Issued December 2012

The principle in IAS 16 Property, Plant, and Equipment and to IAS 38 Intangible Assets for recognizing depreciation and amortization respectively is the consumption of economic benefits. The method used allocates the cost on a systematic basis reflecting the pattern of consumption of the asset’s future economic benefits.

The proposed amendment will prohibit any method that uses revenue generated from an asset as the basis of depreciation or amortization. Revenue reflects the pattern of future economic benefits rather than the consumption of the future economic benefits embodied in the asset.

In the Basis of Conclusions for the proposed amendment, the IASB notes that in limited circumstances the use of revenue may give rise to the same result as the units of production method. The example provided is an acquired intangible right to broadcast a movie, which could be amortized based on advertising revenue where such revenues serve as a closely correlated proxy for the number of viewers. It appears that this is more coincidental rather than being based on cause and effect, given the fact that revenue is determined by the interaction of both quantity and price.

The amendments proposed to both IAS 16 and IAS 38 both make explicit the fact that a decrease in future selling prices could be indicative of technological or commercial obsolescence reflecting a decrease in future economic benefits.

The comment period ends April 2, 2013.