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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