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."