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Change in depreciation

Good day,

our parent company decided to replace fully depreciated notebooks as part of a "project". All other PCs and NTB that were not included might also be replaced and this is were we run into a little contradiction, because we have set that 40,000 CZK goes directly into expense, but our parent company would very much like to include only the PC’s and NTB that are part of the project in assets. From the perspective of Czech standards it's nonsense, either all from 1.1. I will be in assets or all in expenses I cannot include one PC in assets and another (just because it’s not in the project) in expenses.

I believe that something like this is not allowed under IFRS or am I wrong? The only option I can think of is to recorded one set as “investment whole” (investièní celek) under the title NTB and the other, under the title of PC, as expense, but not item per item what is the parent wants. Do you know where

I need some supporting argument, from which could be seen that even from the perspective of IFRS I can not throw items around as I want ...

Thank you


before answering your question, I must make a few points.

Firstly, it seems to me that your company policy (expensing items costing 40 thousand CZK or less) is based in Czech law, rather than IFRS.

As a result, this policy is set in contradiction to IAS 8 (primarily paragraph 12), which states: “management may also consider the most recent pronouncements of other standard-setting bodies THAT USE A SIMILAR CONCEPTUAL FRAMEWORK to develop accounting standards”.

Since CNS are not set by such a standard setter, they may not be used as a basis for any IFRS policy.

Secondly, IFRS is not, unlike Czech standards, legalistic. Rather than explicitly prescribing exact procedures, it relies on principles and allows professionals to form their own professional judgment.


Obviously, allowing professionals to form their own judgment does not mean (contrary to common belief) that IFRS allows management to use, willy-nilly, whatever procedure strikes their fancy.

Allowing professionals to form their own judgment does mean that IFRS allows accountants to devise procedures that capture the true economic essence of transactions, events or conditions without the distortion and bias inherent in prescriptive and formalistic statutory accounting standards.

But to your situation.

IAS 16.9 explicitly says that it “does not prescribe the unit of measure for recognition, ie what constitutes an item of property, plant and equipment.”  Instead, it requires the company, its management, to use its own discretion.

In other words, under IFRS, the class need not be "computers". The classes may be " administrative computers", "executive notebooks ", "sales notebooks ", "research workstations", "ERP servers and work stations", etc.

Similarly, each of these classes can have a different life expectancy. 

For example, executive notebooks or engineering workstations could be useful for only a few months before being replaced, while administrative PCs or servers used in accounting could last years.

In any event, the key is that LIFE (the period of time the item is expected to serve its purpose and be useful to the enterprise) NOT purchase price, determines whether the item shall be recognized as an asset or expense.

If the item will be useful for more than one period it should be capitalized and depreciated over that period(s).  If it will not, it should be expensed in the period acquired.

Applying an arbitrary monetary limit, say 40,000 Kè, not only goes against IAS 16, but (since it is a bright line taken directly from pronouncements of a standard-setting body that DOES NOT use a similar conceptual framework) is a violation of IAS 8 and an error.

In other words, if IAS 16 is applied properly, an item that serves the company for ANY extended period of time (I mentioned "a period" above just because it’s simpler, and easier to apply in practice) is an asset, regardless of how much was spent to acquire it.

Obviously, the logic behind the 40,000 Kè cutoff is the added work related to capitalization versus the ease of expensing (actually, in the ÈR, this is primarily a tax driven issue, but a discussion of this would be beyond the scope of this reply).

And this cost/benefit logic is just as applicable under IFRS.  It’s just that, under IFRS, it has to be gone about differently.

As stated, if IAS 16 is applied strictly, any item useful to the company for any extended period of time would be capitalized (even a screwdriver costing less than €10, unless, of course, the company expects to “lose" it before the end of the quarter).

Nevertheless, IAS 8.8 states “IFRSs set out accounting policies that the IASB has concluded result in financial statements containing relevant and reliable information about the transactions, other events and conditions to which they apply. Those policies NEED NOT BE APPLIED WHEN THE EFFECT OF APPLYING THEM IS IMMATERIAL. ...”

In other words, the company can, to save itself some effort, set a minimum capitalization level (provided it is doing so for a legitimate reason*) if (and ONLY IF) it does lead to material misstatement.

This implies that a policy like the following would be appropriate:

1st The company identifies up all the "small assets" it expensed during the period.

2nd It sums up these "expenses".

3rd It compares this sum with the PP&E balance on its statement of financial position.

4th If the sum is greater than about 1% of PP&E, the misstatement is material.

5th It corrects this material misstatement by reclassifying one “small asset” after another (starting with the largest, because its simplest) from expense to assets until the sum falls below 1%.

By the way, if the "small assets" are populated with items (like furniture and fixtures, for example) that have a long life (say 10 years or more) it should also test whether the aggregate expense over that life does not exceed 5% of PP&E (to stay within the magical 1-5% materiality range).

Oh, and for the record.

The lack of an IFRS obligation to (in contrast to most “national GAAPs”) "take stock" of PP&E every year, and the availability of simple procedures (such as group or composite methods), mean that the accounting effort required to capitalize "small assets" is equivalent to the effort required to expense them.

As a result (if tax implications are ignored), many companies (especially those that apply "national GAAP" for tax purposes) either set no minimum capitalization level or one that is merely symbolic (say €100 or less).

To summarize.

If your management believes that some computer will serve their function for less than (for simplicity) one year, it is perfectly justifiable to expense those computers (disaggregated is not only by acceptable, but preferable) even if they cost 400.000 Kè or more.

On the other hand, if management believes that other computers used for other purposes, will be serving these purposes for several years, it is proper accounting to capitalize those computers (probably as part of a larger, aggregated class) even if they cost 4.000 Kè or less.


And, BTW, don’t forget that depreciation period and useful life should be more or less equal.

If your company is in the habit of using fully depreciated assets (a Czech national sport) for more than a year, it is committing an error (a “mistake in applying accounting policies” to be precise).




* IAS 8.8 goes on to say “However, it is inappropriate to make, or leave uncorrected, immaterial departures from IFRSs to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.”

This means that if the company is choosing to expense many small items to, for example, lower its taxable income (in countries where IFRS serves as a tax base) or manage earnings (by creating hidden reserves in its PP&E), even a small misstatement would be an error that would have to be corrected (as per IAS 8.41-49).

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