02 April 2013

Deloitte commented on clarification of acceptable methods of depreciation and amortisation

Deloitte Touche Tohmatsu Ltd published its response to the IASB's ED Clarification of Acceptable Methods of Depreciation and Amortisation (ED/2012/5). Deloitte agrees with the general prohibition of a revenue-based method of depreciation or amortisation for the reasons expressed in the ED.

Deloitte recommends that the Board provide additional clarity on circumstances in which a revenue figure might form part of the calculation of depreciation or amortisation under the diminishing balance or units of production method.

The IASB proposes to amend IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets to prohibit a depreciation or amortisation method that uses revenue generated from an activity that includes the use of the asset. This is because it reflects a pattern of future economic benefits being generated from the asset, rather than reflecting the expected pattern of consumption of the future economic benefits embodied in the asset. Do you agree? Why or why not?

Deloitte agrees with the general prohibition of a revenue-based method of depreciation or amortisation for the reasons expressed in the ED.

Do you have any other comments on the proposals?

Deloitte notes that paragraph BC1 of the Basis for Conclusions of the exposure draft provides a clearer description of the unacceptable methods of depreciation and amortisation (i.e., a method that uses revenue as the basis for depreciation or amortisation, rather than as a proxy for usage of the asset or an indication of technical or commercial obsolescence) than do proposed paragraphs 62A of IAS 16 and 98A of IAS 38 (whose reference to ‘a method that uses revenue’ could be read as encompassing the methods noted as acceptable elsewhere in  the ED). Deloitte recommends that this clearer description be included in the main body of IAS 16 and IAS 38.

In addition, Deloitte believes that the methodology for amortisation of intellectual property assets described in paragraphs BC4 and BC5 of the Basis for Conclusions of the exposure draft should be presented more clearly as an example of application of the units of production method rather than an exception to the prohibition of revenue-based amortisation. Such a description could then be included alongside proposed paragraph 98B in the main body of IAS 38. Deloitte also recommends that the reference to use of advertising revenue “to the extent that advertising revenue has a linear relationship with viewer numbers” be removed as it implies a requirement for a greater level of precision than the earlier reference to “a reasonable basis” and could render use of this method impracticable for most entities.

Deloitte also notes that consideration of technical or commercial obsolescence to a determination of the useful life of an asset is already required by IAS16.56(c) and IAS38.90(c) and hence it is unnecessary to refer to useful life in proposed paragraphs 62B and 98B.

Finally, Deloitte notes that full retrospective application of the amendments may be onerous in some circumstances. Deloitte therefore suggests that the Board consider whether prospective application from the start of the comparative period would provide sufficient comparability without necessitating recalculation of depreciation or amortisation and related items (such as impairment charges and depreciation or amortisation included in the cost of other assets) from the date of acquisition of each affected asset.

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