Finance & accounting
Fixed asset depreciation methods for Philippine companies
Straight-line, declining balance and units-of-production depreciation explained, with examples, useful life, residual value and book vs. tax considerations.
Depreciation spreads the cost of property and equipment over the years the asset is used. For Philippine companies reporting under PFRS, property, plant and equipment is depreciated using a method that reflects how the asset's benefits are consumed, most often straight-line. Tax rules allow certain methods as well, so many companies maintain book and tax depreciation separately where they differ.
Key terms
| Term | Meaning |
|---|---|
| Cost | Purchase price plus costs to bring the asset into use (delivery, installation) |
| Useful life | Period the company expects to use the asset |
| Residual value | Estimated amount recoverable at the end of the useful life |
| Depreciable amount | Cost − residual value |
| Carrying amount | Cost − accumulated depreciation − impairment |
Straight-line method
Equal depreciation every period.
Formula: (cost − residual value) ÷ useful life
Example: a delivery truck costs ₱2,400,000, has a residual value of ₱400,000 and a useful life of 5 years. Annual depreciation = (₱2,400,000 − ₱400,000) ÷ 5 = ₱400,000 per year, or ₱33,333.33 per month.
Declining balance method
Higher depreciation in early years, falling over time. A common version is double declining balance, using twice the straight-line rate applied to the carrying amount.
Example (same truck, ignoring residual value until the end): straight-line rate 20%, so double declining rate 40%.
| Year | Opening carrying amount | Depreciation (40%) | Closing carrying amount |
|---|---|---|---|
| 1 | ₱2,400,000 | ₱960,000 | ₱1,440,000 |
| 2 | ₱1,440,000 | ₱576,000 | ₱864,000 |
| 3 | ₱864,000 | ₱345,600 | ₱518,400 |
| 4 | ₱518,400 | ₱118,400* | ₱400,000 |
| 5 | ₱400,000 | 0 | ₱400,000 |
*Limited so the carrying amount does not fall below residual value.
Units-of-production method
Depreciation based on usage, suitable for machines whose wear depends on output or hours.
Formula: (cost − residual value) ÷ total expected units × units this period
Example: a machine costs ₱5,000,000, residual ₱500,000, expected to produce 900,000 units. This year it produced 150,000 units. Depreciation = ₱4,500,000 ÷ 900,000 × 150,000 = ₱750,000.
Choosing a method
- Straight-line for most buildings, furniture, IT equipment and vehicles
- Declining balance where assets lose value fastest early, such as some technology
- Units of production for production equipment with variable use
Review useful lives and residual values periodically and adjust prospectively when expectations change.
Book vs. tax depreciation
The Tax Code allows depreciation methods such as straight-line, declining balance and sum-of-the-years'-digits, subject to conditions, and BIR regulations limit deductions for certain assets, such as some vehicles. Where tax rules differ from your accounting policy, track both and account for deferred tax as your framework requires. Agree the approach with your auditor and tax adviser.
Components and impairment
Large assets can have components with different lives, such as a building's structure and its elevators. Depreciate significant components separately. Review assets for impairment when there are indications their carrying amount may not be recoverable.
Keeping the fixed asset register right
Depreciation is only as good as the register behind it. Common problems: assets disposed of but still depreciating, additions recorded late, assets moved between branches without updates, and no physical verification. See fixed asset audits and asset registers.
Where Cirquolus fits
Cirquolus Asset management manages fixed asset records, check-in and check-out, consumables and asset valuation across companies and branches, and inventory and asset audits support verification. Financial reporting connects through financial management.
Frequently asked questions
What is the most common depreciation method in the Philippines?
Straight-line is the most widely used for financial reporting because it is simple and suits most assets.
What is residual value?
The estimated amount the company expects to recover from an asset at the end of its useful life, after disposal costs.
Can a company use different depreciation for tax and books?
Yes, where rules allow. Track both and account for any deferred tax according to your reporting framework.
When does depreciation start?
When the asset is available for use, meaning it is in the location and condition needed to operate as intended.
Bring this workflow to a Cirquolus demo.
Show us your current process, companies and branches. We will map it to the modules you need and propose a realistic rollout.