In current cost accounting (CCA), assets are shown in the balance sheet at the current replacement costs after allowing for depreciation. This also requires an adjustment for depreciation.
Formula
Use the following formula to calculate the current year’s depreciation under CCA:
To calculate the depreciation adjustment, the following formula can be used:
Depreciation adjustment = Current year’s depreciation on CCA – Depreciation on historical cost
Example
A machine was purchased on 1 January 2014 at a cost of $1,000,000. Its useful life was estimated at 10 years. The machine’s replacement cost was $180,000 on 1 January 2019 and $2,000,000 on 31 December 2019. Calculate the depreciation adjustment.
Solution
Current year’s depreciation (CCA method) = (180,000 + 2,000,000) / (2 x 10)
= $190,000
Historical depreciation = 1,000,000 / 10 = $100,000
Depreciation adjustment = Current year’s depreciation on CCA – Historical depreciation
= 190,000 – 100,000
= $90,0000