Group depreciation definition
/What is Group Depreciation?
Group depreciation is the practice of assembling several similar fixed assets into a single group, which is used in aggregate as the cost base for depreciation calculations. Assets should only be assembled into a group if they share similar characteristics and have approximately the same useful lives. Examples of group depreciation are "group of desks" and "group of trucks" that are treated as single assets.
Group depreciation should be calculated on the straight-line basis. When an asset recorded as part of a group is retired, the related asset cost and accumulated depreciation are removed from the group's asset balance and accumulated depreciation, respectively.
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When Not to Use Group Depreciation
The use of group depreciation can reduce the time required to calculate depreciation, especially when large numbers of assets are aggregated into a single group. However, the practice is not recommended for the reasons noted below. Consequently, though there may be an occasional use for group depreciation, the concept is rarely employed.
Computerized Depreciation
If accounting software is used to automate the calculation of depreciation, no labor is saved by using group depreciation. This is now the case for most businesses.
Capitalization Limit
A large number of small-expenditure items can be clustered into a group and treated as a fixed asset, even though they would have been charged to expense if treated as individual units that fall below the corporate capitalization limit. This means that the use of group depreciation can alter the amount of reported profitability by deferring expense recognition. The result is a one-time boost in profits, followed by reduced profits over multiple periods as the extra depreciation is recognized.
Asset Tracking
It can be difficult to physically track every asset comprising an asset group.
Asset Disposal
The disposal accounting for an asset within an asset group can be confusing, especially when it is not certain which group an asset was assigned to.
Group Characteristics
An asset may be fraudulently inserted into the wrong asset group in order to take advantage of the longer useful life or larger salvage value assumptions used for that group (which would effectively delay expense recognition for the asset).
Example of Group Depreciation
The Sweet Candy Cane Company buys five candy cane extruder machines at the same time. Each one costs $50,000, for a total expenditure of $250,000. The company’s accountant estimates that these machines will have a ten-year life and no salvage value. Based on this information, and the uniformity of the underlying assets, the accountant could use group depreciation to depreciate all of the assets together. This amount would be $25,000 per year, which is calculated as $250,000 cost ÷ 10 years = $25,000 depreciation per year. At the end of ten years, the accountant would have charged the full $250,000 of depreciation to expense, resulting in a carrying amount of $0 for the five candy cane extruders. This example illustrates a situation in which it makes sense to depreciation a group of identical assets together, rather than individually.