Overview

The Accounting Standards Board issued AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation in August 2014. This legislation amends AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets in response to the International Accounting Standards Board’s issuance of Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) in May 2014. The amendments establish the principle that the basis of depreciation and amortisation should reflect the expected pattern of consumption of the future economic benefits of an asset and clarify that revenue-based methods are not appropriate for calculating depreciation, as revenue generally reflects factors other than the consumption of the economic benefits embodied in the asset. The amendments apply to annual reporting periods beginning on or after 1 January 2016, although earlier application is permitted. The AASB considered submissions on the Exposure Draft ED 231 Clarification of Acceptable Methods of Depreciation and Amortisation before issuing AASB 2014-4. This Standard is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Scope and Application

AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation applies to entities that prepare financial reports in accordance with Australian Accounting Standards. These entities include both public and private sector organisations, such as corporations, partnerships, trusts, and unincorporated associations that are required to prepare financial statements. The amendments are designed to ensure consistency and transparency in the way depreciation and amortisation are calculated and reported in financial statements. The amendments do not apply to financial instruments, lease contracts, or insurance contracts, as these are governed by other accounting standards. AASB 2014-4 applies to annual reporting periods beginning on or after 1 January 2016, and earlier application is permitted for annual reporting periods beginning on or after 1 January 2005. The standard is applicable to both Commonwealth and state jurisdictions, as it is based on Australian Accounting Standards which are adopted nationally. The application of the standard is not restricted or extended by any subordinate instruments.

Key Provisions

The key provisions of AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation are contained in sections that amend AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets. Section 1 outlines the principle for the basis of depreciation and amortisation as the expected pattern of consumption of the future economic benefits of an asset (section 22). This principle is intended to ensure that the depreciation and amortisation methods accurately reflect the way in which assets are used over their useful lives. Section 2 clarifies that revenue-based methods of calculating depreciation are not appropriate, as revenue often includes factors unrelated to the consumption of the economic benefits of an asset (section 23). Additionally, section 3 establishes that revenue is generally an inappropriate basis for measuring the consumption of the economic benefits of an intangible asset, though this presumption can be rebutted in limited circumstances (section 24). The Act imposes obligations on entities to ensure that their accounting practices comply with the new standards set forth by AASB 2014-4. Entities must adopt the new depreciation and amortisation methods for assets used in their operations, aligning their financial reporting with the principle of the expected pattern of consumption of future economic benefits. This requirement extends to both property, plant, and equipment as well as intangible assets. Specifically, entities must avoid using revenue-based methods for calculating depreciation unless specific conditions are met that rebut the presumption against such methods. Compliance with these provisions ensures that financial statements accurately reflect the true consumption of economic benefits over the useful life of the assets. For breaches of the standards set by AASB 2014-4, entities may face civil or criminal consequences depending on the severity and intent of the non-compliance. The Australian Securities and Investments Commission (ASIC) oversees the enforcement of accounting standards and can take action against entities that fail to comply with the mandated accounting practices. Penalties for non-compliance can include fines, legal action, and other administrative sanctions. While the specific penalties are not detailed in the legislation itself, they are generally outlined in related regulatory frameworks and can vary based on the nature and extent of the breach. Entities are encouraged to implement robust internal controls and training to ensure adherence to the new standards and avoid potential penalties.