Generally, U.S GAAP and IFRS both view depreciation as allocation of cost over an asset’s life. There are three steps of the depreciation process: firstly find depreciable base of the asset, and then estimate asset’s useful life and last choose a method of cost apportionment that best matches revenue flow from the asset. Depreciation methods allowed under U.S. GAAP include straight-line, units of production, or accelerated methods (sum of digits or declining balance).
Component depreciation is allowed but not commonly used. On the other hand, IFRS allows straight-line, units of production, and both accelerated methods. Component depreciation is required when asset components have different benefit patterns. Thus the impact of major differences results that assets with different components will have different depreciation schedules, which may increase or decrease assets and revenue. Under both GAAP and IFRS, changes in depreciation method and changes in useful life are treated in the current and future periods, in other words- not retrospectively. Under IFRS, estimates of useful life and residual value, and the method of depreciation, are reviewed at least at each annual reporting date.
For a company currently using GAAP a change to IFRS could result in a greater frequency of revisions in deprecation rate which in turn could mean less predictable depreciation expense. IFRS allows a company to choose between two different models in order to value PP&E after it has been recognized on the books: the historical cost model and the revaluation model. Cost model is like GAAP where PP&E is carried at its cost less any accumulated depreciation and any accumulated impairment losses. revaluation model allows a company to revalue PP&E on its books to fair value if fair value can be reliably measured.
The Review on Comparing IFRS To GAAP 2
IFRS 8-1: What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed? A fair value measurement gives companies an accurate portrayal of the company’s assets. Both IFRS and GAAP have requirements of specific information that needs to be reported regarding fair value measurement practices. With ...
However, GAAP does not permit revaluations of PP&E or mineral resources. Thus for a company currently using GAAP a change to IFRS and the use of the revaluation model could lead to a substantial increase in asset values on the balance sheet as well as a corresponding substantial increase in depreciation expense. For example, at the beginning of the year a company has a building with a carrying value of $100,000 and a remaining useful life of 10 years that was recently valued at $300,000. Under GAAP, depreciation expense for the year would be $10,000 (assuming straight-line).
While under IFRS, depreciation expense for the year could be either $30,000 or $10,000.
Reference:
Current Major Differences between IFRS and US GAAP
http://post.nyssa.org/nyssa-news/2010/04/current-major-differences-between-ifrs-and-us-gaap.html Depreciation & Impairment under GAAP and IFRS http://belkcollegeofbusiness.uncc.edu/jmcathey/6260/ifrs/Day/Davis%20&%20Lunt%20-%20Depreciation%20&%20Impairment.pdf
