Multiple-asset groups may be depreciated in one of two ways: the “group” method and the “composite” method. The group method is typically used for groups of assets that are largely homogeneous and have approximately the same useful lives. The composite approach is used when the assets are closely related and heterogeneous and have different lives (e.g., individual assets in a power plant). When applied to a largely homogeneous population, the group method more closely approximates a single-unit depreciation profile because the dispersion from the average useful life is not meaningful. Under both methods, a reporting entity depreciates the balance over the average life of the assets in the group.

Regulated utilities often apply the group method to fixed assets such as utility poles and other components of their transmission and distribution systems, which are too numerous and of individually low value to practically track on an individual basis. Reporting entities often apply the composite method for component parts of larger assets such as power plants, which also contain numerous components and parts that are impractical to track separately. To apply the group or composite method of depreciation, a reporting entity should have quantitative data to support the method, such as expected useful life of the assets, the dispersion of useful lives from the average for group depreciation, and the calculations supporting the weighted average depreciation rate for the composite method. Periodic studies should also be performed to support ongoing use of the group or composite method.

In general, and unlike the unitary convention of accounting for fixed assets, neither the group nor composite method of depreciation results in the recognition of a gain or loss upon the retirement of an asset. If an asset is retired before or after the average service life of the group is reached, the resulting gain or loss is included in the accumulated depreciation account. The amount recorded in accumulated depreciation is the difference between the original cost of the asset and any consideration received upon retirement or disposal. The result is that the gain or loss on disposal remains in accumulated depreciation; no gain or loss on disposal is recorded in earnings. The group and composite methods simplify the bookkeeping process and tend to smooth any potential differences caused by over- or under-depreciation. As a result, periodic income is not distorted by significant gains or losses on disposals of assets. Refer to Example UP 12-1 for an illustration of the journal entries expected in this application.

Generally, no. ASC 250-10-45-18 states that a change in method of depreciation is considered a change in accounting estimate effected by a change in accounting principle. “The new depreciation method is adopted in partial or complete recognition of a change in the estimated future benefits inherent in the asset, the pattern of consumption of those benefits, or the information available to the reporting entity about those benefits.” In such circumstances, the effect of the change in accounting principle, or the method of applying it, is considered inseparable from the effect of the change in accounting estimate.

Like other changes in accounting principles, a change in accounting estimate that is effected by a change in accounting principle is permitted only if the new accounting principle is preferable. Absent such a conclusion, a reporting entity cannot modify its depreciation method(s). Although the composite and group depreciation methods are an acceptable method, the unitary method is generally considered preferable. Therefore, we generally do not believe it would be appropriate to change from this method to the group or composite method.

See FSP 30 for further information on accounting for changes in accounting principle or changes in estimates and FSP 30.5 for further information on changes in depreciation methods.

Yes. Both of these conventions are considered acceptable pursuant to GAAP. The composite or group method of depreciation may be applied by any reporting entity if it is selected at the time the asset is placed in service. In addition, certain entities may use more than one method of depreciation, such as applying unit depreciation to fixed assets with large unit costs while the group method is applied to other types of assets with lower unit costs.

It depends. Reporting entities that apply the group or composite method of depreciation should obtain updated depreciation studies on a regular basis. The frequency of the study is often a function of the extent of changes since the last study. For example, more frequent or immediate studies may be appropriate in circumstances when a reporting entity experiences a significant and unplanned level of retirements. Significant and unplanned retirements may change the key characteristics of the group of assets (e.g., average age of the assets, average remaining life of the assets) such that the previous depreciation rates may no longer be a reasonable estimate of the assets’ remaining lives. Periodic depreciation studies with regular updates should help to ensure that depreciation is recorded over a reasonably accurate assessment of the remaining useful lives of the assets.

It depends, but generally no. We believe that a gain or loss should be recognized in earnings only when unforeseen or unexpected retirements have occurred. For example, the early retirement of an entire generating station due to storm damage would likely be considered abnormal and would result in the recognition of a loss. We believe that the occurrence of an unforeseen or unexpected retirement would be rare.