Tatiana Geykhman of Accounting Consulting Services examines the practical implications of IC rejections related to IAS 16.
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The Interpretations Committee (IC) regularly considers anywhere up to 20 issues at its periodic meetings. A very small percentage of the issues discussed result in an interpretation. Many issues are rejected; some go on to become an improvement or a narrow scope amendment. The issues that are not taken on to the agenda end up as ‘IFRIC rejections’, known in the accounting trade as ‘not an IFRIC’ or NIFRICs. The NIFRICs are codified (since 2002) and included in the ‘green book’ of standards published by the IASB although they technically have no standing in the authoritative literature. This series covers what you need to know about issues that have been ‘rejected’ by the IC. We go standard by standard and continue with IAS 16 as per below.
IAS 16 covers recognition, measurement, and disclosure of property, plant and equipment (PPE). Nine matters related to IAS 16 have resulted in an agenda rejection by the IC.
A number of issues have been submitted to the IC on the acceptable methods of depreciation.
Production method (May 2004)
The IC considered the so-called production method of depreciation. An example is the use of the road that is expected to increase over time. The IC considered whether this method could be used for an asset whose benefits were not consumed directly through use. The IC rejected the issue and deferred this to the Board. The units of production method results in a charge based on the expected use or output. It can be used where this method reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
Interest method (November 2004)
The IC also rejected a submission asking about the interest method of depreciation. Under this method, the depreciated amount of an asset reflects the present value of future net cash flows expected from it, and thus the asset would be treated similarly to a receivable.
The IC noted that the depreciation method should reflect the manner in which future economic benefits of the asset are consumed. For example, straight-line depreciation would be the most appropriate method where a road is used equally over time.
IAS 16 establishes the principle for the basis of depreciation as being the expected pattern of consumption of the future economic benefits of an asset. In the case of a toll road, consumption might be low in the early periods and high in later periods. The IC discussed in November 2011 and March 2012 whether a unit of production method (expected use or output) might be more appropriate to reflect the pattern of consumption of the expected future economic benefits and suggested a clarification of IAS 16 and IAS 38.
The IASB then clarified that the use of revenue-based methods to calculate depreciation of an asset is presumed to be an inappropriate basis, because revenue reflects factors other than the consumption of the economic benefits embodied in the asset. In May 2014 the IASB amended IAS 16 and IAS 38. These amendments are effective for annual periods beginning on or after 1 January 2016.
Cost of testing (July 2011)
The IC was asked to clarify what could be viewed as sales proceeds from testing an asset. The submission considered an industrial group consisting of several autonomous plants in a jurisdiction subject to local regulation. The regulation required a ‘commercial production date’ to be identified for the industrial complex as a whole. The submission asked whether the proceeds from the plants already in operation could be offset against the costs of testing the plants that are not yet available for use.
The IC noted that the cost of testing and proceeds from testing should be determined separately for each PPE item. The IC thought that the IAS 16 guidance is sufficient to determine when a PPE item is available for use and to distinguish proceeds that reduce costs of testing an asset from revenue from production. Diversity in practice was not expected.
Summary of IAS 16 rejections
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