What is the depreciable amount in IFRS

The depreciable amount of an asset is the basis for calculating the expense for depreciation or amortization of property, plant, equipment, or some intangibles.

This value is determined by deducting the residual value from the asset cost.

Let’s remember that the residual value is the estimated amount that an entity expects to receive in the future for the sale of a property, plant, and equipment or an intangible after a certain period of use.

For example, If an entity acquires a building, and the company plans to use it for 50 years and determines that once sold the asset, the company will obtain a 1 million, it means that the residual value is equal to 10%.

And in this case, the depreciable amount will be of 9 million.

In other words,9 million will be the base on which an entity must calculate the depreciation of the asset.

What is the adjusted depreciable amount?

The depreciable amount can change due to any of the following situations:

  • Changes in residual value.
  • Changes in the useful life of an asset.
  • Impairment losses Asset revaluations
  • Changes in decommissioning costs.

Depreciable amount due to changes in residual value

The first element that we will analyze is the changes in the residual value of an asset.

The residual value is an estimate that an entity makes on the initial recognition of an asset.

The value may change over time due to new information received by the entity.

When there is a change in this value, the immediate consequence is a variation in the depreciable amount.

In this way, the depreciation charge will be affected.

For example, an entity in year 1 acquires a warehouse for 500,000, with a useful life of 25 years and a residual value of 10% of the asset cost.

At the beginning of year 5, the company considers that the residual value should increase to 15% due to new information arising.

The depreciable amount in year 1 is : 450,000 = 500,000 – (500,000 X10% = 50,000)

Thus, the depreciation expense in year 1 is 18,000 (450,000 / 25 years)

Now, at the beginning of year 5, the new residual value is equal to: 75,000 (500,000 x 15%)

Depreciable amount: Carrying amount at the beginning of year 5 – residual value

Carrying amount : 500,000 – (18,000 x4) : 428,000

New depreciable amount : 428,000 – 75,000 = 353,000

Depreciation expense year 5 : 353,000 / 21 years : 16,809.

Depreciable amount due to changes in the useful life of an asset

Changes in the useful life of an intangible or property plant and equipment are changes in the accounting estimates that must be recognized prospectively according to IAS 8. 

For example, in year 1, an entity acquires a patent for 200,000 with a useful life of 15 years.

However, at the beginning of year 12, due to new information, the company considers that the asset’s useful life must be 30 years from the acquisition.

This means that the asset’s remaining useful life is 19 years, taking into account that the patent has already been used for 11 years.

Asset cost : 200,000

Accumulated amortization : 146,666 (200,000 /15)x11

Carrying amount: 53,333

In this way, the carrying value of the intangible in year 11 is 53,333.

However, because there was a change in the useful life of the asset, the new depreciable amount is equal to the carrying value.

In other words, 53,333.

This value must be distributed over the remaining useful life of the intangible.

That is, the amortization expense from year 12 must be 2,807 (53,000 / 19 years).

Depreciable amount and impairment loss.

Property plant and equipment, as well as intangibles, are subject to impairment.

This means that their carrying amount is above their recoverable amount.

The recoverable amount of an asset or cash-generating unit is the highest of its fair value, less costs of disposal, and its value in use.

For example, a company has a building whose carrying amount is 700,000, the fair value is 600,000, the estimated costs associated with the sale amount to 30,000, and its value in use is equal to 550,000.

In this case, the recoverable amount is equal to 570,000 which is the greatest of the fair value less costs to sell and value in use.

In other words, this is the maximum purchase price that independent third parties are willing to pay to acquire this building according to the effects of supply and demand,

Therefore, a company must recognize an impairment loss of 130,000.

This with the objective of equal the carrying amount to the recoverable amount and showing the economic reality of an asset

 The carrying amount value of 570,000 will be the new depreciable amount.

That is, this will be the basis we must calculate the new depreciation for the following years based on paragraph 63 of IAS 36, which establishes the following:

After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

Paragraph 63 IAS 36

The depreciable amount and the revaluation of assets.

Just as some properties, plant, and equipment, or some intangibles can lose value, others can present increases. 

When an entity uses the revaluation model in its accounting policy for subsequent measurement, it must reflect the increase in the fair value of the assets.

Let’s remember that IAS 16 determines two models for the subsequent measurement of the assets.

The cost model, or the revaluation model.

The cost model is static.

In other words, it’s based on historical information.

This is, does not take into account the market value assets, while the revaluation model is a dynamic model that is based on the fair value assets.

When an entity chooses the revaluation model as its accounting policy, it must adjust the carrying amount of its assets to match the revalued amount; let’s see an example.

An entity in year 1 acquires a building for 2 million, with a useful life of 20 years.

At the end of year 5, the fair value of the asset is 1,900,000.

Paragraph 35 of IAS 16 establishes two methods to adjust the asset to the revalued amount.

In this example, we will use method B.

This method indicates that the accumulated depreciation recognized to date must be eliminated.

This amounts to 500,000 (2,000,000 / 20) X 5.

At the end of year 5, the carrying amount of the asset is equal to 1,500,000.

Once eliminated accumulated depreciation, the carrying amount becomes 2,000,000 again.

However, the fair value tells us that we must adjust it by 100,000 to equal it to the market value.

In this way, the new carrying amount is 1,900,000, equal to the revalued amount and in the same way to the depreciable amount, since, on this value, we will calculate the new depreciation for subsequent years.

Depreciable amount and decommissioning costs

IAS 16, specifically in paragraph 16, establishes that the cost components of a property, plant, and equipment must consider its acquisition price, directly attributable costs, and dismantling costs.

The dismantling costs are the disbursements that a company should incur due to having used a place where a property, plant, and equipment operated, and rehabilitate this place to leave it in similar conditions to those found initially.

For example, an entity acquired a specialized machine for 300,000.

So that this asset can function according to the specifications of the management, it is necessary to make a series of modifications in the warehouse where the asset will operate for 30,000.

The entity estimates that it will use the asset for 10 years, and once this period ends, it will sell it for 26,000.

In addition, it will be necessary to carry out a series of reforms to rehabilitate the place for 45,000.

What should be the cost of the asset considering a discount interest rate of 10%?

The cost of the asset is as follows:

Acquisition price: 300,000

Directly attributable costs: 30,000

Dismantling costs: 45,000

Since decommissioning costs are an estimate of a future outflow of resources should be discounted to present value to show the effect of the value of money over time.

Present Value = (1+Interest) ^-n X Estimated amount.

Interest rate = 10%

Term  = 10 years.

Estimated amount = 45,000

Present value: 17,349

Total asset cost = 300,000 + 30,000 + 17,349 = 347,349

In this way, our depreciable amount is as follows:

Total cost of the asset = 347,349

Residual value = 26,000

Depreciable amount = 321,349

The residual value is 26,000 since this is the value for which the entity expects to sell the asset after 10 years.

Now, what happens if, at the beginning of year 6, the entity considers that due to new information, the estimate made of dismantling costs should decrease by 12,000.

The carrying amount of the asset at the end of year 5 is: 186,675 = 347,349 – (321,349 / 10) X5)

When there is a variation in the estimate of decommissioning costs, the change in value will affect the cost of the asset according to paragraph 5 of IFRIC 1, as shown below:

ifric 1 paragraph 5

In this way, the new depreciable amount is as follows:

Asset cost: 347,349

Residual value: 26,000

Changes in decommissioning costs: (12,000)

Accumulated depreciation: 160,675

New depreciable amount: 148,674