The half year convention depreciation is calculated on the basis that assets are brought into use or taken out of use half way through a financial year irrespective of when they were actually acquired or disposed of.
The main purpose of the half year convention is to avoid having to track the dates of acquisition and disposal of an asset.
The net effect of half year convention depreciation is that, in the year of acquisition and disposal, the depreciation expense will be half of the full year amount.
For example, if an asset is acquired on 1 February it is treated as having been brought into use on 1 July and the depreciation for the year is one half a full years depreciation. Likewise if an asset is disposed on 1 September, it is treated as being taken out of use on 1 July and the depreciation expense for the year is again one half the full years depreciation.
Half Year Convention Depreciation Example
Suppose a business acquires an asset costing 80,000 with a useful life of 4 years on the 1 March. Assuming the business adopts the straight line method of depreciation and the asset has no salvage value, calculate the half year depreciation assuming the asset is acquired on 1 March.
Asset acquisition date = 1 March Asset cost = 80,000 Useful life = 4 years Depreciation rate = 1/4 = 25% Half year convention depreciation year 1 = 25% x 80,000 x 1/2 = 10,000
As the asset is acquired part way through the year the half year convention depreciation (10,000) is allocated over the 10 months from the date of acquisition (March) to the year end (December) at the rate of 10,000 / 10 = 1,000 a month.
In year 2 the depreciation expense is for a full year and calculated as normal.
Depreciation expense year 2 = 25% x 80,000 = 20,000
Assume on 1 September of year 3 the asset is disposed of. As the business uses the straight line depreciation half year convention the depreciation expense for the year is one half the full year amount and is calculated as follows:
Asset disposal date = 1 September Half year convention depreciation year 3 = 25% x 80,000 x 1/2 = 10,000
Half year convention depreciation is sometimes referred to as mid year convention depreciation.
For further information see the Wikipedia definition.
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