Clarification of Acceptable Methods of Depreciation and Amortisation

In December 2012, the International Accounting Standards Board (the IASB) published an Exposure Draft where it proposed to amend IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets to clarify that preparers should not use revenue-based methods to calculate charges for the depreciation or amortisation of items of property, plant and equipment or intangible assets. The IASB explained that a revenue-based method reflects a pattern of economic benefits being generated from the asset, rather than the expected pattern of consumption of the future economic benefits embodied in the asset.

The Exposure Draft was open for comment until 2 April 2013 and could be found on the IASB Project Page.

In December 2012, EFRAG issued its draft comment letter where it supported the IASB's efforts to clarify the current requirements regarding the use of revenue-based methods of depreciation and amortisation.

However, EFRAG believed that the IASB should remove the seeming contradiction between the standard and the Basis for Conclusions by reflecting the reasoning presented therein - that there are circumstances where revenue might be an appropriate proxy for the use of an asset - in the body of the standard.

After having consulted its constituents, EFRAG issued in April 2013 its final comment letter where it supported the IASB's efforts to clarify the current requirements regarding the use of revenue-based methods of depreciation and amortisation.

However, EFRAG believed that the IASB should remove any language from the exposure draft that discourages entities from applying revenue-based methods when they represent an appropriate proxy for reflecting the depreciation of the asset through its use.

In May 2014, the IASB issued Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments IAS 16 and IAS 38 (the Amendments).

The Amendments aim to clarify that the use of revenue-based methods to calculate the depreciation of an asset is not to be assumed appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.
The Amendments also clarify that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. However, this presumption can be rebutted in certain limited circumstances.

The Amendments are effective for annual periods beginning on or after 1 January 2016, although entities are permitted to apply them earlier.

In June 2014, EFRAG issued an Invitation to Comment relating to the endorsement of the Amendments for use in the European Union and European Economic Area. It consulted both on its assessment of the amendments against the technical criteria for the endorsement in the EU and on its initial assessment of the costs and benefits that would arise from the implementation and application of the Amendments in the EU.

On 24 July 2014, after having analysed its constituents' comment letters, EFRAG assessed that the Amendments satisfy the technical criteria for EU endorsement. Therefore, EFRAG issued its positive endorsement advice.

On 9 July 2015, the Accounting Regulatory Committee (ARC) voted by written procedure in favour of Amendments.