Changing Depreciation Methods: Procedures and Implications

Two companies buy identical machines on the same day, use them the same way, and yet report completely different profits for the next five years – simply because one depreciates the asset on the straight line method and the other on the written down value method. Depreciation policy is not a formality; it shapes reported profit, tax outgo, and asset values. So what happens when a business decides, midway through an asset’s life, that the method it originally chose no longer reflects reality? This is where the change of method in depreciation accounting comes in, and getting the mechanics right matters as much as understanding the theory.

Why would a business change its depreciation method at all? 🔗

Depreciation methods are not meant to be switched on a whim. A change is justified only in specific situations: when a statute or an accounting standard makes it compulsory, or when management genuinely believes the new method will present a fairer, more accurate picture of the enterprise’s financial position. The ICAI’s guidance note on depreciation accounting is explicit that a change from one method to another should happen only if adopting the new method is required by statute, needed for compliance with an accounting standard, or results in a more appropriate presentation of financial statements.

In practice, this could mean an asset that once wore out evenly (justifying the straight line method) has started losing more value early in its life due to rapid technological obsolescence, making the written down value method more suitable. Or a parent company might switch a subsidiary’s method to keep group accounting policies consistent. Whatever the trigger, the change cannot be cosmetic, and it comes with an accounting trail that has to be followed carefully.

Two ways to apply a change in method 🔗

Once a business decides to switch methods, it has two broad ways to implement the change, and the outline of consequences differs sharply between them.

Prospective application 🔗

Under the prospective approach, the new method applies only from the date of change onward. Nothing about the past is touched – the asset’s book value as it stands on the date of change becomes the new opening balance, and future depreciation is calculated on this balance using the new method and the asset’s remaining useful life. No adjustment entry is passed for earlier years. This approach is typically used for a change in an accounting estimate, such as a revision in useful life or residual value, rather than a full change in method.

Retrospective application 🔗

Retrospective application, by contrast, treats the new method as if it had always been in use for that particular asset. This is the standard treatment prescribed for a change in depreciation method under Indian accounting practice. As explained in professional accounting guidance on the topic, when a change in the method of depreciation is made, depreciation is recalculated according to the new method from the date the asset first came into use, and the resulting deficiency or surplus is adjusted through the profit and loss account in the year the method is changed.

The step-by-step procedure for a retrospective change 🔗

This is the part students usually need to work through carefully in problems, so it helps to break it into clear steps.

Step 1: Find total depreciation already charged under the old method 🔗

Add up the depreciation charged on the asset every year from the date of purchase up to the date the method is being changed. This gives the book value currently appearing in the books.

Step 2: Recalculate depreciation as if the new method had always applied 🔗

Starting from the same original cost and the same date of purchase, work out what the depreciation charge would have been each year had the new method been used from day one. Sum these figures to get the total depreciation that “should have” been charged under the new method.

Step 3: Compare the two totals 🔗

Subtract the old-method total from the new-method total.

• Deficiency: If the new method’s cumulative depreciation is higher than what was actually charged, there is a shortfall. This additional amount needs to be charged now.
• Surplus: If the new method’s cumulative depreciation is lower, too much depreciation was charged earlier, and the excess needs to be written back.

Step 4: Pass the adjustment entry 🔗

The deficiency or surplus is not spread across old financial statements (which have already been finalised and reported to shareholders). Instead, it is adjusted entirely in the accounts of the year in which the change is made. A deficiency is debited to the profit and loss account (it reduces current year’s profit) and credited to the asset account, reducing its book value further. A surplus works the other way: it is credited to the profit and loss account and debited to the asset account, restoring some of the book value. This treatment is confirmed across professional accounting resources, including discussions of the comparative depreciation accounting standards followed in India.

A worked example 🔗

Suppose a company buys machinery for ₹1,00,000 and has been charging depreciation at 10% per annum on the straight line method for three years. Now, at the start of year four, it decides to switch to the written down value method at 20% per annum, with retrospective effect.

The written down value method would have charged ₹48,800 over three years, against the ₹30,000 actually charged under the straight line method. That leaves a deficiency of ₹18,800. This amount is debited to the profit and loss account in year four and credited to the machinery account, bringing its book value down from ₹70,000 (as per the old records) to ₹51,200 – exactly what it would have been had the written down value method been used from the start. From year four onward, depreciation continues at 20% on this reduced written down value.

Effect on financial statements 🔗

A change of method, applied retrospectively, has a visible ripple effect:

• Profit and loss account: A deficiency adjustment reduces current year profit, sometimes sharply, since it bundles in “missed” depreciation from previous years. A surplus adjustment boosts current year profit instead.
• Balance sheet: The asset’s book value is realigned to what it would have been under continuous use of the new method, which changes the net block of fixed assets reported.
• Comparability: Because prior years’ financial statements are not restated, a reader comparing this year’s profit with last year’s profit needs to know about the change to interpret the numbers correctly. This is precisely why disclosure is not optional.

Disclosure requirements 🔗

A change in depreciation method must be disclosed with its justification and its quantified financial effect, so that users of the financial statements understand why profit moved the way it did. This isn’t just good practice; it is treated as a change in accounting policy that requires quantification and full disclosure in the notes to accounts, as reiterated by ICAI’s guidance on the subject. Without this disclosure, a sudden jump or drop in profit would be misleading to investors, lenders, and auditors alike.

How the classification has evolved under Ind AS 🔗

Traditionally, under the old Accounting Standard 6 framework, a change in depreciation method was treated as a change in accounting policy, applied with retrospective effect exactly as described above. Under the newer Ind AS framework, however, the classification is more nuanced. Ind AS 8 draws a sharp distinction between a change in accounting policy (applied retrospectively, with restatement of prior periods) and a change in accounting estimate (applied prospectively, with no restatement). As one analysis of the Ind AS framework points out, this raises a genuine classification question when a company switches its depreciation method – whether it should be treated as a policy change or an estimate change, since the answer determines whether the business restates its historical statements or simply adjusts going forward.

For B.Com coursework and most Indian company accounts today, the classic retrospective treatment illustrated above remains the standard approach you’ll be tested on and the one most companies still follow in practice. But it’s worth knowing that under Ind AS 8’s broader framework, changes in accounting estimates – such as revising useful life or residual value based on new information – are always applied prospectively, affecting only the current and future periods without touching what was already reported.

Why this distinction matters beyond the exam 🔗

Depreciation might look like a mechanical, arithmetic exercise, but a change of method touches profit figures, tax computations, dividend decisions, and even loan covenants that are often tied to profitability ratios. A company cannot switch methods to simply manage its reported profit for a good or bad year – the change has to be justified, properly computed, and transparently disclosed. Understanding both the calculation and the reasoning behind it is what separates rote memorisation from a genuine grasp of financial accounting.

What do you think? If a company reports a sudden drop in profit purely because of a retrospective depreciation adjustment, how should an investor read that number differently from a drop caused by an actual decline in business performance? And do you think today’s prospective treatment for estimate changes makes financial statements easier or harder to compare year on year?

References

1. https://taxguru.in/chartered-accountant/guidance-note-on-accounting-for-depreciation-in-companies-issued-by-icai.html
2. https://www.vskills.in/certification/tutorial/change-in-method-of-depreciation/
3. https://indianjournalofmarketing.com/index.php/IJF/article/download/71613/55951
4. https://www.taxmann.com/post/blog/accounting-treatment-of-changes-in-depreciation-method-from-slm-to-wdv-as-per-ind-as-framework
5. https://www.cmaknowledge.in/2025/02/ind-as-8-accounting-policies-changes-in-accounting-estimates-and-errors.html