What Is Depreciation?

• Depreciation involves adjusting the value of an asset, the furnace, over time -- typically several fiscal periods -- to accurately estimate the current value of a company's assets at a given point in time. Not only is a company's asset and liability ratio of concern to potential investors and lenders, the amount of the yearly depreciation expense for the asset affects the company's profit margin and income tax liability. The rate of depreciation is directly related to the number of years the asset is expected to be used.
  
  

Who Determines the Useful Life of an Asset?

• It is up to a company's management to determine the useful life of the furnace. It would be impossible to establish specific rules, since the life of an asset is dependent upon each specific situation. The only rule enforced by the Internal Revenue Service (IRS) and the Financial Accounting Standards Board (FASB) is that the estimated useful life be reasonable; individual situations are taken into consideration when a company is audited internally, independently or by the IRS itself.
  
  

Useful Life Translated into a Depreciation Rate

• Companies are allowed to employ any of several methods of depreciation; it is even common for a business to use one method for financial reporting and another method entirely for tax purposes. Straight-line depreciation is calculated by dividing the cost of the asset by the useful life and then deducting the same amount each year. Declining balance methods allow companies to write off more of the asset at the beginning of the useful life, since a brand new asset will lose an extra percentage of the value after being used even once.
  
  

Average Depreciation Rate of a Furnace

• The average depreciation rate of a furnace is clearly dependent upon a number of factors. The type, size and quality of the furnace all make a difference, as does the environment being heated. Also, different depreciation methods produce different depreciation rates. Historic data, manufacturer warranties and use estimates are all resources that can serve to determine useful life and the subsequent rate. Management should keep copies of any supporting data regarding determination of the life and rate in the event of an audit.