For each component the appropriate depreciation

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Unformatted text preview: locate the cost of an item of property, plant and equipment into its significant parts, or `components', and depreciate each part separately. For each component the appropriate depreciation method, rate and period needs to be considered. This process may involve significant judgement. An item of property, plant and equipment should be separated into components when those parts are significant in relation to the total cost of the item. This does not mean that a company should split its assets into an infinite number of components if the effect on the financial statements would be immaterial. Some oil and gas companies that have been applying full cost accounting under previous GAAP may have been calculating DD&A at a cost centre (typically a country) level. While there is no cost-pool concept under IFRS, the standard does allow companies to group and depreciate components within the same asset class together, provided they have the same useful life and depreciation method. However, it is unlikely that development or production oil and gas assets will be able to be grouped at a level greater than a field; this is because each field may be significant and the lives of the fields, and therefore depreciation rates, will vary. Companies need to consider the impact, including on accounting systems, of depleting assets on a much more detailed level than previous GAAP . Depreciation method Companies need to choose the most appropriate depreciation method IFRS do not specify one particular method of depreciation as preferable. Oil and gas companies have the option to use the straight-line method, the reducing balance method or the unit-ofproduction method, as long as it reflects the pattern in which the economic benefits associated with the asset are consumed. The unit-of-production method is most commonly used to deplete upstream oil and gas assets, using a ratio that reflects the annual production of a field in proportion to the estimate of reserves within that field. IFRS provides no specific guidance on how the assumptions within the res...
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This note was uploaded on 12/03/2012 for the course ACCOUNTING 102-1132 taught by Professor Accountinggroup during the Fall '11 term at Al-Quds University.

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