Under IFRS, how should LMN account for this change in depreciation method?


QUESTION:

 Company LMN acquires a machine for $100,000 on January 1, 20X1. The machine has an estimated useful life of 5 years and no residual value. LMN uses the straight-line method to depreciate its machines. On January 1, 20X4, LMN decides to change its depreciation method to the double-declining-balance method. Under IFRS, how should LMN account for this change in depreciation method?

ANSWER:

Under IFRS, changes in depreciation method are considered changes in accounting estimate, and are accounted for prospectively. This means that the change is reflected in the financial statements from the date of the change forward, and no adjustments are made to amounts previously recorded.

In this case, LMN changed its depreciation method from straight-line to double-declining-balance method. Therefore, LMN should apply the new depreciation method starting from January 1, 20X4, and no adjustments should be made to amounts previously recorded.

The new depreciation expense should be calculated using the double-declining-balance method, which involves applying a depreciation rate that is double the straight-line rate to the carrying amount of the asset. The carrying amount of the asset at the beginning of the year should be the same under both methods.

Assuming a 5-year useful life and no residual value, the straight-line rate would be 20% (1 รท 5), and the double-declining-balance rate would be 40% (2 x 20%). The depreciation expense for the machine for each of the remaining years under the double-declining-balance method would be calculated as follows:

  • Year 1: $40,000 (40% x $100,000)
  • Year 2: $24,000 (40% x $60,000)
  • Year 3: $14,400 (40% x $36,000)
  • Year 4: $8,640 (40% x $21,600)
  • Year 5: $5,184 (40% x $12,960)

Therefore, LMN should record depreciation expense of $40,000 for the machine for the year ended December 31, 20X4, and $24,000 for the year ended December 31, 20X5, and so on, until the end of the machine's useful life.

In summary, LMN should account for the change in depreciation method prospectively, and apply the new depreciation method starting from the date of the change forward. No adjustments should be made to amounts previously recorded.


Here are the journal entries to record the change in depreciation method for Company LMN:

January 1, 20X4:

No journal entry required, as the change in depreciation method is considered a change in accounting estimate and is accounted for prospectively.

December 31, 20X4:

Debit Depreciation expense for $40,000

Credit Accumulated depreciation for $40,000

To record depreciation expense under double-declining-balance method for the year ended December 31, 20X4.

December 31, 20X5:

Debit Depreciation expense for $24,000

Credit Accumulated depreciation for $24,000

To record depreciation expense under double-declining-balance method for the year ended December 31, 20X5.

And so on, for each remaining year of the machine's useful life.


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