10.2.6: Revision of Depreciation

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As noted previously, many elements of the depreciation calculation are based on estimates. IFRS requires that these estimates be reviewed on an annual basis for their reasonableness. If it turns out that the original estimate is no longer appropriate, how should the depreciation calculation be revised? The treatment of estimate changes requires prospective adjustment, which means that current and future periods are adjusted for the effect of the change. No adjustments should be made to depreciation amounts reported in prior periods. The reasoning behind this treatment is that estimates, by their nature, are subject to inaccuracies. As well, conditions may change; the asset may be used in a different fashion than originally intended, or the asset may lose function quicker or slower than originally anticipated. As long as the original estimate was reasonable in relation to the information available at the time, there is no need to adjust prior periods once conditions change.

Consider our original example of straight-line depreciation. The initial calculation resulted in an annual depreciation charge of $9,500. After two years of use, the company's management noticed that the asset's condition was deteriorating quicker than expected. The useful life of the asset was revised to seven years, and the residual value was reduced to $2,000. The revision to the depreciation charge would be calculated as follows:

$\frac{\text { Remaining book value }- \text { Revised residual value }}{\text { Remaining useful life }}$

Thus, the calculation would be as follows:

$\frac{\$ 100,000-(\$ 9,500 \times 2)-\$ 2,000}{7-2=5 \text { years remaining }}=\$ 15,800$ per year

The company would begin charging this amount in the third year and would not revise the previous depreciation that was recorded. This technique is also applied if the company changes its method of depreciation, because it believes the new method better reflects the pattern of use or benefits derived from the asset, or if improvements are made to the asset that add to its capital cost.

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