IAS 17 and Reducing balance: Difference between pages

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imported>Doug Williamson
(Added the new IFRS 16 standard on Leases to See also. Not clear at this point whether IFRS 16 is replacing IAS 17)
 
imported>Doug Williamson
(Standardise appearance of page)
 
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International Accounting Standard 17, dealing with leases.
1.


IAS 17 requires finance lease liabilities to be accounted for 'on balance sheet'.
A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


It also requires the appropriate allocation of the total lease instalments between finance charges and reduction of the outstanding lease liability.


'''Example'''


A fixed asset has a cost of $12m,


Under IAS 17 the total finance charge should be spread in such a way as to produce a constant periodic rate of interest on the remaining balance of the liability.
to be depreciated on a reducing balance basis at a rate of 40% per year.


However, IAS 17 also allows for some form of approximation to be used to simplify the calculation.


Fully accurate calculation bases for spreading the total finance charge include the Actuarial method.
The depreciation charge for Year 1 would be:


The Sum of the digits method is simpler to apply, and will normally produce a close approximation.
= $12m x 40%


= $4.8m.




=== Future developments ===
The net book value at the end of Year 1 (and the start of Year 2):


Differences in accounting standards can lead to significant non-comparability. A joint IASB-FASB project is seeking to improve and align accounting for leases by developing an approach that is more consistent with other definitions of assets and liabilities.  
= 12 - 4.8


The project would result in a replacement of IAS 17.
= $9.2m.
 
 
The depreciation charge for Year 2:
 
= $9.2m x 40%
 
= $3.68m.
 
 
The net book value at the end of Year 2 (and the start of Year 3):
 
= 9.2 - 3.68
 
= $5.52m.
 
 
And so on.
 
Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).
 
 
2.
 
''UK tax.''
 
UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.




== See also ==
== See also ==
* [[Actuarial method]]
* [[Depreciation]]
* [[FASB]]
* [[Straight line]]
* [[Finance charge]]
* [[Finance lease]]
* [[IASB]]
* [[International Financial Reporting Standards]]
* [[Off-balance sheet finance]]
* [[Operating lease]]
* [[SSAP 21]]
* [[Sum of the digits]]
* [[Sum of the digits]]
* [[IFRS 16]]
* [[Writing down allowance]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Accounting,_tax_and_regulation]]

Revision as of 12:35, 18 March 2015

1.

A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


Example

A fixed asset has a cost of $12m,

to be depreciated on a reducing balance basis at a rate of 40% per year.


The depreciation charge for Year 1 would be:

= $12m x 40%

= $4.8m.


The net book value at the end of Year 1 (and the start of Year 2):

= 12 - 4.8

= $9.2m.


The depreciation charge for Year 2:

= $9.2m x 40%

= $3.68m.


The net book value at the end of Year 2 (and the start of Year 3):

= 9.2 - 3.68

= $5.52m.


And so on.

Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).


2.

UK tax.

UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.


See also

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