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Many production companies still use their fully depreciated property, plant and equipment. It means that the useful lives of these assets were incorrectly estimated.
The standard IAS 16 defines the useful life as either:
a) The period over which an asset is expected to be available for use by an entity, or
b) The number of production or similar units expected to be obtained from the asset by an entity.
Standard IAS 16 requires entities to review assets' useful lives at least at each financial year-end.
Still, many entities simply forget it. They just book the annual depreciation charge based on the rates determined for some group of assets and that's it.
They do not revise the useful lives of their assets and as a result, they end up with using fully depreciated assets in the production process.
How to fix this situation?
Solution 1: Review useful lives at each financial year-end. Treat it as a change in accounting estimate.
Useful life is an accounting estimate and if you find out that it is different from what you initially set, you need to book this change in line with the standard IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
It means that you simply set the new remaining useful life, take the carrying amount and recognize the depreciation charge based on the carrying amount and new remaining useful life.
If your assets have been fully depreciated and you did not review the useful life of PPE in the past, there is an accounting error resulting from failed application of IAS 16.
If this error is material, you need to correct it -- this video shows you the example of correcting the errors in line with IAS 8.
Solution 2: Revalue your assets to their fair value.
Standard IAS 16 permits 2 models for subsequent measurement of your property, plant and equipment: cost model and revaluation model.
You can therefore change your accounting policy and switch from cost model to revaluation model in order to keep your assets at their fair value.
However, I do NOT recommend this option because it would not reflect the economic reality of the production assets in the best way.
Please watch the video and find out more.
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13 сен 2024