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Commission Regulation
(EC) No 2238/2004 of 29 December 2004 amending
Regulation (EC) No 1725/2003 adopting certain
international accounting standards in accordance with
Regulation (EC) No 1606/2002 of the European Parliament
and of the Council, as regards IASs IFRS 1, IASs Nos 1
to 10, 12 to 17, 19 to 24, 27 to 38, 40 and 41 and SIC
Nos 1 to 7, 11 to 14, 18 to 27 and 30 to 33
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Depreciation
43. Each part of an
item of property, plant and equipment with a cost that
is significant in relation to the total cost of the item shall
be depreciated separately.
44. An entity
allocates the amount initially recognised in respect of an
item of property, plant and equipment to its significant parts
and depreciates separately each such part. For example, it may
be appropriate to depreciate separately the airframe and
engines of an aircraft, whether owned or subject to a finance
lease.
45. A significant
part of an item of property, plant and equipment may have a
useful life and a depreciation method that are the same as the
useful life and the depreciation method of another significant
part of that same item. Such parts may be grouped in
determining the depreciation charge.
46. To the extent
that an entity depreciates separately some parts of an item of
property, plant and equipment, it also depreciates separately
the remainder of the item. The remainder consists of the parts
of the item that are individually not significant. If an
entity has varying expectations for these parts, approximation
techniques may be necessary to depreciate the remainder in a
manner that faithfully represents the consumption pattern and/or
useful life of its parts.
47. An entity may
choose to depreciate separately the parts of an item that do
not have a cost that is significant in relation to the total
cost of the item.
48. The depreciation
charge for each period shall be recognised in profit
or loss unless it is included in the carrying amount of
another asset.
49. The depreciation
charge for a period is usually recognised in profit or loss.
However, sometimes, the future economic benefits embodied in
an asset are absorbed in producing other assets. In this case,
the depreciation charge constitutes part of the cost of the
other asset and is included in its carrying amount. For
example, the depreciation of manufacturing plant and equipment
is included in the costs of conversion of inventories (see IAS
2). Similarly, depreciation of property, plant and equipment
used for development activities may be included in the cost of
an intangible asset recognised in accordance with IAS 38 Intangible
Assets.
Depreciable Amount
and Depreciation Period
50. The depreciable
amount of an asset shall be allocated on a systematic
basis over its useful life.
51. The residual
value and the useful life of an asset shall be reviewed
at least at each financial year-end and, if expectations
differ from previous estimates, the change(s)
shall be accounted for as a change in an
accounting estimate in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.
52. Depreciation is
recognised even if the fair value of the asset exceeds its
carrying amount, as long as the asset’s residual value does
not exceed its carrying amount. Repair and maintenance of an
asset do not negate the need to depreciate it.
53. The depreciable
amount of an asset is determined after deducting its residual
value. In practice, the residual value of an asset is often
insignificant and therefore immaterial in the calculation of
the depreciable amount.
54. The residual
value of an asset may increase to an amount equal to or
greater than the asset’s carrying amount. If it does, the
asset’s depreciation charge is zero unless and until its
residual value subsequently decreases to an amount below the
asset’s carrying amount.
55. Depreciation of
an asset begins when it is available for use, ie when it is in
the location and condition necessary for it to be capable of
operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the
date that the asset is classified as held for sale (or
included
in a disposal group that is classified as held for sale)
in accordance with IFRS 5 and the date that the asset is
derecognised. Therefore, depreciation does not cease
when the asset becomes idle or is retired from active
use unless
the asset is fully depreciated. However, under usage methods of
depreciation the depreciation charge can be zero while there
is no production.
56. The future
economic benefits embodied in an asset are consumed by an
entity principally through its use. However, other factors,
such as technical or commercial obsolescence and wear and tear
while an asset remains idle, often result in the diminution of
the economic benefits that might have been obtained from the
asset. Consequently, all the following factors are considered
in determining the useful life of an asset:
(a) expected usage
of the asset. Usage is assessed by reference to the asset’s
expected capacity or physical output.
(b) expected
physical wear and tear, which depends on operational factors
such as the number of shifts for which the asset is to be used
and the repair and maintenance programme, and the care and
maintenance of the asset while idle.
(c) technical or
commercial obsolescence arising from changes or improvements
in production, or from a change in the market demand for the
product or service output of the asset.
(d) legal or similar
limits on the use of the asset, such as the expiry dates of
related leases.
57. The useful life
of an asset is defined in terms of the asset’s expected
utility to the entity. The asset management policy of the
entity may involve the disposal of assets after a specified
time or after consumption of a specified proportion of the
future economic benefits embodied in the asset. Therefore, the
useful life of an asset may be shorter than its economic life.
The estimation of the useful life of the asset is a matter of
judgement based on the experience of the entity with similar
assets.
58. Land and
buildings are separable assets and are accounted for
separately, even when they are acquired together. With some
exceptions, such as quarries and sites used for landfill, land
has an unlimited useful life and therefore is not depreciated.
Buildings have a limited useful life and therefore are
depreciable assets. An increase in the value of the land on
which a building stands does not affect the determination of
the depreciable amount of the building.
59. If the cost of
land includes the costs of site dismantlement, removal and
restoration, that cost portion of the land asset is
depreciated over the period of benefits obtained by incurring
those costs. In some cases, the land itself may have a limited
useful life, in which case it is depreciated in a manner that
reflects the benefits to be derived from it.
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