Backlog Depreciation

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on October 13, 2021

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

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

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

True contributes to his own finance dictionary, 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.

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