IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

56

Wiley IFRS: Practical Implementation Guide and Workbook

• Buildings: 10 years • Plant and machinery: 7 years • Furniture and fixtures: 5 years Acc urate Inc. uses the straight-line method of depreciation. The original cost of the various components of property, plant, and equ ipment were • Build ings: $ 15,000,000 Required Compute the impact on the income statement for the year ending December 3 1, 20X4, if Accurate Inc. decides to change the useful lives of the property, plant, and equipment in compliance with the recom– mendations of external valuation experts. Ass ume that there were no salvage values for the three components of the property, plant, and equipment either initially or at the time the useful lives were re– visited and revised. Solution a. The annual depreciation charges prior to the change in estimate were Buildings: $ 15,000,000/ 15 $ 1,000,000 Plant and machinery: $10,000,0001 10 $1,000,000 Furniture and fixtures: $3,500,00017 $500 000 Total $2 500 000 (A) • Plant and machinery : $10,000,000 • Furniture and fixtures : $3,500,000

b. The revised annual deprec iation for the year ending December 31, 20X4, would be Buildings: [$15,000,000 - ($1,000,000 x 3)] 1 10 $ 1,200.000 Plant and machinery: [$10,000,000 - ($1,000,000 x 3)] 17 $1,000,000 Furniture and fixtures: [$3,500,000 - ($500,000 x 3)] 15 $400000 Total $2600000 (B) c. The impa ct on Income Statement for the year ending December 3 1, 20X4 (B) - (A) $2,600,000 - $2,500,000 $)00000

10.3 Occasionally it may be difficult to distinguish between changes in measurement bases (i.e. accounting policies) and changes in estimate. In such cases, the change is treated as a change in estimate. 10.4 Changes in accounting estimates are to be adjusted prospectively in the period in which the estimate is amended and, if relevant, to f uture peri ods if they are also affected.

Case Study 3

Facts On January I, 20X I, Robust Inc. purchased heavy-duty equipment for $400,000 . On the date of installa– tion, it was estimated that the machine has a useful life of 10 years and a residual value of $40,000. Accordin gly the annual depreciation worked out to $36,000 = [($400, 000 - $40,000) 1 10]. On January I, 20X5 , after four years of using the equipment, the company decided to review the useful life of the equipment and its residual value . Technical experts were consulted. Acco rding to them , the remaining useful life of the equ ipment at January I, 20X5 , was seven years and its residual value was $46,000. Required Compute the revised annual depreciation for the year 20X5 and f uture years. Solution The revised annual depreciation based on the remaining useful life and revised residual value will be computed based on this formula: Revised annual depreciation = (Net book value at January I, 20X5 - revised residual value) 1 remaining useful life