IFRS for SMEs defines depreciation as the systematic allocation depreciable amount of an asset over its useful life, Depreciation is often described as the amount by which the economic value embedded in the asset diminishes through its use, namely, the estimated cost of using the asset in the process of generating income or carrying out the operating activities of the entity.
Many practicing applies the depreciation based on the wear and tear allowance granted as a deduction for tax purposes. The question that needs to be addressed is whether this practice is in compliance with IFRS for SMEs or whether it results in fair presentation of the financial statements.
In order to address these questions it is important to under standard the impact a depreciation policies has on the financial statements and the effect it has on the reliability and usefulness of the information to users of financial statements. The depreciation policy adopted by the entity direct affects the profit for the period, namely, the depreciation expense charged to profit or loss, and the carrying amount of the assets in the statement of financial position. The depreciation policy adopted by an entity impact on the two main areas on which a practitioner expresses and opinion, namely, the fair presentation of (i) the financial position of the entity, and (ii) the financial performance of the entity.
The risks of applying and inappropriate depreciation policy are: (a)non-compliance to the provision of IFRS for SMEs [s17.16 – s17.23] – this is a significant risk to the practitioner and the opinion expressed on the financial statements; (b)fair presentation of the financial position and financial performance of the entity – impacting on the qualitative characteristics of the financial statements; (c)impacting on the solvency and financial risks of the entity – directly affected by measuring the carrying amount of the...