28 July 2024
Under International Financial Reporting Standards (IFRS), depreciation is addressed primarily through **IAS 16: Property, Plant and Equipment** and **IAS 38: Intangible Assets**. Unlike the Companies Act in India, which provides specific depreciation rates for different categories of assets, IFRS does not prescribe fixed depreciation rates or schedules. Instead, IFRS provides guidelines on how to determine the depreciation rate based on the asset's useful life, residual value, and the method used.
### **Key Points on Depreciation Under IFRS:**
#### **1. **Determining Depreciation**
- **Depreciation Method**: IFRS allows the use of various depreciation methods such as straight-line, diminishing balance, and units of production. The method chosen should reflect the pattern in which the asset’s future economic benefits are expected to be consumed.
- **Useful Life**: The useful life of an asset is the period over which the asset is expected to be used by the entity. It is not prescribed but must be estimated based on historical data, industry standards, and other relevant factors.
- **Residual Value**: This is the estimated amount that an entity would currently obtain from the asset if it were already in the condition expected at the end of its useful life. It should be reviewed at least annually and adjusted if necessary.
#### **2. **IAS 16: Property, Plant and Equipment**
- **Depreciation Calculation**: The depreciation charge for each period is determined based on the depreciable amount of the asset, which is its cost less its residual value. The depreciable amount is allocated over the asset’s useful life.
- **Review**: The depreciation method and useful life should be reviewed at least at each financial year-end and adjusted if there are significant changes in the expected pattern of economic benefits.
#### **3. **IAS 38: Intangible Assets**
- **Amortization**: For intangible assets, the concept similar to depreciation is amortization. It is applied systematically over the asset’s useful life, which should be reviewed annually.
- **Indefinite Life**: If an intangible asset is deemed to have an indefinite useful life, it is not amortized but is tested for impairment annually.
### **4. **Guidance on Depreciation Methods**
- **Straight-Line Method**: Spreads the cost of the asset evenly over its useful life. - **Diminishing Balance Method**: Allocates higher depreciation charges in the earlier years of the asset's life. - **Units of Production Method**: Based on the asset’s usage or output.
### **5. **Disclosure Requirements**
- **IAS 16**: Requires disclosure of the depreciation methods used, the useful lives or depreciation rates, the carrying amount of each class of asset, and changes in the estimated useful life and residual value.
### **Summary**
Under IFRS: - **No Prescribed Rates**: IFRS does not specify depreciation rates or schedules. - **Determined Based on Useful Life and Residual Value**: Depreciation is calculated based on the asset's useful life, residual value, and chosen method. - **Methods**: Straight-line, diminishing balance, and units of production methods can be used. - **Review and Disclosure**: Depreciation methods and useful lives should be reviewed annually and disclosed in the financial statements.
For detailed guidance, refer to **IAS 16** and **IAS 38** on the official [IFRS website](https://www.ifrs.org).
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