Comments from ACCA to the International Accounting Standards Board, April 2013.
In our view these amendments do not significantly advance the understanding of the consumption of the economic benefit of the asset which is the principle behind depreciation and amortisation. They do not even provide a supportable blanket prohibition on a revenue-based model.
We would therefore prefer that these amendments were not made to the standards, but at most the content could be an interpretation. Acceptable methods of depreciation and amortisation would then remain a matter of judgement in applying the existing principle.
Q1. The IASB proposes to amend IAS16 and IAS38 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 the 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?
What lies at the heart of this issue is whether the principle of the consumption of the economic benefit is adequately explained and understood. We do not think that these amendments help significantly with that issue and that writing rules which prohibit certain sorts of models helps only marginally. We note that for example the reverse annuity method of depreciation was specifically prohibited at one point.
Furthermore as the exposure draft itself recognises in the basis of conclusions, revenue generation patterns can sometimes be a good proxy for the consumption of the economic benefits of assets (paragraphs BC3 to BC5), especially for some intangible assets where physical consumption cannot be measured. The proposed rule in paragraphs 62A of IAS16 and 98A of IAS38 is therefore not even a satisfactory one as a complete ban. However we agree that in the majority of cases revenue methods will not be appropriate. So the guidance if needed might be better as an interpretation of the standards.
Q2. Do you have any other comments on the proposals?
The amendment proposes full retrospective application. While we do not support the proposals, were they to go ahead we would support a prospective application of these amendments. This would be more consistent with the rest of IAS16 and 38, where changes in depreciation methods normally result in prospective application from the date of change.