Determining the Useful Life of an Asset Under IFRS

Under IFRS, what is the useful life or recovery period of an asset?

  • This may be equal to, or may be considerably less than, its technical or physical life
  • The determination of the useful life involves a good deal of uncertainty and subjectivity
  • The estimate should be reasonable, fair and prudent

For example:  A laptop computer as a rule of thumb has a five or six year useful life.  The reality is that while there are many old XP operating system laptops still in use that are eight to ten years old.

The key is that the business organization must develop  a depreciation procedures manual that details how the four basic depreciation elements are determined for each of the asset classes or types used by the business organization.  Once these procedures are developed, they must be followed consistently:

  • What is the cost of the asset
  • What is the useful life
  • What is the salvage value of the asset at the end of its useful life
  • What is the pattern of benefit or usefulness derived from the asset likely to be.  Which in turn determines the method of depreciation used.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

IFRS & Fixed Asset Depreciation: An Overview of the Requirements

IAS 16:  Property, Plant & Equipment:

 

One of the hottest topics in the US accounting world is the transition to IFRS, which stands for International Financial Reporting Standards.  IFRS and IAS, International Accounting Standards, provide the detail behind the conceptual framework of the International Accounting Standards Board (IASB).  To clarify, the IASB is the international version of the U.S. FASB.  In a world where everything continues to grow into a globalized state, many feel that having uniformed accounting practices is needed for fair and reliable business reporting.  Moreover, having uniformity would make for easier comparisons among global competitors, and easier reporting for multinational corporations with global subsidiaries.  Still, despite being seen as inevitable, there is both much resistance to the change and a great deal of confusion as to what is entailed.

IFRSHere at DepreciationGuru, we will attempt to help clarify the issues and make the transitions easier.  Thus, we will address several issues through a number of posts.

This first post will dive into International Accounting Standards (IAS) 16, which details regulations for Property, Plant, and Equipment.  Listed below is a brief outline of IAS 16 as put together by DepreciationGuru.  Should you want to obtain full text copy of IAS 16, please click here.

IAS 16:  Property, Plant & Equipment

 

  • The IASB’s Framework contains five (5) elements, which need to be satisfied before IAS 16 applies. Once satisfied, the following IAS 16 elements must be met:
  • Basic required information
    • Cost of the asset or Basis
    • Estimated useful life of the asset to the business
    • Estimated residual selling value (salvage or scrap value)
    • What is the pattern of benefit or usefulness derived from the asset
  • Recognition of Property, Plant and Equipment
    • An asset can only be recognized if:
      1. It is probable that future economic benefits will flow to the entity
      2. The cost of the asset can be measured (Measurement) reliably
      3. Measurement stages:
      4. Initial Measurement
      5. Subsequent Expenditures
      6. Measurement subsequent to initial measurement
  • Componentization
    • When an asset is made up of multiple components and these components have different useful lives. The asset should be broken down into the separate components and each component should be depreciated as a separate asset
  • Depreciation
    • The depreciation or expensing of an asset should allocate the expense the cost of the asset over its useful life
    • The depreciation method used should reflect how the economic benefits of the asset are used by the entity
  • Derecognition
    • The carrying amount of an assets is derecognized upon:
      1. The disposal of the asset; or
      2. When no future economic benefits will be recognized from the assets use or disposal

There are other IAS Statements that may also apply to assets covered by IAS 16, Property, Plant and Equipment.  These will be discussed in future posts.  Still, if there is anything that you would like to know on this issue, or any related issues, please feel free to ask.  Also, considering the conflicting view points on this topic, we would love to know whether you’re for or against the conversion and transition to IFRS.

Questions? Comments? Let us know in the comments section below.

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More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

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