Answer / anuj kumar

According to IAS 8 change in accounting estimate is treated prospectively i.e. if a depreciation method is changed then the carrying amount of the asset at the date of change will be depreciated on the basis of new method. Consider the example to understand.

Example

A company bought an asset for 100,000 with an expected useful life of five years. After two years of use company decided to change the depreciation method from straight-line basis to reducing balance method at the rate of 15%.

Required: Calculate the depreciation for the third and fourth year


Step 1: Find the carrying amount at the date of change

Change in depreciation is made after two years so we will depreciate the asset for two years and it was on straight line basis.

100,000 / 5 = 20,000 per year

For two years it will be 20,000 x 2 = 40,000

Thus, carrying amount of the asset at the end of second year was 100,000 – 40,000 = 60,000

Step 2: Depreciate the carrying amount on the new basis from the date of change

Carrying amount at the date of change = 60,000

New basis of depreciate = Reducing balance method @ 15%

Depreciation for the third year will be calculated as follows:

60,000 x 0.15 = 9,000

Depreciation for the fourth year will be calculated as follows:

(60,000 – 9,000) x 0.15 = 7,650

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