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Accounting Updates

IAS 16 & 38 Amendment – Revenue-based depreciation not appropriate

A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life, in accordance with International Accounting Standards (IAS) 16 Property, Plant and Equipment. These methods include the straight-line method, the diminishing balance method and the units of production method.

Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change.  The diminishing balance method results in a decreasing charge over the useful life. The units of production method results in a charge based on the expected use or output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

Note that revenue-based methods are not included with those that are specifically mentioned under IAS 16, but International Accounting Standards Board (IASB) noted that there are many entities using revenue as basis for depreciation (such as based on sales units, revenue amounts).

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About leecpa

Orlando Calundan is a Certified Public Accountant. He has exposures in audit of financial statements of entities in various industries such as real estate, food (quick service restaurants), manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements.


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