In essence, what does this “depreciation of property, plant and equipment” mean? IAS 16 defines depreciation as “systematic allocation of the depreciable amount of an asset over its useful life”. For easier understanding I think it’s important to tear the definition into pieces – systematic allocation, depreciable amount and useful life. 

When we talk about depreciation, the key component to define is how to allocate the depreciable amount over the asset’s useful life, over a determined period. Depreciation is asked to reflect on the asset’s future economic benefits so it can either be as straight-line (that is, you’d account each month an equal amount to expenses), diminishing balance (that is, each period the charge decreases) or units of production method (that is, the charge is based on the expected output).

Now, a depreciable amount that we’re asked to depreciate into expenses, is not exactly the cost of the asset (initial acquisition cost), but cost less the asset’s residual value.

Since the term “useful life” has been determined before, we are now left with finding the depreciation for the asset. As the definition above says, to find the charge you ought to take the depreciable amount, divide it by the method you’ve decided to apply and spread the charge over the period you plan to use the asset for the benefit of the company.