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Depreciation of Labratory Equipment


Any guidance on the depreciation rates on diagnostic laboratory equipment that comply with IAS 16's requirements?
In our country's tax law such assets are depreciated at 15% on the straight line basis or at 20% on the reducing balance basis. These rates seem very accelerated.


under IFRS there is no guidance similar to tax law (IFRS does not define depreciation periods by classification of asset the way tax law does).

As outlined in IAS 16.50, any asset (including diagnostic laboratory equipment) is depreciated over its useful life.

IAS 16.56 provides guidance on determining useful life. The criteria that will most likely be most appropriate is IAS 16.56.c: technical or commercial obsolescence.

In any event, you should select a depreciation period that corresponds to when you expect to dispose of the asset.

For example, if you acquire it 1.1.X1 and set depreciation at 4 years, you should dispose of it on 31.12.X4, but no later than 31.12.X5.

If you dispose of after 31.12.X5, most auditors would consider this an error that would need to be corrected retroactively.

The company has adopted IFRS for the first time and is considering change in depreciation policy. The depreciation per GAAP accounting was as per the tax law.

From your response, I assume your company used US GAAP exclusively for taxation purposes.

The reason is that ASC 360-10-35-3 states: Depreciation expense in financial statements for an asset shall be determined based on the asset's useful life.

In addition ASC 360-10-35-9 (Unacceptable Depreciation Methods) also states: If the number of years specified by the Accelerated Cost Recovery System of the Internal Revenue Service (IRS) for recovery deductions for an asset does not fall within a reasonable range of the asset's useful life, the recovery deductions shall not be used as depreciation expense for financial reporting.

This guidance is comparable to the IAS 16 guidance I cited above.

However, in the US, as the IRS requires accrual accounting, US GAAP is often used for just this purpose.

While not correct, if US GAAP is used exclusively for taxation purpose (the company has no public accountability, is not listed on an exchange, is not registered with the SEC), this error is overlooked.

However, IFRS is not designed for taxation. This implies that using tax tables is not acceptable under IFRS in any circumstances.

This also implies that, after the transition of IFRS, to apply its guidance correctly, your company will need to use depreciation periods that reflect actual useful life in the IFRS financial statements. Then it will need to use depreciation periods outlined in tax law in its tax returns. It will also need to recognize deferred taxes in the IFRS financial statements because the depreciation periods for IFRS and taxation purposes will (in practically all situations) be different.

BTW, just out of curiosity, where is your company located and why is it adopting IFRS instead of US GAAP?

The company is domiciled in Ethiopia and it adopts IFRS for its financial reporting. My question was, is there any best practice useful life/depreciation rate for laboratory equipment for a company engaged in diagnostic laboratory service for financial reporting to comply with IAS 16?
In our country the tax depreciation rate for such assets is 20% if the reducing balance basis method is used or 15% if the straight line basis is used.


As I wrote above "as outlined in IAS 16.50, any asset (including diagnostic laboratory equipment) is depreciated over its useful life."

Useful life is company specific, so there are no “best practices” you can refer as they would not be company specific.

Therefore, the company should use a depreciation period that corresponds to how long it expects to use the equipment (plus / minus 1 year).

As outlined in IAS 16.62, the company should use a depreciation method that reflects the expected pattern of consumption of the future economic benefits embodied in the asset. If technological change makes the equipment lose utility faster at the beginning of its life, a diminishing (reducing) balance method would be appropriate, otherwise a straight-line method should be used. 

The tax periods / methods should not be used unless they reflect the actual useful life / consumption of benefits, which they usually do not.

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