Depreciation in Switzerland: a simple definition
Types of depreciation
Direct amortization
Direct depreciation is a method of accounting for asset impairment in which the value of the asset is reduced evenly over its expected useful life. This is the simplest and most commonly used method of calculating depreciation.
Example of direct depreciation
In this example, we are depreciating a business machine.
- Debit account
- Credit account
- Depreciation of furniture
- Machines
Indirect amortization
When indirect depreciation is used, the balance sheet shows the acquisition value of the assets. A negative asset account is then used to correct this value. The accounts used for this purpose are FAC s/asset category.
On the balance sheet, it will therefore be possible to see the initial value of the asset account with, below it, the accumulated depreciation fund corresponding to depreciation.
Example of indirect depreciation
In this example, we depreciate a business machine using the indirect method.
- Debit account
- Credit account
- Depreciation of furniture
- FAC s/ machines
Indirect or direct depreciation?
As we have seen, the main difference between direct and indirect depreciation lies in the way the depreciation charge is calculated and spread over the life of the asset.
For assets that depreciate faster (such as machinery), indirect depreciation may be more appropriate. For assets depreciating more slowly (such as office furniture), direct depreciation may be appropriate.
Depreciation methods
Straight-line depreciation
Example of straight-line depreciation
Take, for example, a computer purchased by a company for CHF 1,000 in year N and depreciated on a straight-line basis over 5 years.
- Year
- Amortization
- Residual value
- N
- 1'000/5 = 200.-
- 800.-
- N+1
- 1'000/5 = 200.-
- 600.-
- N+2
- 1'000/5 = 200.-
- 400.-
- N+3
- 1'000/5 = 200.-
- 200.-
- N+4
- 1'000/5 = 200.-
- 0.-
Declining-balance depreciation
Declining-balance depreciation is calculated on the basis of the residual value in each year. Unlike straight-line depreciation, therefore, the value will always be different.
Example of declining-balance depreciation
Let's take the same example as for straight-line depreciation. We have a computer purchased by a company for CHF 1,000 in year N and depreciated at a rate of 40%.
- Year
- Amortization
- Residual value
- N
- 1'000*40% = 400.-
- 600.-
- N+1
- 600*40% = 240.-
- 360.-
- N+2
- 360*40% = 144.-
- 216.-
- N+3
- 216*40% = 86.4
- 129.6
- N+4
- 129.6*40% = 51.84.-
- 77.76
- N+5
- Residual value
- 0.-
When using declining-balance depreciation, a large amount is depreciated in the first few years, and then the amount depreciated becomes smaller and smaller. This method is particularly well-suited to cases where an asset is known to depreciate a lot at the outset, but little thereafter.
Current rates
- Asset class
- Percentage
- Commercial buildings (including land)
- Commercial furniture
- Motor vehicles
- Computers
- Patents, goodwill, etc.
- 3 %
- 25 %
- 40 %
- 40 %
- 40 %
You can find a complete list of depreciation percentages in the notice A/1995 for commercial companies. You can also find amortization rate for self-employed workers on the Confédération website.
Frequently Asked Questions
What is depreciation?
Depreciation can be defined as an accounting practice that spreads the depreciation of an asset over several years. It reflects the loss in value of an asset over time, due to wear and tear or obsolescence.
What's the difference between direct and indirect depreciation?
Direct depreciation spreads the depreciation of an asset evenly over its lifetime. Indirect depreciation, on the other hand, applies a declining-balance method, resulting in higher deductions in the early years and lower deductions at residual value.
What is the most appropriate depreciation method for rapidly depreciating assets?
For assets that depreciate rapidly, such as machinery and computers, indirect depreciation may be more appropriate.
