Depreciation Definition

GLOSSARY

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What does Depreciation mean?

The charge in a company’s accounts which reflects the reduction in value of an asset over time as its useable life is exhausted. Depreciation is charged before calculation of profit, on the grounds that the use of capital assets is one of the costs of being in business and one of the contributors to profit. There are two main methods of depreciation: • Straight line: the residual (scrap) value of the asset is deducted from its original cost, and the resultant figure is divided by the estimated life of the asset. The result of that is deducted annually over the life of the asset. So an asset that costs £10,000 and that has a residual value of £200 with a useable life of 4 years is depreciated by £2450 per year. • Reducing balance: the amount of annual depreciation is a constant proportion of the cost of the asset. Depreciation has no effect on cash flow. It is just an accounting procedure.

View the related checklists about Depreciation

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Best Practice Guide for Term Sheet Completeness—Explainer

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Discover our 172 Practice Notes on Depreciation

Share purchase agreement—pro-buyer—corporate seller—conditional—long form

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Share purchase agreement—pro-buyer—individual sellers—conditional—long form

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Dive into our 50 Precedents related to Depreciation

A council is buying back land by agreement in relation to a possible compulsory purchase order. A seller is being paid the market value of their property as well as compensation in the form of disturbance payments and statutory loss. The seller does not want the amount set out in this way in the transaction documents but wants the full figure reflected in the TR1. How should this be reflected in the TR1, eg should option 1 in panel 8 be used or option 3 (other receipts). By using ‘other receipts’, would this have any effect on the stamp duty land tax payment?

A council is buying back land by agreement in relation to a possible compulsory purchase order. A seller is being paid the market value of their property as well as compensation in the form of disturbance payments and statutory loss. The seller does not want the amount set out in this way in the transaction documents but wants the full figure reflected in the TR1. How should this be reflected in the TR1, eg should option 1 in panel 8 be used or option 3 (other receipts). By using ‘other receipts’, would this have any effect on the stamp duty land tax payment? It is commonly the case that a local authority will seek to negotiate with landowners while a compulsory purchase order is being sought. The general compensatory principle is that the forced seller should be put in an equivalent position meaning that they are no worse off in financial terms after the acquisition than they were before, but also should be no better off. The...

Can a law firm be liable to its client in a transaction where a loss is sustained through currency fluctuation?

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See the 13 Q&As about Depreciation

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UT considers intangible assets related party rules in context of LLP profits calculation (Muller UK and Ireland Group LLP v HMRC)

Tax analysis: In Muller UK and Ireland Group LLP and others v HMRC, the Upper Tribunal (UT) considered an appeal against a decision of the First-tier Tax Tribunal (FTT) that amortised depreciation debits in respect of intangible assets transferred by corporate members to an LLP were correctly disallowed by HMRC on the basis of the related party exception within section 882 of the Corporation Tax Act 2009 (CTA 2009). The UT dismissed the appellants’ appeals.

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GLOSSARY