What Is Group Depreciation?
Group depreciation combines similar fixed assets into a pool with a common cost base for calculating depreciation on financial statements. The assets grouped together should be similar in the way they function, or each asset should be small enough that it is not considered material on its own.
Because modern accounting software easily records depreciation for individual assets, the use of group depreciation, also known as "composite depreciation", has become less common.
- Group depreciation combines similar fixed assets into a pool with a common cost base for calculating depreciation on financial statements.
- By pooling assets that are similar in nature, a company can simplify its depreciation calculation, saving it time and money.
- Assets can only be assembled into a group if they share similar characteristics and have the same useful lives.
- Because modern accounting software easily records depreciation for individual assets, the use of group depreciation has become less common.
Understanding Group Depreciation
Depreciation is an accounting technique that allows business owners to write off an asset's value gradually—commonly over the course of its useful life or life expectancy. Rather than realizing the entire cost in year one, depreciating the asset enables companies to spread out that cost and match it to associated revenues.
Companies generally make lots of purchases over the years, giving them numerous assets and expenses to keep track of. To make life easier, it’s sometimes possible to get around this arduous exercise by depreciating a group of similar assets as a single entity, rather than individually.
By pooling assets that are similar in nature, such as office equipment or delivery trucks that travel about the same distance every year, a company can simplify its depreciation calculation and save time and expense for accounting and auditing tasks. When applied correctly, this can be achieved without compromising accuracy.
Group Depreciation Requirements
Before deciding to pool assets into one group, it is important to consider how each asset will be depreciated individually, a process known as unit depreciation, and whether it makes sense to group this asset with any others.
Assets can only be assembled into a group if they share similar characteristics and have roughly the same useful lives—the number of years they’re likely to remain in service for the purpose of cost-effective revenue generation.
In general, group depreciation is meant to be used for multiple smaller items of lower cost. The Financial Accounting Standards Board (FASB), an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies in the United States, recommends that unit depreciation is applied to fixed assets that have large unit costs and are comparatively few in number and that group depreciation be applied to assets that are significant in number and have relatively small values.
These are suggestions, though, rather than requirements. In some cases, it is also possible for larger, more expensive items, including buildings, to be pooled together for group depreciation purposes.
Limitations of Group Depreciation
Group depreciation is, as previously mentioned, becoming rarer. Before, it was used to save time and money. Now there’s less incentive to group assets together as there’s accounting software capable of automating depreciation calculations.
Group depreciation has lost its luster as inexpensive accounting software can now track depreciation for individual assets with relative ease.
Group depreciation has also attracted some controversy. Among the biggest concerns is that an asset could purposely be inserted into a group composed of others with longer useful lives or larger salvage value assumptions. Taking such action would effectively delay expense recognition for the misplaced asset, triggering a boost in profits.