Backlog Depreciation | Formula, Calculation, Examples, & FAQs [Link]
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Backlog Depreciation
Written by True Tamplin, BSc, CEPF®
Reviewed by Subject Matter Experts
Updated on January 30, 2024
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Table of Contents
Backlog Depreciation: Definition
Formula to Calculate Backlog Depreciation
Backlog Depreciation FAQs
Backlog Depreciation: Definition
Whenever an asset is revalued, the profit on revaluation is transferred to the
revaluation reserve account. However, the revaluation also gives rise to backlog
depreciation.
This backlog depreciation should be charged to the revaluation reserve account. The
concept of backlog depreciation is illustrated in the next section.
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Backlog Depreciation | Formula, Calculation, Examples, & FAQs [Link]
Formula to Calculate Backlog Depreciation
Backlog depreciation = Difference in depreciation - Depreciation chargeable in current
year
Example
Compute the backlog depreciation using the information given below:
A machine was purchased on 1 January 2019 at a cost of $12,000,000
The machine's useful life is estimated at 10 years
The machine's replacement cost was $20,000,000 on 1 January 2024 and
$22,000,000 on 31 December 2024
Solution
Replacement cost of the machine on 1/1/2024 (Current value) = $20,000,000
Expired life on 1 January 2024 = 5 years
Depreciation under CCA = (20,000,000 x 5) / 10 = $1,000,000
Replacement/Current value on 12/31/2024 = $22,000,000
Expired life on 31 December 2024 = 6 years
Depreciation under CCA = (22,000,000 x 6) / 10 = $13,200,000
Difference in Depreciation = 13,200,000 - 10,000,000 = $3,200,000
Current year's depreciation = (20,000,000 + 22,000,000) / (2 x 10) = $2,100,000
Backlog depreciation = Difference in depreciation - depreciation chargeable in current
year
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Backlog Depreciation | Formula, Calculation, Examples, & FAQs [Link]
= 3,200,000 - 2,100,000
= $1,100,000
Backlog Depreciation FAQs
How is backlog depreciation calculated?
Backlog Depreciation is calculated by subtracting the current year’s Depreciation from the
difference in Depreciation between the replacement cost and expiry of useful life.
How is backlog depreciation treated under CCA?
The entire charge will be shifted to the revaluation reserve account, which is a component of
equity similar to share capital. However, the portion of Depreciation that is charged to
revaluation reserve account should be reversed into capital. If this is not done, the balance
will remain in the account and will be removed by using it as an additional charge towards
replacement cost on next valuation.
Why is backlog depreciation needed?
Backlog Depreciation arises due to the inconsistency of revaluation of assets. Hence this
amount is transferred to the revaluation reserve account which has a higher tax credit
compared to normal Depreciation charges.
How is backlog depreciation calculated in the case of depreciation on original
cost?
Backlog Depreciation will be equal to difference in Depreciation between replacement cost
and expired life. For example, if the current value of an asset is $10,000 and its accounting
life has expired, then backlog Depreciation = $10,000 – $0 = $10,000.
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Backlog Depreciation | Formula, Calculation, Examples, & FAQs [Link]
How is backlog depreciation calculated in the case of depreciation on revalued
amount?
Backlog Depreciation will be equal to difference between current replacement cost and
expired life. For example, if the current value of an asset is $10,000 and its accounting life has
expired, then backlog Depreciation = $12,000 – $10,000 = $2,000.
A BO UT T H E AU T H O R
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and
founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The
Handy Financial Ratios Guide, a member of the Society for Advancing
Business Editing and Writing, contributes to his financial education site,
Finance Strategists, and has spoken to various financial communities such as
the CFA Institute, as well as university students like his Alma mater, Biola
University, where he received a bachelor of science in business and data
analytics.
To learn more about True, visit his personal website or view his author
profiles on Amazon, Nasdaq and Forbes.
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