Most of the non-current assets held by the entities require depreciation because of use devaluation as a result of use of the asset in business operations or other factors.
Many different depreciation methods can be used by the entities to record the effect of devaluation. However, IAS 16 Property, Plant and Equipment requires that:
In simple words it means that depreciation expense should be recognized in the same fashion as benefits are derived from the asset through its use.
Due to this requirement, if the consumption pattern of economic benefits changes then entity might have to change the depreciation method.
Change in depreciation method is a change in accounting estimate and NOT a change in accounting policy. For example if entity was previously using straight-line method of depreciation and now the circumstances require a change in depreciation method then IAS 16 allows such change and such change is just a change in accounting estimate.
Also a change in accounting estimate does not mean rectification of prior period error. Revision accounting estimate does not mean that we have discovered an error that we were continuously doing in previous accounting periods.
Example
A company bought an asset for 100,000 with an expected useful life of five years. After two years of use company decided to change the depreciation method from straight-line basis to reducing balance method at the rate of 15%.
Required: Calculate the depreciation for the third and fourth year
Step 1: Find the carrying amount at the date of change
Change in depreciation is made after two years so we will depreciate the asset for two years and it was on straight line basis.
100,000 / 5 = 20,000 per year
For two years it will be 20,000 x 2 = 40,000
Thus, carrying amount of the asset at the end of second year was 100,000 – 40,000 = 60,000
Step 2: Depreciate the carrying amount on the new basis from the date of change
Carrying amount at the date of change = 60,000
New basis of depreciate = Reducing balance method @ 15%
Depreciation for the third year will be calculated as follows:
60,000 x 0.15 = 9,000
Depreciation for the fourth year will be calculated as follows:
(60,000 – 9,000) x 0.15 = 7,650
I want to see how we compute the depreciation with an example if its a change from reducing balance to straight line.
I reviewed your blog it’s really good. thanks a lot for the information about this blog. I want more information
Happy to learn with a beautiful example.
the company A is using the SLM to depreciate the assets. If the company A is acquIred by company B who is using another method of depreciation of assets. In this case how they can change the depreciation method?
Happy to learn with a beautiful example.
the company A is using the SLM to depreciate the assets. If the company one is squared by company B who is using another method of depreciation of assets. In this case how they can change the depreciation method?
Acquired **
Mr. Verma used SLM method of depriciation for first two year for her business. WDV Method For third year and again SLM for next three years. Is she doing the right thing?
If the change takes place mid year sy at the end of P5, could we change the depreciation methodforthe full year or would we have to stick to the old method for the year or would we change at the begining otP^
Thank you for explaining the topic with a suitable example. Can you kindly illustrate,if the change is with retrospective effect. How it is treated in books of accounts/
Example for switching to DDB would be helpful including increase from improvement and increase in salvage value and useful life
Nice give more examples
Nice and fantastic explanation. Give more examples