Backlog Depreciation

Backlog Depreciation: Definition

Whenever an asset is revalued, the profit on revaluation is transferred to the revaluation reserve account. However, the revaluation also gives rise to backlog depreciation.

This backlog depreciation should be charged to the revaluation reserve account. The concept of backlog depreciation is illustrated in the next section.

Formula to Calculate Backlog Depreciation

Backlog depreciation = Difference in depreciation – Depreciation chargeable in current year

Example

Compute the backlog depreciation using the information given below:

A machine was purchased on 1 January 2013 at a cost of $12,000,000
The machine’s useful life is estimated at 10 years
The machine’s replacement cost was $20,000,000 on 1 January 2018 and $22,000,000 on 31 December 2018

Solution

Replacement cost of the machine on 1/1/2018 (Current value) = $20,000,000
Expired life on 1 January 2018 = 5 years
Depreciation under CCA = (20,000,000 x 5) / 10 = $1,000,000
Replacement/Current value on 12/31/2018 = $22,000,000
Expired life on 31 December 2018 = 6 years
Depreciation under CCA = (22,000,000 x 6) / 10 = $13,200,000
Difference in Depreciation = 13,200,000 – 10,000,000 = $3,200,000
Current year’s depreciation = (20,000,000 + 22,000,000) / (2 x 10) = $2,100,000
Backlog depreciation = Difference in depreciation – depreciation chargeable in current year
= 3,200,000 – 2,100,000
= $1,100,000

Frequently Asked Questions

How is backlog depreciation calculated?

Backlog Depreciation is calculated by subtracting the current year’s Depreciation from the difference in Depreciation between the replacement cost and expiry of useful life.

How is backlog depreciation treated under CCA?

The entire charge will be shifted to the revaluation reserve account, which is a component of equity similar to share capital. However, the portion of Depreciation that is charged to revaluation reserve account should be reversed into capital. If this is not done, the balance will remain in the account and will be removed by using it as an additional charge towards replacement cost on next valuation.

Why is backlog depreciation needed?

Backlog Depreciation arises due to the inconsistency of revaluation of assets. Hence this amount is transferred to the revaluation reserve account which has a higher tax credit compared to normal Depreciation charges.

How is backlog depreciation calculated in the case of depreciation on original cost?

Backlog Depreciation will be equal to difference in Depreciation between replacement cost and expired life. For example, if the current value of an asset is $10,000 and its accounting life has expired, then backlog Depreciation = $10,000 – $0 = $10,000.

How is backlog depreciation calculated in the case of depreciation on revalued amount?

Backlog Depreciation will be equal to difference between current replacement cost and expired life. For example, if the current value of an asset is $10,000 and its accounting life has expired, then backlog Depreciation = $12,000 – $10,000 = $2,000.

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.