Clarifying Depreciation And Amortization (At The Margins…)


The IASB recently issued Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16 and IAS 38), effective for annual periods beginning on or after January 1, 2016. IAS 16 and 38 both require depreciating or amortizing an asset using a method reflecting "the pattern in which the asset's future economic benefits are expected to be consumed by the entity." The amendments address the question of whether this might ever allow using a revenue-based method - one that "allocates an asset's depreciable / amortizable amount based on revenues generated in an accounting period as a proportion of the total revenues expected to be generated over the asset's useful economic life." They conclude that such a method isn't appropriate, "because it reflects a pattern of economic benefits being generated from operating the business (of which the asset is part) rather than the economic benefits being consumed through the use of the asset." This seems reasonable enough as a general premise - the revenue generated from an asset might clearly vary for a range of market-related factors having nothing inherently to do with the rate at which its economic benefits are being consumed. It's possible though to identify cases where the two would usually track each other closely, and the amendments to IAS 38 provide some illustrations: "In the circumstance in which the predominant limiting factor that is inherent in an intangible asset is the achievement of a revenue threshold, the revenue to be generated can be an appropriate basis for amortization. For example, an entity could acquire a concession to explore and extract gold from a gold mine. The expiry of the contract might be based on a fixed amount of total revenue to be generated from the extraction (for example, a contract may allow the extraction of gold from the mine until total cumulative revenue from the sale of gold reaches CU2 billion) and not be based on time or on the amount of gold extracted. In another example, the right to operate a toll road could be based on a fixed total amount of revenue to be generated from cumulative tolls charged (for example, a contract could allow operation of the toll road until the cumulative amount of tolls generated from operating the road reaches CU100 million). In the case in which revenue has been established as the predominant limiting factor in the contract for the use of the intangible asset, the revenue that is to be generated might be...

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