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Exposure Draft of the Amendments to Ind AS 16 And Ind AS 38 (Clarification of Acceptable Methods of Depreciation and Amortisation) (Corresponding to Amendments to IAS 16 And IAS 38) (Comments to be received by September 15, 2014)
August, 26th 2014
               Exposure Draft


   Clarification of Acceptable Methods of
       Depreciation and Amortisation
(Amendments to Ind AS 16 And Ind AS 38)




(Last date for Comments: September 15, 2014)




                   Issued by
          Accounting Standards Board
The Institute of Chartered Accountants of India
CONTENTS

                                                        from page

AMENDMENTS TO Ind AS 16 PROPERTY, PLANT AND EQUIPMENT



AMENDMENTS TO Ind AS 38 INTANGIBLE ASSETS
                                                               Exposure Draft
                                                Clarification of Acceptable Methods of

                                               Depreciation and Amortisation
                                           (Amendments to Ind AS 16 and Ind AS 38)


Following is the Exposure Draft of Clarification of Acceptable Methods of Depreciation and
Amortisation (Amendments to Ind AS 16 and Ind AS 38) issued by the Accounting Standards
Board of The Institute of Chartered Accountants of India, for comments. The Board invites
comments on any specific aspect of the Exposure Draft. Comments are most helpful if they
indicate the specific paragraph or group of paragraphs to which they relate, contain a clear
rationale and, where applicable, provide a suggestion for alternative wording.


Comments should be submitted in writing to the Secretary, Accounting Standards Board, The
Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha
Marg, New Delhi 110 002, so as to be received not later than September 15, 2014. Comments
can also be sent by email to commentsasb@icai.in .

(The Exposure Draft of the Indian Accounting Standard includes paragraphs set in bold type and
plain type, which have equal authority. Paragraphs in bold type indicate the main principles.
(This Exposure Draft of the amendments Indian Accounting Standard should be read in the
context of its objective and the Preface to the Statements of Accounting Standards1)


Amendments to
Ind AS 16 Property, Plant and Equipment


    Paragraph 56 is amended and paragraph 62A is added. Paragraphs 60­62 are not amended but
    are included here for ease of reference. New text is underlined.


              Depreciable amount and depreciation period

              ...

56            The future economic benefits embodied in an asset are consumed by an entity principally
              through its use. However, other factors, such as technical or commercial obsolescence



                                                            
1
  Attention is specifically drawn to paragraph 4.3 of the Preface, according to which accounting standards are
intended to apply only to items which are material
      and wear and tear while an asset remains idle, often result in the diminution of the
      economic benefits that might have been obtained from the asset. Consequently, all the
      following factors are considered in determining the useful life of an asset:

      (a)   ...

      (c)   technical or commercial obsolescence arising from changes or improvements in
            production, or from a change in the market demand for the product or service
            output of the asset. Expected future reductions in the selling price of an item that
            was produced using an asset could indicate the expectation of technical or
            commercial obsolescence of the asset, which, in turn, might reflect a reduction of
            the future economic benefits embodied in the asset.
      ...

      Depreciation method

60    The depreciation method used shall reflect the pattern in which the asset's future
      economic benefits are expected to be consumed by the entity.

61    The depreciation method applied to an asset shall be reviewed at least at each
      financial year-end and, if there has been a significant change in the expected pattern
      of consumption of the future economic benefits embodied in the asset, the method
      shall be changed to reflect the changed pattern. Such a change shall be accounted
      for as a change in an accounting estimate in accordance with Ind AS 8.

62    A variety of depreciation methods can be used to allocate the depreciable amount of an
      asset on a systematic basis over its useful life. 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.

62A   A depreciation method that is based on revenue that is generated by an activity that
      includes the use of an asset is not appropriate. The revenue generated by an activity that
      includes the use of an asset generally reflects factors other than the consumption of the
      economic benefits of the asset. For example, revenue is affected by other inputs and
      processes, selling activities and changes in sales volumes and prices. The price
      component of revenue may be affected by inflation, which has no bearing upon the way
      in which an asset is consumed.

      ...
Amendments to
Ind AS 38 Intangible Assets

Paragraph 92 is amended. In paragraph 98, the phrase `unit of production method' has been
amended to `units of production method'. Paragraphs 98A­98C are added. Paragraph 97 is not
amended but is included here for ease of reference. Deleted text is struck through and new text
is underlined.


Useful life

      ...

92    Given the history of rapid changes in technology, computer software and many other
      intangible assets are susceptible to technological obsolescence. Therefore, it is likely will
      often be the case that their useful life is short. Expected future reductions in the selling
      price of an item that was produced using an intangible asset could indicate the
      expectation of technological or commercial obsolescence of the asset, which, in turn,
      might reflect a reduction of the future economic benefits embodied in the asset.

      ...

      Amortisation period and amortisation method

97    The depreciable amount of an intangible asset with a finite useful life shall be
      allocated on a systematic basis over its useful life. Amortisation shall begin when the
      asset is available for use, ie when it is in the location and condition necessary for it to
      be capable of operating in the manner intended by management. Amortisation shall
      cease at the earlier of the date that the asset is classified as held for sale (or included
      in a disposal group that is classified as held for sale) in accordance with Ind AS 105
      and the date that the asset is derecognised. The amortisation method used shall
      reflect the pattern in which the asset's future economic benefits are expected to be
      consumed by the entity. If that pattern cannot be determined reliably, the straight-
      line method shall be used. The amortisation charge for each period shall be
      recognised in profit or loss unless this or another Standard permits or requires it to
      be included in the carrying amount of another asset.

98    A variety of amortisation methods can be used to allocate the depreciable amount of an
      asset on a systematic basis over its useful life. These methods include the straight-line
      method, the diminishing balance method and the units of production method. The method
      used is selected on the basis of the expected pattern of consumption of the expected
      future economic benefits embodied in the asset and is applied consistently from period to
      period, unless there is a change in the expected pattern of consumption of those future
      economic benefits.




98A   There is a rebuttable presumption that an amortisation method that is based on the
      revenue generated by an activity that includes the use of an intangible asset is
      inappropriate. The revenue generated by an activity that includes the use of an intangible
      asset typically reflects factors that are not directly linked to the consumption of the
      economic benefits embodied in the intangible asset. For example, revenue is affected by
      other inputs and processes, selling activities and changes in sales volumes and prices. The
      price component of revenue may be affected by inflation, which has no bearing upon the
      way in which an asset is consumed. This presumption can be overcome only in the
      limited circumstances:

      (a)    in which the intangible asset is expressed as a measure of revenue, as described in
             paragraph 98C; or

      (b)    when it can be demonstrated that revenue and the consumption of the economic
             benefits of the intangible asset are highly correlated.

98B   In choosing an appropriate amortisation method in accordance with paragraph 98, an
      entity could determine the predominant limiting factor that is inherent in the intangible
      asset. For example, the contract that sets out the entity's rights over its use of an
      intangible asset might specify the entity's use of the intangible asset as a predetermined
      number of years (i.e. time), as a number of units produced or as a fixed total amount of
      revenue to be generated. Identification of such a predominant limiting factor could serve
      as the starting point for the identification of the appropriate basis of amortisation, but
      another basis may be applied if it more closely reflects the expected pattern of
      consumption of economic benefits.

98C   In the circumstance in which the predominant limiting factor that is inherent in an
      intangible asset is the achievement of a revenue threshold, the revenue to be generated
      can be an appropriate basis for amortisation. For example, an entity could acquire a
      concession to explore and extract gold from a gold mine. The expiry of the contract might
      be based on a fixed amount of total revenue to be generated from the extraction (for
      example, a contract may allow the extraction of gold from the mine until total cumulative
      revenue from the sale of gold reaches Rs.2 billion) and not be based on time or on the
      amount of gold extracted. In another example, the right to operate a toll road could be
      based on a fixed total amount of revenue to be generated from cumulative tolls charged
      (for example, a contract could allow operation of the toll road until the cumulative
      amount of tolls generated from operating the road reaches Rs.100 million). In the case in
      which revenue has been established as the predominant limiting factor in the contract for
      the use of the intangible asset, the revenue that is to be generated might be an appropriate
      basis for amortising the intangible asset, provided that the contract specifies a fixed total
      amount of revenue to be generated on which amortisation is to be determined.

      ....

 
 
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