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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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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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= 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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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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