The term «depreciation» covers two close but different concepts. In either case translation is straightforward — «амортизация».

In accounting, depreciation is used to measure the decline in an asset’s value. The idea is to reflect the asset’s devaluation over its economic life: a depreciation formula takes into account the cost of the property, its estimated useful life and, sometimes, the conditions of usage. The concept is needed to quantify future investment that is required to replace the asset.

Russian accounting standards operate with the following methods of depreciation:

  • The straight-line method — each year’s depreciation expense of the asset is determined by dividing the depreciable base by the number of years in the estimated life of the asset. Thus, under this method, each year’s depreciation is the same.
  • The declining balance method — method of depreciation in which the depreciable base of the asset is reduced each year by a fixed percentage rate.
  • The units of production method — the asset is depreciated each year according to the number of units produced, total hours used or other measure of production. Thus, under this method the amount of annual depreciation fluctuates by output or use.
  • The sum-of-the-years-digits method — the digits in the asset’s expected life are added together. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year one.

The declining balance method and the sum-of-the-years-digits method are accelerated depreciation methods as they put the bulk of an asset’s depreciation in the earlier years of its life.

In taxation, it is the way of deducting the cost of property from taxable income. Contrary to what common sense would lead to expect, the money spent on new equipment is not removed from taxation at the time of purchase but spread over years (except for smaller items).

For income tax purposes, Russian legislation uses the linear (or straight-line) and non-linear (accelerated) methods. Also, the term «ускоренная амортизация» or «accelerated depreciation» is used when, for tax purposes, the estimated life of an asset is deemed to be shorter than usual, regardless whether the depreciation method is straight-line or accelerated (art. 259.3 of the Tax Code).