The proposed amendments would introduce additional paragraphs into IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets to clarify the interpretation of the largely equivalent concepts of 'depreciation' and 'amortisation'.
IAS 16 and IAS 38 require the depreciation or amortisation method to reflect the pattern in which an asset's future economic benefits are expected to be consumed. A variety of methods may be used in meeting this requirement, and an entity is required to select the method that most closely reflects the expectation pattern of consumption of the future economic benefits embodied in the asset. Common methods include the straight-line method, the diminishing balance method and the units of production method.
The proposed amendments would clarify that revenue-based methods of depreciation and amortisation cannot be used in meeting the requirements of IAS 16 and IAS 38. This is because such methods reflects a pattern of generation of economic benefits that arise from the operation of the business of which an asset is part, rather than the pattern of consumption of an asset’s expected future economic benefits.
The premise behind the proposed amendment sees revenue as an interaction of two factors: quantity and price. Unlike quantity (units), price is generally not directly linked to the consumption of the underlying asset, but instead reflects the market dynamics surrounding the goods and services the entity produces.
Previous IASB discussions on this matter included the consideration of research showing revenue-based depreciation or amortisation methods are sometimes used in two particular industries: service concession arrangements (which triggered the initial request for clarification on this matter to the IFRS Interpretations Committee) and in the media business (where revenue may be utilised as a 'surrogate' for viewer numbers when depreciating film and similar rights). The Basis for Conclusions accompanying the proposals notes the limited circumstance when revenue could be used is when the use of a revenue-based method gives the same result as the use of a units of production method.
The proposed amendments also provide some further guidance in the application of the diminishing balance method, noting that information about technical or commercial obsolescence of the product or service output is relevant for estimating the pattern of consumption of future economic benefits of the asset and the useful life of the asset.
The amendments proposed in the exposure draft were original proposed to be included in the 2011-2013 cycle of annual improvements, which were published on 20 November 2012. The IASB decided on separate exposure at its October 2012 meeting, partially on the basis of concerns noted by the Due Process Oversight Committee that the proposed amendments may not meet the annual improvements criteria.
The exposure draft is open for comment for a period of 120 days which closes on 2 April 2013. The amendments are expected to be finalised in the third quarter of 2013.
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