How to Depreciate a Wrecked Vehicle

Wrecked vehicles can lose value and useful lifespan.

Depreciation is both the decrease in an asset's value due to its usage and the accounting procedure used to represent this phenomenon on the accounts. In each period that a depreciable asset is used, a set portion of its depreciable value is deducted as a periodic depreciation expense to represent its diminishing value due to usage. Periodic depreciation expense is calculated by factoring in the asset's fair market value, its useful lifespan, and its potential residual value upon being sold as scrap into a mathematical formula called a depreciation method. Severe damage to vehicles incurred in accidents is treated as a change to these parameters.

Instructions

1. Determine the extent of the damage and whether the vehicle can continue to be used once it is repaired. If the damage is so great that even repairs are no longer feasible, then the vehicle is considered lost and can no longer be depreciated. Instead, its entire value minus accumulated depreciation is written off as a loss in that single period.

2. Send the car in to be repaired.

3. Determine the car's new useful lifespan and new residual value upon disposal if these parameters have changed. Useful lifespan being the length of time that the asset is expected to remain useful at its intended purpose, and residual value being its estimated value upon becoming useless and being sold as scrap. Both parameters can be determined by asking for an appraisal.

4. Calculate the vehicle's new periodic depreciation expense using new parameters, if any, after accounting for the passage of time. Calculation should be done using the same depreciation method used before the accident, since changing the depreciation method is frowned upon without good reason.

References

• IAS Plus: IAS 1, Presentation of Financial Statements
• IAS Plus: IAS 16, Property, Plant, and Equipment