Depriciation and Impairment – IFRS and Indian GAAP

Link between Depreciation and Impairment under IFRS

When an item of Property, Plant and Equipment (PPE) is impaired i.e. recoverable amount < carrying amount, carrying amount is reduced to the amount of recoverable amount.

Asset should no more be carried more than their Recoverable amount.

Such a decrease in carrying amount is impairment and is booked in Profit and Loss.

After recognition of an impairment loss, the depreciation charge of the asset shall be adjusted in the future periods to allocate the asset’s revised carrying amount over its remaining useful life.

Example 1:

An entity acquires equipment for Rs.100

Economic life of equipment is 10 years but entity’s policy is to renew such equipment every 5 years i.e. useful life is 5 years

Residual value = 20

Depreciation Plan
Year Depreciation Charge Accumulated Depreciation Carrying amount at year end
1 (100-20)/5 = 16 16×1 = 16 100-16 = 84
2 (100-20)/5 = 16 16×2 = 32 100-32 = 68
3 (100-20)/5 = 16 16×3 = 48 100-48 = 52
4 (100-20)/5 = 16 16×4 = 64 100-64 = 36
5 (100-20)/5 = 16 16×5 = 80 100-80 = 20

Under IFRS there is need to review estimate of residual value at each financial year end where as under Indian GAAP there is no need for an annual review. Below example illustrate depreciation plan when there is change in estimate of residual value.

Suppose in example 1 residual value is estimated in year 4 = 10

Depreciation Plan
Year Depreciation Charge Accumulated Depreciation Carrying amount at year end
1 (100-20)/5 = 16 16×1 = 16 100-16 = 84
2 (100-20)/5 = 16 16×2 = 32 100-32 = 68
3 (100-20)/5 = 16 16×3 = 48 100-48 = 52
4 (100-48-10)/2 = 21 48+21 = 69 100-69 = 31
5 100-69-10 = 21 69+21 = 90 100-90 = 10

Under IFRS there is need to review estimate of useful life at each financial year end where as under Indian GAAP there is no need for an annual review. Below example illustrate depreciation plan when there is change in estimate of useful life.

Suppose now in example 1 the useful life is revised in year 3 as 4 years

Depreciation Plan
Year Depreciation Charge Accumulated Depreciation Carrying amount at year end
1 (100-20)/5 = 16 16×1 = 16 100-16 = 84
2 (100-20)/5 = 16 16×2 = 32 100-32 = 68
3 (68-20)/2 = 24 32+24 = 56 100-56 = 44
4 (44-20)/2 = 24 56+24=80 100-80 = 20

Suppose in example 1 depreciation test is performed in year 3 and estimation of recoverable amount at year end is 45

Now if you see in example 1 above the Net book value at year end 3 is 52

Thus Impairment is 52-45 = 7
Year Depreciation Charge + Impairment Accumulated Depreciation + Impairment Carrying amount at year end
1 (100-20)/5 = 16 16×1 = 16 100-16 = 84
2 (100-20)/5 = 16 16×2 = 32 100-32 = 68
3 (100-20)/5 = 16 16 + 7 = 23 16×3 = 48 48+7 =55 100-55 = 45
4 (45-20)/2 = 12.5 55+12.5 = 67.5 100-67.5 = 32.5
5 (45-20)/2 = 12.5 67.5+12.5 = 80 100-80 = 20