Depreciation policy

A company's depreciation policy defines the methods and rates applied to write down fixed assets over their estimated useful lives: straight-line, declining balance or units-of-production methods, with asset-specific lives determined by management. Policy choices directly affect reported EBITDA, net income and asset values. In financial due diligence, the appropriateness of the depreciation policy is reviewed: excessively long useful lives understate depreciation and inflate EBITDA, while accelerated write-offs may understate the carrying value of productive assets. Differences between Swiss CO, French GAAP and IFRS depreciation treatments require specific attention in cross-border transactions.

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Example: due diligence on a Swiss manufacturing company reveals that industrial equipment is depreciated over 15 years (straight-line), while the industry norm is 8–10 years. Restating to a 10-year life increases annual depreciation by CHF 350,000 — reducing EBITDA by this amount and increasing maintenance capex estimates, with a combined negative impact of approximately CHF 2.8 million on the DCF valuation.

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Hectelion benchmarks depreciation policies against sector norms and IFRS standards in every financial due diligence engagement.