Exposure Draft ED/2012/5 – Clarification of acceptable methods of depreciation and amortization
Proposed amendments to IAS 16 and IAS 38 (‘the exposure draft’)
We are responding to your invitation to comment on the exposure draft on behalf of PricewaterhouseCoopers.
Following consultation with members of the PricewaterhouseCoopers network of firms, this response summarizes the views of member firms who commented on the exposure draft. 'PricewaterhouseCoopers' refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
We agree with the principle of the proposed amendments although we are not convinced that the amendments are necessary. The current standards IAS 16 and IAS 38 are clear that assets are to be depreciated or amortized to reflect the pattern in which the asset’s economic benefits are consumed by the entity. Conceptually, the generation of revenues is a measure of output and is not a measure of the consumption of economic benefits. We acknowledge though that the definition of economic benefits and how these are consumed are complex topics. We believe that they should be fully considered as the Board works on the new conceptual framework.
There may be some instances where a substantial proportion of an asset’s economic benefits are consumed at the beginning of its useful life or license period when it is used to generate significant cash flows. Some have been using revenue as a proxy for consumption in those circumstances. However, we suggest that other methods of depreciation or amortization such as the declining balance method, with a focus on economic obsolescence, or the units of production method could achieve a similar pattern of depreciation or amortization.
If the Board decides to proceed with the proposals in the exposure draft we ask the Board to clarify whether the scope of the proposed amendments includes the asset recognized for the incremental costs of securing an investment management contract (IAS 18 Illustrative examples 14 (b) (iii)).
Our responses to the specific questions posed in the invitation to comment are attached as Appendix 1 to this letter.
Grant Thornton International Ltd comments letter
Grant Thornton International Ltd is pleased to comment on the International Accounting Standards Board's (the Board) Exposure Draft Clarification of Acceptable Methods of Depreciation and Amortization - Proposed amendments to IAS 16 and IAS 38 (the ED).
We have considered the ED, as well as the accompanying draft Basis for Conclusions.
We support clarification in these areas. We also agree with the proposal to prohibit the use
of depreciation or amortization methods that are based on actual revenue generated.
However, we suggest that the final amendments should acknowledge that for some assets the
Expected future pattern of revenue generation can serve as a valid proxy for the expected Consumption of economic benefits.
Our responses to the questions in the ED's Invitation to Comment are set out in the
If you have any questions on our response, or wish us to amplify our comments, please
Contact our Executive Director of International Financial Reporting, Andrew Watchman
( or telephone + 44 207 391 9510).
Kenneth C Sharp
Global Leader - Assurance Services
Issues addressed by the Exposure Draft ED/2012/5.
The proposed draft touches on the clarification of the acceptable methods of depreciation and amortization. IAS 16 and IAS 38 both ascertain the founding principles for depreciation and amortization as being the expected asset’s future benefit and consumption pattern. The key aim of these amendments on IAS 38 and 16, is to ensure that those preparing financial records do not use revenue based methods in calculating depreciation or amortization, on property plant and equipment or an intangible asset for that matter. The reason behind discouraging revenue based method is that this method reflects an outline the several economic benefits the asset offers as opposed to the expected consumption pattern of the future economic assets found within the asset.
The issue of this amendment came about when IFRS interpretation committee received a proposal submission on the matter: to this effect the committee gave recommendations to IASB to amend IAS16 and 38.
PWC comment letters (issues addressed)
PWC feel that this amendment is okay but fails to see its necessity. The firm considers the current wording in the IAS 16 and AIS 38 adequate and there is no need of modification. PWC recognizes that the generation of revenue is a good measure of output and is not a scale for measuring the consumption of economic benefit. However, they argue that definition of economic benefits and how their consumption is a complex issue. The firm believes that the two issues should be put into consideration by IASB in working on the new concepts. (PricewaterhouseCoopers, 2013)
PWC argues that there may be circumstances where a sufficient proportion of an asset economic benefit may be consumed at the start of its useful life. The assets may also be economically useful in the licensed period when it generates large cash flows. The firm argues that while Some businesses have been using revenue as a proxy in such instances, their suggestion is the use of other methods of depreciation such as reducing balance having a focus on economic obsolesce.
PWC is of the opinion that if the board is to effect the proposals in the exposure draft, IASB should give clarification on whether the scope of the proposed changes encompass asset recognized for the incremental cost of securing an investment management contract.
Grant Thornton international Ltd comments letter
The firm supports the amendments with regard to prohibiting the use of depreciation and amortization based on actual revenues. The reason given for the support of the change is that revenues are a measure of the results of using an asset rather than economic benefits from the asset. Grant argues that a method of depreciation and amortization that based on actual revenues would give zero depreciation and amortization results. This is so especially in times when the firm uses the intangible asset for defensive purpose since no revenue accrues. (PricewaterhouseCoopers, 2013)
Nevertheless, the firm suggests that the final amendments should recognize that some assets expected future revenues can serve as a worthy proxy for the expected consumption of economic benefits.
In the new paragraphs of IAS 16 and 98B of IAS 38 that gives the following explanation: “that an expected future reduction in the unit selling price of the product or service output of an asset could indicate technical or commercial obsolescence, and could be relevant to the application of the diminishing balance method” (Thornton, 2013) The firm as in agreement with the basic statement but gives a suggestion that its purpose and effect must be clarified.
The firm also suggests that the statement in the proposal touching on the unexpected future reduction in the unit price of a good or service having an impact on reducing balance should be explicitly stated.
Comparisons of comments from various respondents
Price waterhousecoopers PWC and Grant Thornton international Ltd agree that the proposed draft needs more clarification in its statement’s wording. Grant Thornton international Ltd suggests that some key words in IAS 38 should be underlined so that they agree with IAS 16. In particular, the firm suggests new that the paragraph 98A of IAS 38 be underlined to show consistency with paragraph 62A in IAS 16.
Both agree in terms of prohibiting the use of depreciation and amortization methods based on revenue. PWC argue that PWC recognizes that the generation of revenue is a good measure of output and is not a scale for measuring the consumption of economic benefit. Likewise, Grant Thornton international argue that revenues reflect an eventuality of using a particular asset rather than economic benefits from the asset.
PWC is of the opinion that the current AIS 38 and IAS 16 are not faulty and sees no apparent need to amend them; the firm thinks this is unnecessary modification on IAS and should be dropped. Grant Thornton international thinks that the amendments are a necessary evil and that they should be made clear by putting stress on important words on the amended paragraphs.
In my opinion, the comment letters relate more to the capture theory of regulation. The theory states that regulations face manipulation to fit the needs of those they affect. Capture theory argues that the regulations serve the interest of the industries concerned. In the two comment letters addressed in this paper: the IAS 16 and IAS 38 are regulations that address the needs of companies to account for depreciation and amortization in a particular way hence the regulation originates from the needs of the interest groups i.e. PWC and Grant Thornton international.
New York Times: March 7th 2013: Regulator Expresses Doubts about an Auditor’s Procedures
America’s audit firms’ regulator expressed concerns of its discovering serious problems in the procedures at Pricewaterhousecoopers that the firm has been unable to remedy. This marked a second time a key audit firm got rebuked by the regulator: the Public Company Accounts Oversight Board. This board instituted back in the year 2002 by Sarbanes- Oxley Act in of 2002, created in response to accounting scandals at Enron and World.com. In 2011, Delloite and Touche was a culprit in similar accounting irregularities.
Legally speaking, the board has zero impact on PWC but steps in to criticize alongside an array of several other criticisms from other regulators across the globe arguing that the firm is not exercising sufficient amount of independence from the company’s management. In relation to the study, this means that the firm is contravening the principles of accounting and audit as clearly indicated by international accounting standards board (IAS) that advocate for independence of an audit firm’s functions from its management. The collusion or conflict between the two compromises the quality of output exhibited by the firm.
Using carefully chosen words, the Public Company Accounts Oversight Board said that they had reasonable grounds to doubt the fact that PWC carried out adequate audits in 2008 and 2009. Some deficiencies reported by the inspection team do suggest that the firm’s system of quality control may in some respects fail to provide sufficient assurance that the firm’s audit work will meet applicable standards, and requirements,” (NORRIS, 2013) Said the board In a 2010 report released I march.
The board argues that the accounting firm may not be applying the required level of professional skepticism in areas vulnerable to management bias. In response to this statement, the firm said that the board’s criticism relates to complex judgmental evolving areas in audit and that it is trying its level best to remedy the situation. The firm further argues that the conclusions of the Public Company Accounts Oversight Board are not significant enough to warrant justification of the claims they have against PWC.
The Public Company Accounts Oversight Board does inspections annually on major firms releasing a public report on problems in various audit firms inspected although names of such companies remain concealed in the report. In addition, there exists a second part of the report where the board gives the report on potential defects in a firm’s quality control system. This part of the report remains unpublicized unless the accused firm fails declines to take corrective measures on the situation within a span of one year.
The board has a huge backlog of cases pending remedies and finally decided that PWC had not taken sufficient required steps to alleviate the situation. The firm’s board under the watch of James R. Doty, has expressed frustrations on what it regards as continued problems with audit and the Public Company Accounts Over sight’s decision to make the report public.
Serious audit inefficiencies identified from the firm by the board, cannot pass as mere isolated cases of technical inefficiency.
The lack of management estimates review, which is a requirement by IAS, comprises one of the three key issues the board highlighted about PWC. The second relates to firm’s audit of a decision relating to the value of goodwill. This is a contravention of the basic IAS regulation on the treatment of goodwill. The last key issues concern the firm’s internal controls reviews by the firm. It is a requirement for the firm to constantly review its internal control system, this is done to ensure they are functioning efficiently, failure to review may results to audit report qualification.
NORRIS, F. (2013). Regulator Expresses Doubts About an Auditor’s Procedures. The New York Times
PricewaterhouseCoopers. (2013). IASB comment letters. PWC .
Thornton, G. (2013). IASB comment letters. Grant Thornton .