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Total depreciation and amortization of long-lived assets is required to be disclosed in a reporting entity’s financial statements. Many reporting entities choose to disclose this information as one or more lines in the statements of operations and of cash flows.
Where depreciation and amortization is classified in the statement of operations depends on the asset’s function. For example, the depreciation of a manufacturer’s factory and production equipment would likely be considered fixed overhead and capitalized as part of inventory costs, while the depreciation of corporate headquarters would typically be considered part of general and administrative expense. ASC 730-10-25-2 states that depreciation of capitalized equipment or facilities that are acquired or constructed for research and development activities should be considered research and development costs.
Some reporting entities choose to report all depreciation (usually with amortization) that is directly charged to earnings as a separate line item in the statement of operations rather than include it in the related line items by function (e.g., cost of sales, selling and marketing, general and administrative). Not all depreciation of manufacturing productive assets can be absorbed into inventory. The allocation of indirect costs (e.g., fixed production overheads) should be based on normal capacity, which is defined in ASC 330-10-30-3.

Excerpt from ASC 330-10-30-3

Normal capacity refers to a range of production levels. Normal capacity is the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Some variation in production levels from period to period is expected and establishes the range of normal capacity.

The reporting entity should apply judgment in determining whether a production level is within the range of normal capacity considering various business- and industry- specific factors. Any unallocated fixed cost overheads, including depreciation expense, are considered period costs and should be charged to earnings in the current period.
When some or all of the depreciation, depletion, and amortization related to the manufacturing of products or the services provided by a reporting entity are excluded from the cost of sales line item, SAB Topic 11.B, Depreciation And Depletion Excluded From Cost Of Sales (codified in ASC 220-10-S99-8) provides guidance indicating that if cost of sales excludes charges for depreciation, depletion, and amortization, the description of the line item should reflect this (e.g., “Cost of sales (exclusive of items shown separately below)” or “Cost of sales (exclusive of depreciation shown separately below)”).
Reporting entities that present cost of sales excluding depreciation, depletion, and amortization must also consider the requirements of S-K 302(a). This guidance requires certain SEC registrants to disclose selected quarterly financial data, including gross profit (i.e., net revenue less costs and expenses associated directly with, or allocated to, products sold or services rendered).
In addition to the items discussed above, it is also common for a reporting entity to disclose how it determines the useful lives of its depreciable or amortizable assets.
See FSP 8 for disclosures required for property, plant, and equipment and other long-lived assets, including depreciation and amortization disclosure requirements.
New guidance
Amortization expense may result from lease transactions that are accounted for under ASC 842. The amortization of a right-of-use asset should be presented in accordance with ASC 842-20-45-4 and may differ depending on whether the lease is a finance lease or an operating lease. The requirements of ASC 842 are covered in PwC’s Leases guide and not discussed in this guide.

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