Answers / FP&A

How do you forecast depreciation?

A core FP&A interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

Build it bottom-up in two layers tied to the capex plan. Existing assets: run off the current asset base over its remaining useful lives per the fixed-asset register (the existing depreciation 'tail' declines as assets fully depreciate). New assets: take planned capex by category, apply the relevant useful life and method (straight-line typically), and phase the start of depreciation by when assets are placed in service (a mid-year/half-year convention if that's policy). Sum the two. Don't forget the adjustments: disposals remove future depreciation, impairments reduce carrying value (and thus future depreciation) or accelerate the charge, and different asset classes have different lives. Critically, depreciation must articulate with the capex budget and the balance-sheet PP&E roll-forward in the 3-statement model — a common error is forecasting depreciation inconsistently with capex.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Existing assets run off remaining useful lives (declining tail)
  • ✓New capex × useful life, phased by in-service date (mid-year convention)
  • ✓Adjust for disposals (less) and impairments (less/accelerated)
  • ✓Must articulate with capex budget and PP&E roll-forward

COMMON MISTAKES

  • ✗Depreciation inconsistent with the capex plan
  • ✗Ignoring the declining tail on existing assets
  • ✗Forgetting disposals/impairment effects

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