U.S. Gaap vs. Ifrs on Depreciation

Topics: Depreciation, Generally Accepted Accounting Principles, Asset Pages: 2 (470 words) Published: February 3, 2013
U.S. GAAP vs. IFRS on Depreciation
Generally, U.S GAAP and IFRS both view depreciation as allocation of cost over an asset’s life. There are three steps of the depreciation process: firstly find depreciable base of the asset, and then estimate asset’s useful life and last choose a method of cost apportionment that best matches revenue flow from the asset. Depreciation methods allowed under U.S. GAAP include straight-line, units of production, or accelerated methods (sum of digits or declining balance). Component depreciation is allowed but not commonly used. On the other hand, IFRS allows straight-line, units of production, and both accelerated methods. Component depreciation is required when asset components have different benefit patterns. Thus the impact of major differences results that assets with different components will have different depreciation schedules, which may increase or decrease assets and revenue. Under both GAAP and IFRS, changes in depreciation method and changes in useful life are treated in the current and future periods, in other words- not retrospectively. Under IFRS, estimates of useful life and residual value, and the method of depreciation, are reviewed at least at each annual reporting date. For a company currently using GAAP a change to IFRS could result in a greater frequency of revisions in deprecation rate which in turn could mean less predictable depreciation expense. IFRS allows a company to choose between two different models in order to value PP&E after it has been recognized on the books: the historical cost model and the revaluation model. Cost model is like GAAP where PP&E is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Revaluation model allows a company to revalue PP&E on its books to fair value if fair value can be reliably measured. However, GAAP does not permit revaluations of PP&E or mineral resources. Thus for a company currently using GAAP a change to...
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