IASB clarifies depreciation and amortisation

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12 May 2014

The International Accounting Standards Board (IASB) has published 'Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)'. The amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.


During 2011, the IFRS Interpretations Committee considered a constituent request to clarify the meaning of the term 'consumption of the expected future economic benefits embodied in the asset' when determining the appropriate amortisation method. The Committee came to the conclusion to recommend to the IASB to amend IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets to clarify that a revenue-based method is not considered to be an appropriate manifestation of consumption.

The IASB published Exposure Draft ED/2012/5 Clarification of Acceptable Methods of Depreciation and Amortisation (Proposed Amendments to IAS 16 and IAS 38) following the Interpretations Committee's recommendation on 4 December 2012. However, the ED proposed in the Basis for Conclusions that there would be limited circumstances in which a revenue-based method gave the same result as a 'units of production' method. As constituents perceived this statement to be contradictory with the proposed amendments to the standard, the IASB decided to drop this comment in the final amendments.


Amendments to IAS 16 Property, Plant and Equipment

The requirements of IAS 16 are amended to clarify that a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. 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.

Amendments to IAS 38 Intangible Assets

The requirements of IAS 38 are amended to introduce a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate for the same reasons as in IAS 16. However, the IASB states that there are limited circumstances when the presumption can be overcome:

  • The intangible asset is expressed as a measure of revenue (the predominant limiting factor inherent in an intangible asset is the achievement of a revenue threshold); and
  • it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated (the consumption of the intangible asset is directly linked to the revenue generated from using the asset).

Amendments to both standards

Guidance is introduced into both standards to explain that expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset.

Dissenting Opinion

One IASB member dissented from the publication of the amendments. This Board member is concerned that the amendments do not fully resolve the issue originally raised with the IFRS Interpretations Committee and that the amendments are not sufficiently clear on what evidence is required to overcome the presumption that is being introduced into IAS 38.

Effective Date

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

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