(a) Lathe

The lathe was purchased six years ago and was originally being written off over an estimated useful life of twelve years. As at 1 January 20X4 six of the years have elapsed with a further six years remaining. It was decided that the machine will now only be usable for a further four years.

IAS 16 Property, Plant and Equipment requires that where the original estimate of useful life is revised, adjustments should be made in current and future periods (not in prior periods). The unamortised cost of the asset should be charged to revenue over the remaining useful life of the asset. The carrying amount of GH¢75,000 should therefore be charged over the remaining four years of useful life, giving an annual depreciation charge of GH¢18,750.

The revision is not a change in accounting policy, or a fundamental error but a change in accounting estimate. It is therefore not appropriate to deal with any excess depreciation by adjusting opening retained earnings.

(b) Grinder
The grinder was purchased in 20X1 and was originally being depreciated on a straight line basis. It has now been decided to depreciate this on the sum of digits basis.
IAS 16 requires that depreciation methods be reviewed periodically and if there is a significant change in the expected pattern of economic benefits, the method should be changed. Depreciation adjustments should be made in current and future periods. This change might be appropriate if, for instance, usage of the machine is greater in the early years of an asset’s life when it is still new and consequently it is appropriate to have a higher depreciation charge.
If the change is implemented, the unamortised cost (the carrying amount) of the asset should be written off over the remaining useful life commencing with the period in which the change is made. The depreciation charge for the remaining life of the asset will therefore be as follows.

Disclosure will need to be made in the accounts of the details of the change, including the effect on the charge in the year.

(c) Property

IAS 16 permits the revaluation model to be adopted.

Where any item of property plant or equipment is revalued, the entire class which the asset belongs should be revalued. Revaluations must be kept up date. Where there are volatile movements in fair value, the revaluation should be performed annually. Where there are no such movements, revaluation every three to five years may be appropriate.

Accumulated depreciation at the date of revaluation is either

(i) restated proportionately with the change in the gross carrying amount that the carrying amount after the revaluation equals the revalued amount (e.g. where revaluations are made to depreciated replacement cost using indices)

(ii) eliminated against the gross carrying amount of the assets and the net amount restated to the revalued amount of the asset (e.g. where buildings are revalued to their market value).

IAS 16 requires that the subsequent charge for depreciation should be based on the revalued amount. The annual depreciation will therefore be GH¢62,500, i.e. GH¢1,500,000 divided by the 24 years of remaining life.

There will then be a difference between the revalued depreciation charge and the historical depreciation charge.

The resulting excess depreciation may be dealt with by a movement in reserves, i.e. by transferring from the revaluation reserve to retained earnings a figure equal to the depreciation charged on the revaluation surplus each year.