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ACCA Strategic Professional · Strategic Business Reporting (International) · Presentation and disclosure in financial statements

Zeta Co depreciated its machinery over 10 years. At the start of year 5, following a technical review, management concluded the remaining useful life is 3 years, not 6. How should Zeta account for this change under IAS 8?

A change in useful life is a change in accounting estimate, so it is applied prospectively. Zeta depreciates the carrying amount at the start of year 5 over the new remaining life of 3 years, with the effect in profit or loss and no restatement of comparatives.

  1. ARestate the comparative figures and adjust opening retained earnings as if the 7-year total life had always applied
  2. BApply the change prospectively by spreading the carrying amount at the start of year 5 over the revised remaining lifeCorrect
  3. CRecognise the whole additional depreciation immediately in other comprehensive income
  4. DTreat it as a prior period error and restate all earlier periods

Explanation

A change in useful life is a change in accounting estimate. IAS 8 requires prospective recognition in profit or loss in the period of change and future periods. The carrying amount at the start of year 5 is therefore depreciated over the remaining 3 years. Restating retrospectively would be wrong because it is not a policy change or an error.

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