Depreciation
Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life, reflecting the gradual consumption of the asset's economic value through use, obsolescence, or passage of time.
Depreciation is a non-cash accounting charge — it reduces reported profit but does not involve an actual cash outflow in the period it is recorded. The cash was paid when the asset was originally acquired; depreciation simply spreads that cost across the periods during which the asset generates economic benefit. This is why EBITDA (which adds back depreciation) is used as a proxy for cash earnings in certain analyses.
Under Ind AS 16 (Property, Plant and Equipment), Indian companies must depreciate assets based on their estimated useful lives using a rational and consistent method. The straight-line method (equal charge each year) and the written-down value (WDV) method (declining charge each year) are the most common. Indian companies may also use the component approach — depreciating significant components of an asset separately based on their individual useful lives, which can more accurately reflect economic reality for complex assets like aircraft or industrial machinery.
For capital-intensive businesses — airlines, telecom, cement, steel — depreciation is a massive line item in the P&L. Jet Airways, during its operational years, reported large depreciation charges on its leased and owned aircraft fleet. Understanding depreciation policy is critical to valuing these companies: two cement companies with identical capacities may report very different profits if one has older, largely depreciated assets and the other made recent greenfield investments with higher net book values.
Depreciation policy choices can be used to manage reported profits, though accounting standards constrain the extent of this. A company that adopts longer useful life assumptions will depreciate assets more slowly, reporting higher profits in early years. If useful life assumptions are unrealistically long and assets need replacement sooner, the company will face impairments or abnormally high replacement capex in future years — costs that did not appear in historical P&Ls.
For investors, comparing depreciation as a percentage of gross block (original asset cost) over time helps assess consistency. A declining ratio may indicate that assets are aging and the company is under-investing in maintenance capex — a sign of capital extraction from the business. Conversely, a rapidly rising ratio may indicate aggressive depreciation catch-up after a period of under-depreciation.