How to Switch Depreciation Methods

The Internal Revenue Service allows a U.S. company to change an asset's depreciation method one time during the asset's lifetime. Companies typically switch from accelerated depreciation methods -- such as declining balance or sum-of-the-year digits methods -- to straight-line depreciation in the later years of an asset's lifetime. It is during these later years that the annual depreciation expense from an accelerated depreciation method falls below that available from the straight-line method. The Financial Accounting Standards Board Statement 154 relieves companies from the obligation to restate previous financial statements when changing a depreciation method.

• 1

  Identify the current year's depreciation expense for an asset subject to accelerated depreciation. Each year's depreciation expense was determined at the time of the asset's purchase by the choice of depreciation method made by the company.

• 2

  Identify for the current year the total remaining depreciable balance of an asset currently subject to accelerated depreciation. The depreciable balance is the initial purchase cost less salvage value and accumulated depreciation. For accelerated depreciation methods, this balance decreases each year at a decreasing rate.

• 3

  Divide the current depreciable balance by the remaining years of the asset's depreciable lifetime. This would be the current year's depreciation expense under the straight line method. If the straight-line expense is larger than the accelerated depreciation expense for the year, the company should switch to the straight-line method.