ACCA Applied Knowledge · Financial Accounting · Depreciation
Under IAS 16 Property, Plant and Equipment, which of the following best describes the purpose of charging depreciation on a non-current asset?
Depreciation allocates the depreciable amount of an asset systematically over its useful life, matching its cost to the periods that benefit from its use. It is not a valuation exercise and does not set aside cash for replacement.
- ATo build up a cash fund for replacing the asset at the end of its life
- BTo allocate the depreciable amount of the asset over its useful lifeCorrect
- CTo reduce the carrying amount of the asset to its current market value each year
- DTo recognise the fall in the asset's fair value caused by inflation
Explanation
IAS 16 requires the depreciable amount to be allocated on a systematic basis over the asset's useful life. Depreciation is an accounting allocation, not a way of valuing the asset or saving cash. Option A is wrong because depreciation does not create any cash fund.
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