Understanding Depreciation and Its Calculation in the UAE

Why do you need to think about depreciation in your business

If your company conducts accounting and keeps accounting books, you need to consider depreciation. It plays a crucial role in business accounting, as it allows companies to spread the cost of an asset over the years it is used to generate revenue. This way, companies can match expenses with income, comply with accounting standards adopted in the UAE, and remain compliant.

Moreover, depreciation helps business owners and accountants maintain more precise financial statements. By reflecting the decline in an asset’s value, companies avoid overstating them. Depreciation can also help to reduce taxes, since the amount is counted as an expense and can be deducted from taxable income.

Tax implications of depreciation in the UAE

Depreciation is quite significant when it comes to the UAE taxes. Companies are able to offset such expenses against their taxable income, effectively lowering their overall tax liability. The depreciation rate for financial reporting purposes in the UAE is determined by accounting standards such as IFRS (e.g., IAS 16 - Property, Plant, and Equipment), and businesses must comply with these regulations to ensure they are accurately reporting their depreciation expenses.

Certain industries in the Emirates, such as real estate, construction, and manufacturing, can draw a significant tax benefit from applying accelerated depreciation, as they can claim larger deductions during the initial stages of an asset's use and effectively reduce their taxable income.

Assets eligible for depreciation in the UAE

In the UAE, businesses can apply depreciation to a range of fixed assets, including buildings, vehicles, machinery, office equipment, and computers. Designed for long-term use, they typically have a lifespan exceeding one year. They inevitably diminish in value due to wear and tear, obsolescence, or technological advancements.

Depreciation allows companies to systematically distribute the cost of these assets over their productive years, ensuring that financial records accurately reflect both the gradual decline in asset value and the economic benefit derived from their use.

1. Buildings and structures

• Commercial and industrial buildings used for business operations
• Warehouses, factories, and other permanent facilities

2. Vehicles

• Company cars and delivery vans
• Trucks and specialized transport vehicles

3. Machinery and equipment

• Manufacturing and production machinery
• Heavy equipment used in construction or industrial activities

4. Office equipment and technology

• Office furniture and fixtures
• Computers, servers, and related hardware
• Printers, copiers, and other office devices

It’s important to highlight that land is not depreciated, as its value typically doesn’t diminish over time.

What is depreciation?

Definition of depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. This helps match the asset’s cost with the income it generates, giving a more accurate picture of a company’s finances.
It’s important to note that it is a non-cash expense; it does not directly affect cash flow, but it does reduce the book value of fixed assets and lowers taxable income.

Differences between depreciation and amortization

While depreciation reduces the value of physical assets, amortization does the same for intangible ones, ensuring that both types of assets are accurately represented in financial statements.

Depreciation methods

Straight-line method

It is the simplest and commonly adopted approach. It spreads the asset’s cost evenly over its useful life. It assumes that the value of the asset declines at a steady rate.

Ideal for assets that depreciate predictably, such as office furniture, fixtures, and buildings.

The main advantage is its simplicity and consistency, which makes budgeting easier.

Declining balance method

It is an accelerated depreciation technique. It records higher depreciation in the early years of an asset’s life and gradually reduces the expense over time.

Ideal for assets that lose value quickly, for example, industrial machinery or IT equipment. It’s common in sectors like construction and manufacturing, where equipment’s peak efficiency is in the early years.

The benefit is that it aligns higher expenses with periods of maximum usage.

Units of production depreciation

This method bases depreciation on how much the asset is actually used, rather than how much time has passed.

t’s ideal for production machinery or factory equipment, where wear and tear depend on operational output. Depreciation is calculated according to the units produced or hours operated, so the cost accurately reflects the asset’s real usage.

This method is most useful for businesses with fluctuating production levels, as it adjusts with activity.

Sum-of-the-years’ digits method

This is another accelerated depreciation approach. It allocates more expense in the first years and less in later years, recognising that many assets wear out faster when they’re new. The calculation uses a decreasing fraction based on the sum of the years in the asset’s lifespan.

It is usually applied for such assets as vehicles or heavy machinery.

The advantage is that it matches the higher initial decline in value with the early years of intense use.

How depreciation affects financial statements

Impact on the balance sheet

Depreciation gradually reduces the book value of fixed assets over time. This adjustment keeps valuations in line with real market conditions, preventing overstatements. On the balance sheet, accumulated depreciation is recorded in a contra-asset account and offset against the asset’s original purchase cost, showing its net book value. Accurate depreciation entries help ensure that financial statements present a realistic view of the company’s assets.

Impact on the income statement

Depreciation is recorded on the income statement as an expense, directly reducing a company’s profitability. In the UAE, it is treated as a non-cash expense — it does not involve actual cash payments but remains deductible for tax purposes. This treatment influences both operating income and net income. Any inaccuracies in depreciation calculations can distort these figures, leading to a misleading view of the company’s financial health.

Depreciation schedules: why do you need one?

• To keep key details about the asset: purchase price, projected salvage value, annual depreciation amount
• To forecast future expenses
• To ensure precise and transparent financial reporting
• To provide clear and accurate tax returns and audits

A depreciation schedule is a financial document that outlines the depreciation expense assigned to each asset over its useful life.

Depreciation across different industries

Real Estate

Assets under depreciation: Buildings and commercial properties (note: land is not depreciated)

Methods typically used: Primarily the straight-line method, often over long periods (e.g., 20–30 years)

Benefits and features:

• Simple, even allocation of cost over many years
• Ideal for assets with predictable wear and a long useful life
• Helps spread cost and reduce taxable income gradually

Unique challenges:

• Correctly separating the value of land (non-depreciable) and building (depreciable)

Transportation, construction and manufacturing

Assets under depreciation: Vehicles, heavy machinery, and equipment

Methods typically used:

• Declining balance (accelerated depreciation)
• Units of production (based on usage or hours of operation)

Benefits and features:

• Captures rapid early value loss for start-of-use-intensive assets
• Units-of-production links expense directly to activity, ensuring precision

Unique challenges:

• Predicting equipment wear and useful life accurately
• Heavy usage and obsolescence risk can make straight-line impractical
• Ensuring actual usage data is tracked and aligned with depreciation schedule

Technology and telecommunications

Assets under depreciation: Hardware and software (sometimes amortized if intangible)

Methods typically used: Accelerated methods (e.g., declining balance) or straight-line for hardware; amortization for intangible software licenses

Benefits and features:

• Captures short asset lifespans due to fast technological change
• Keeps financial records current and realistic

Unique challenges:

• Rapid obsolescence requires frequent depreciation updates
• Technology turnover makes accurate schedules essential to avoid overstatement

Best practices for depreciation management in the UAE

To effectively manage depreciation in your UAE business, it is highly recommended to consult professional accountants and tax specialists for assistance. Accounting rules are constantly evolving, and only experts who deal with business accounting on a daily basis possess up-to-date information and know the best accounting and bookkeeping practices.

Here is a checklist of what a company should do to ensure efficient depreciation management:

• Track fixed assets by maintaining records of asset purchases, usage, and depreciation schedules.
• Conduct regular audits to identify potential risks, such as overestimating an asset’s lifespan or failing to account for the actual wear-and-tear rate of machinery, vehicles, or other equipment.
• Stay informed about any changes affecting depreciation calculations and ensure that accounting practices comply with current regulations.
• Engage professional accountants to maintain accurate accounting and bookkeeping, monitor financial health, optimize taxes, ensure compliance with UAE accounting and tax rules, and avoid fines.