuai [Year 2006] Document No. 3, hereinafter referred to as Standard No. 4).

II. Key Issues Involved

Article 17 of Rule No. 4 stipulates that enterprises shall reasonably select a depreciation method for fixed assets based on the expected manner in which economic benefits associated with those assets will be realized. Acceptable methods include straight-line, units-of-production, double-declining balance, and sum-of-the-years'-digits.

Based on the above regulations, can depreciation be calculated based on income generated from economic activities involving the use of fixed assets?

III. Requirements for Accounting Recognition, Measurement, and Presentation

When selecting a depreciation method for property, plant, and equipment in accordance with the provisions of paragraph 4, an entity shall base its decision on the expected pattern of consumption of the economic benefits associated with the asset. Because revenue may be affected by factors such as inputs, production processes, and sales—which are unrelated to the expected consumption pattern of the asset's economic benefits—an entity shall not depreciate based on revenue generated from economic activities that include the use of the asset.

IV. Effective Date and Transition

This interpretation takes effect on 2018/1/1 and shall not be applied retrospectively. For fixed assets recognized prior to the effective date that were not accounted for in accordance with this interpretation, depreciation amounts for prior periods shall not be adjusted, and cumulative effects shall not be calculated. Starting from the effective date, depreciation shall be accrued in future periods based on the reassessed depreciation method.