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IFRS Ready? IAS16 Fixed Assets - What will Change?

by Kent Bettisworth

May 10, 2010

IFRS Ready?  You hear the drums beating louder...IFRS is coming...and you wonder...what does this mean for your company and you...the asset accountant?

Let me share a quick primer, while not comprehensive, can get you started.  You should become familiar with 3 standards, in particular.  These standards are IAS16 - Property, Plant, and Equipment; IAS17 Leases; and IAS38 Intangible Assets.  You can find the full text of these standards at www.iasb.org.  Upon adoption of IFRS, changes required by these standards may include reorganizing your fixed asset records, altering your depreciation expense due to new useful lives as well as revising total asset values, and increasing your balance sheet by adding new right-to-use lease assets and/or new intangible development cost assets.  The remainder of my discussion will speak to the IAS16 standard.

IAS16 has three aspects to consider: 1) componentization, 2) depreciation, and 3) valuation.  IAS16 is not included in the IASB/FASB Convergence project which means the standards are adopted as currently written, and no changes are anticipated nor planned.

1.  Compentization means separating an 'asset unit' into components, and separately depreciating '...if significant cost components of an asset vary in their useful life.' (See paragraphs 9, 43, and 45 of IAS16).  The definition of an asset unit and the assessment of 'significant' are based on management judgement along wi th your auditor's concurrence.  Documentation of this evaluation is important to support the financial statement notes.  Companies with large manufacturing facilities may find themselves requiring significant asset record reorganization, if the facility is one or few asset records today.  If your company possesses large investments in office buildings, there should not be much rework here...if you have implemented cost segregation studies for both tax and financial purposes.  IMPORTANT:  You don't have to wait for IFRS adoption to evaluate your current asset ledger...get started now!  Review the SAP asset module functionality provided by asset super-numbers, group assets, and sub-assets to find the best fit for your asset componentization.

2. Depreciation methods in the US allow the 'group' depreciation of similar assets as a single depreciable unit...and specifically allow assuming retired assets are fully depreciated...resulting in no income statement gain or loss.  Paragraph 68 of IAS16 states income statement gain or loss on asset 'derecognition' (ie. retirement) is required.  This requirement in particular is interpreted as having a significant impact on regulated utilities and oil and gas companies as well as other large corporations who utilize the 'group' method of depreciation.  I have read and re-read this section of IAS16 many times, and believe you could interpret the standard as allowing 'group' depreciation.  Are you violating the 'principle' of recognizing asset depreciation as stated by IAS16? IMPORTANT: Regardless of what I think, you and your auditor must agree. Review the SAP asset module functionality related to the gain/loss setting on your asset retirement transactions.

3. Asset valuations may be very different compared to your company's current historical asset values.  For example, a new option allows restating an entire class of assets to a 'fair' value (see paragraphs 29 and 31 in IAS16).  The definition of 'fair' value introduces a certain amount of management judgement that may be quite uncomfortable for today's asset accountant.  In addition, impairment of asset values, while somewhat similar in calculation, require a one-step test instead of two, and, provide for a reversal of the impairment in future years.  Hence potentially more volatility in depreciation expense is introduced. IMPORTANT: How is your impairment process working today?  Maybe it is time for a tune-up.  Review the SAP asset module functionality for asset revaluation.

In summary, get started now learning IFRS impacts on your fixed assets...and get IFRS Ready!

Kent Bettisworth, BETTISWORTH & ASSOCIATES

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