Which statement accurately describes depreciation under the cost model for PPE?

Which statement accurately describes depreciation under the cost model for PPE?

• A. Depreciation is calculated on the basis of fair value.
• B. Depreciation is based on cost less accumulated depreciation and impairment.
• C. Depreciation is not charged under the cost model.
• D. Depreciation is based on market value changes.

Answer: (B)

Under the cost model, property, plant and equipment are carried at cost less accumulated depreciation and impairment losses. Depreciation is a systematic allocation of the asset’s depreciable amount—typically cost minus residual value—over its useful life. If impairment occurs, the carrying amount is reduced, and future depreciation is calculated from this revised amount. So saying depreciation is based on cost less accumulated depreciation and impairment reflects how the asset’s carrying amount is maintained under this model. Revaluations to fair value or market value aren’t part of the cost model.

Under the cost model, property, plant and equipment are carried at cost less accumulated depreciation and impairment losses. Depreciation is a systematic allocation of the asset’s depreciable amount—typically cost minus residual value—over its useful life. If impairment occurs, the carrying amount is reduced, and future depreciation is calculated from this revised amount. So saying depreciation is based on cost less accumulated depreciation and impairment reflects how the asset’s carrying amount is maintained under this model. Revaluations to fair value or market value aren’t part of the cost model.