The depreciation of aircraft is a specialist area of depreciation accounting. The Financial Reporting Standard 15: Tangible Fixed Assets requires that the major components of an asset that have substantially different economic useful lives from the rest of the asset should be accounted for separately for depreciation purposes. Each component is depreciated over its individual useful economic life, so that the depreciation profile of the whole asset more accurately reflects the actual consumption of the asset’s economic benefits. In the case of an aircraft, it is normal practice to split the asset as follows:

Airframe - cost depreciated over 25 years to residual value, capitalized maintenance depreciated over the period to the next overhaul.

Engines - cost depreciated over 10 years to residual value, capitalized maintenance depreciated over the period to the next overhaul.

Landing gear - cost depreciated over 7 years to residual value, capitalized maintenance depreciated over the period to the next overhaul.

Spare parts - cost depreciated over 10 years.

When an aircraft is purchased, the remaining period through to the next overhaul is implicit in the asset (an airworthy aircraft). It is therefore appropriate to allocate to the separately identified overhaul components the cost of overhaul as at the purchase date. For example, if the last engine overhaul was 2 years previously, the quantum of the component at the date of purchase is the depreciated replacement cost of an overhaul with one year’s useful life remaining.

The effect of the above is likely to increase the depreciation charge considerably when this accounting policy replaces more traditional "straight-line" depreciation accounting policies. The depreciation charge is likely to be even higher if maintenance has been capitalized on overhauls which are due frequently, i.e. less than seven years.

De*pre`ci*a"tion (?), n. [Cf. F. d'epr'eciation.]

1.

The act of lessening, or seeking to lessen, price, value, or reputation.

2.

The falling of value; reduction of worth.

Burke.

3.

the state of being depreciated.

 

© Webster 1913.

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