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The problem is that as these machines are used beyond their useful life, they are fully
depreciated and their carrying amount is zero.
But in this case, what depreciation expense can you recognize in the profit or loss?
None, of course because the carrying amount of your property, plant and equipment cannot
decrease below zero.
So in fact, you use the machines, but you cant really recognize any depreciation expense,
because theres nothing left. You have fully depreciated these assets in the previous reporting
periods.
And as a result, the matching principle does not work here. The expenses simply do not
match the benefits gained from these machines.
The period over which an asset is expected to be available for use by an entity, or
The number of production or similar units expected to be obtained from the asset by
an entity.
It is not the potential or economic life of the asset. These two will often not be the same!
For example, normal economic life of a car is 4 years, but the companys policy is to renew car
park every 2 years. In this case, cars useful life is just 2 years.
Or, the economic life of a machine is 6 years, but after 3 years, the companys experts assess
that the machine can be used for another 5 years. In this case, total useful life is 8 years.
Now this is extremely important: Standard IAS 16 requires entities to review assets useful
lives at least at each financial year-end.
You would not believe how many entities simply forget it!
They just book the annual depreciation charge based on the rates determined for some group of
assets and thats 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.
2.
The change results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions on the entitys
financial position, financial performance or cash flows.
You (and your auditors) can argue that point 2 exactly reflects your situation. But does it really?
It definitely solves nil book value at the end of the current reporting period. Like a pill provides
immediate relief from headaches.
But the accounting policy represents some rules and standards setting how you will report
certain transactions in the financial statements not only now, but also in the future.
Its not like a pill providing immediate relief. It is like a remedy treating the route cause and
making you healthy for a long time, so that you dont need to take pills anymore. But what if you
apply the wrong pill?
So, do you think that changing your accounting policy from cost model to revaluation model
would make you provide better information about your machinery, not only now but also in the
future?
Before you answer that question to yourself, please consider this:
You need to apply the standard IFRS 13 Fair Value Measurement in order to determine
thefair value of your machines. Its very difficult and impracticable.
How can you set the market value of used production machines (mainly if they are so
You need to revalue the entire class of assets, not on an individual basis. Can you
really set the fair value of all machinery? How practical is it?
If after considering all these aspects you still want to switch from cost model to revaluation
model, then IAS 8 makes it easy for you. You dont need to apply the new policy retrospectively,
just prospectively so no restatement of previous periods.