Assets that will last for more than a year are all subject to deprecation
Building, cars, equipment, machinery, computers are all subject to deprecation since they are assets that will last for more than a year. Therefore, every accounting period deducts a fraction of the asset’s cost that is being used up. Companies are able to report the portion that is being used up as Deprecation Expense. A company is allowed to depreciate an asset following the same method in both IFRS and US GAAP. The methods that are used in both are straight-line, accelerated, units-of-production. All these methods are very straight forwards and no significant changes have been made. When depreciating the asset over its useful life no specific method is required. It is up to the company to decide which method they want to record the depreciation expense. IFRS and US GAAP have the same approach on the concept of useful life. The IAS 16, defines useful life as “the period over which an asset is expected to be available for use by an entity” (Depreciation and IFRS.). It further states it could also be defined as “the number of production or similar units expected to be obtained from the asset by an entity” (International Accounting Standard 16 Property, Plant and Equipment). In regards to the useful life of an asset, it is depreciated in a systematic way. This means the numbers of useful years would be consistent unless a company decides the asset is going to become obsolete sooner or later than they though. In this case, there would be a change prospectively in the accounting estimates which is clearly stated in both IAS 8 Accounting Policies, Changes in Accounting Estimates and Error Corrections and FAS 154 Accounting Changes and Error Corrections. This not only affects the useful life; a change in estimate can occur from residual value and even the deprecation method.
Now that we discussed the depreciation of the asset, the next topic is impairment. When a company becomes aware that the recovery of the carrying amount through a sale or use of an asset would not be possible therefore the company would need to record the drop of the asset’s value on their books. Both US GAAP and IFRS generally agree when this issue arises that the asset should be recorded at its fair value. This entry to the company’s books is called impairment. Periodic analyses of a company’s assets must be performed under both US GAAP and IFRS if there seems to be an indication that impairment may exist. The proper disclosure of the impairment is valuable to financial statement users. In essence, an impairment loss must be recognized on the company’s financial statements if the asset’s carry value is greater than its recoverable amount. This scenario typically occurs when there is a drop in the asset’s market value, a spike in costs, or even adverse legal factors. The new carrying value would become the asset’s fair value and depreciation would be recorded over the asset’s remaining useful life. If there was an impartment loss a compensation for it cannot offset against the carrying amount under both accounting models. Although both US GAAP and IFRS have a similar concept of impairment their methodologies that are used to determine impairment differ.
The third topic about is about the similarities between US GAAP and IFRS in reference to disposal. Disposal is defined as the difference between the selling price and the carrying amount. The difference can result in a gain or loss on the asset. An illustration of this would be the following. On July 1, 2010, George Inc. sells a piece of machinery for $22,000. The machinery had cost $60,000 and there was an estimated 5-year life. The expected salvage value was $10,000. Accumulated depreciation had a balance of $35,000 as of January 1, 2010. The company used the straight-line method. After taking into consideration these numbers the gain on the disposal would be $2000 gain. The reason is because we would take the depreciation expense which is the cost subtracted by the salvage value and divided by the estimated useful life. In order to get the carrying value we would get the cost and subtract the accumulated balance that was on account. Once we find the carry value of $20,000 we subtract the selling price of $22,000 from it. Moreover, as per SFAS No.153, if there was a gain on the exchange of nonmonetary asset the company is required to recognize it if it had a commercial substance. This statement is applicable to IFRS and US GAAP.
IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations and FAS 144 discuss how to handle Assets that are for sale. Under US GAAP and IFRS, the asset would be evaluated at the fair value minus the costs to sell or at the lower of the assets carrying amount. As stated earlier, the exchange of nonmonetary assets are related in a similar way under APB 29 Accounting for Nonmonetary Exchanges which was amended by FAS 153 and IAS 16. It states that if there was a gain/loss due to a commercial substance it should be recognized and the fair value of the asset which should be reliably measured.
Cost in both accounting models have a have similar recognition criteria. Both state that costs should be included in the cost of the asset if the “future economic benefits are probably and can be reliably measured” (IAS Plus: IAS 38, Intangible Assets). The capitalizations of general administrative, start-up costs, overhead costs and regular maintenance are not allowed in both models. However, both models indicate that the cost of dismantling, removing, and restoring the site of an asset should be a part of the asset’s cost. Furthermore, there is a requirement in both models which requires an entry for the provision for an asset retirement when there is a legal obligation. Also, if there is a change to an existing restoration obligation it is added to or deducted from the cost of the asset. Then the asset would be depreciated over its remaining useful life.
FAS 34 Capitalization of Interest and IAS 23 Borrowing Costs discusses the capitalization of borrowing cost. Borrowing cost is referred to as interest and other costs that a company gains in result of borrowing funds. This includes but not limited to interest expense, finance charges and certain exchange difference that result in foreign currency. Capitalized interest is the amount of interest that could have been avoided if the money was used to pay the company’s debt rather than constructing the asset. However, there seems to be a misconception that only interest related directly to an asset must be capitalized. All the interest a company incurs could be subject to capitalization no matter the purpose of the funds are for. In March 2007, IAS 23 was issued and indicates that it “requires the capitalization of borrowing costs that are directly attributable to the acquisitions, construction or production of a qualifying asset” (IAS Plus: IASB Agenda - Convergence of IFRSs and US GAAP - IAS 23 Borrowing Cost). Under both accounting models the qualifying asset is generally defined similarly. Furthermore, the recognition of borrowing cost as an expense immediately does not present a faithful representation of the cost associated with the asset. Although there are a number of similarities between the two models, there are differing views in regards to the requirement to capitalize these costs and the specific costs.
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