The Hull plc decides to adopt straight-line depreciation on production equipment

 Depreciation is systematic allocation of asset cost over its useful life to the income statement. Depreciation expense is recognised because an asset value decreases over a period of time due to usage, wear and tear or obsolescence. Charging depreciation to income statement gives a true and fair view of the financial statements of the firm. Depreciation charged on asset is based on the method which is appropriate to the asset class. A depreciation method followed by a firm is an accounting policy. An accounting policy has to be followed consistently by a firm and it cannot be changed year on year basis as per need of the management.

As per IAS 16 depreciation of any asset starts when asset is available for use in the location and condition necessary for it to be capable of operation as per management intention. Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. Thus in the given case the justification of finance managers of Hull plc is not justified. The depreciation policy of the firm is not in accordance with IAS 16 Property, Plant and Equipment. Hence the firm should charge depreciation as per depreciation policy which is consistent with IAS 16.