What is the depreciation of an asset?

Depreciation is the loss/decrease in value of an asset. Depreciation is the accounting method used to recognise a loss in the value of an asset. This depreciation is recorded at the end of the accounting period. The difference between the two is called the “unrealised loss”.

Impairment losses are reversible. To reverse or cancel it, an entry must be made to reverse the impairment:

• by crediting the appropriate account (write-back of depreciation and provisions)
• by debiting the provision for depreciation account

The amount of the reversal can never exceed the total impairment losses recognised.

Which assets are affected by impairment?

There are 4 types of asset concerned by depreciation in accounting terms.

Depreciation of investments

At the close of the accounts, the securities must be revalued. This valuation is based on the stock market price. The current value (inventory value) must be compared with the purchase value of the securities. There is a depreciation if the current value of the security is less than its purchase value. This is known as an unrealised loss. An entry for depreciation of the securities must be recorded.

Stocks depreciation

Inventories correspond to goods and services that are either going to be resold by the company or entirely consumed in the course of production. Depreciation occurs when there is a reduction in the initial expected value of the inventory. This decline may be due, for example, to a deterioration in the stock, or a change in consumer trends or attitudes.

Depreciation of trade receivables

Trade receivables are all amounts owed to a company in connection with sales of goods or services. In the case of impairment, this corresponds to the portion of receivables that the company risks not recovering (for example, in the event of customer payment difficulties).

Depreciation of non-depreciable fixed assets

Firstly, a fixed asset is an asset intended to be used on a long-term basis for a company’s business. There are three types of fixed asset:

• Tangible fixed assets: e.g. vehicles, premises, equipment, etc.
• Intangible fixed assets: these represent the company’s intangible assets.
• Financial fixed assets: corresponding to intangible financial assets (equity interests, loans granted to other companies, etc.).

The assets concerned by impairment are non-depreciable fixed assets. In the case of compatibility, this impairment represents a loss of value of the property due to market trends.