Annuity Depreciation Method and Risk of IFRS Compliance

Syamantak Saha

Oracle allows an easy selection of an Annuity Method of Depreciation. In this method, the Interest Rate paid for the particular Asset is included in the Depreciating amount.

As per the global IFRS Standards, the Depreciating amount is only a systematic reduction of the value of the asset itself. Any financing including loans to pay for the asset and associated interests paid, is an operating expense for the entity and not allocated to the asset. The reason for this is that the interest rate, as determined by reserve banks, can often not co-incide with the asset utility, and an entity may find that the holding value of an asset is much higher than the purchase value, if including an interest rate factor in its depreciation. This often happens when a high-tech product is bought. Whilst the asset itself maybe high value at time of purchase and depreciation is allowed for several years, but the book value of the asset is no longer less than the new market price, due to the rate of development of this technology.

As per, selecting this method would not be compliant with IFRS Standards, but can be easily selected by Customers, by error or intention, leading to a compliance risk at the jurisdiction using IFRS based Standards.

Is it possible for Customers to replace this risk with 'IFRS only' features for the product?

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