IAS 16 - Defer Depreciation Start date


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Hello Everyone,

I have a question, if any one can answer it will be a great help.

We have an Construction in Progress (CIP) Asset. Which will be completed and ready for use from end of Jun-2020, But currently we don't have much volume for this New Fixed asset, (Expecting volumes will ramp-up in next year) so Can IFRS standards allows us to defer start date of depreciation? Please provide the reference as well.

Please keep in mind we are using Straight-line method for all of our assets.
 
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Werner Reisacher

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Glad you mention the Straight-line method. My first reaction was to switch to the "use of units of production" method.
IFRS is pretty strict about the definition of the time when production equipment must start. It is not the moment when it is put to use but the moment when it is available for use.
It is the Accountants' responsibility that the books are kept strictly in line with the applicable Accounting Standards in that Region. He has however not the authority to make a unilateral decision whether and when production equipment is in the desired location and condition, tested by certified technicians, and capable of operating in the manner intended for its specific use by management. These are all conditions included in the IFRS definition of "available for use". Meeting all these requirements can take a long time, and it would be irresponsible and violate all rules of securities and potential serious liabilities if the machine would be declared "available" if not all those conditions are fulfilled and approved by all people involved in the process.
I hope you get my point. Interprete the IFRS based on the intent of the ruling and not strictly by the letter. You may also want to look into the tax implications related to this issue in our country.
 
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Hello Werner,

Thanks a lot for your response. I have an idea about "Management Intent" . "Available for use" means Assets meeting all the requirement to make the asset use for formal operations as management required, and even it is formally handed over to operation as well in some numbers. But As our commercial dept. forecast about the future throughput volume for that new assets is halt due to activity drops in current months and in near future due to COVID-19.

Hence management wants to lower their operating cost, in one of different ways is to reduce depreciation cost up to maximum extent. Therefore if possible to date of start depreciation may be delayed for some months while Capitalizing CIP assets ? OR Can we delay the transfer of CIP asset to capitalization, in order to avoid depreciation. Regarding TAX implications, I am based in Middle East, and For GOD's heaven, we don't have corporate tax here. Hope you get my point as well.

#StaySave.

Regards,
 

Werner Reisacher

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Delaying the depreciation once an asset is capitalized would violate IAS/IFRS rules. Transfering WIP to Finished Equipment before the equipment meets all the conditions outlined in IAS 16 would also violate those rules. The decision about the timing when the equipment passes all technical, safety, and other standards required in your industry in your country, to become available as production equipment, cannot be made by the accountants. You cannot transfer until the moment you receive the written approval from the decision-makers from the technical-, safety-, and other authorized people as outlined in your companies manual that regulates the competencies and signature powers in your organization. You may want to establish a record in the form of an email to the decision-makers reminding them that you need their approval before you will be able to transfer the WIP to make sure that you have a record in case questions come up at a later date.
And please, take also care of yourself and stay safe!
 

Fidget

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If you had been using the unit of production method to depreciate the asset, then there would be no depreciation charge whilst idle. The standard says - in relation to depreciation: "...However, under usage methods of depreciation the depreciation charge can be zero while there is no production".
 
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Werner Reisacher

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Thank you Fidget for bringing this up and glad to hear from you Fidget. In principle, a brilliant idea. I was thinking about it too. I would appreciate hearing from Absial whether that would be possible or create a conflict of "uniform account methods" by cherry-picking the depreciation method by individual machines. Or, if he would need approval first that could run him into a conflict the time.
 
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