Everything You Always Wanted to Know About Amortisation

and Depreciation But Were Afraid to Ask

FOREWORD:

Be-careful of the application of amortisation and depreciation as the translation (English and French)
is a false friend as you can see below:

“IAS 16 (43) Depreciation Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.”

“IAS 16 (43) Amortissements: Chaque partie d’une immobilisation corporelle ayant un coût
significative par rapport au coût total de l’élément doit être amortie séparément. “

AMORTISATION VERSUS DEPRECIATION

• Amortization is the practice of spreading an intangible asset's cost over that asset's useful life.

• Depreciation is the expensing of a fixed asset over its useful life.

• A third method for expensing business assets is the depletion method, which is an accrual accounting
method used by businesses that extract natural resources from the earth—such as timber, oil, and
minerals.

• Impairment of a fixed asset or intangible assets refers to an abrupt decrease of the (present) value
of economic benefits that it can generate due to damage, obsolescence etc or reduced discounted
value of present earnings when doing an impairment test.

Impairment is recognized by reducing the book value of the asset on balance sheet and recording
impairment loss on income statement. It is irreversible once done.

Amortisation only refers to intangible assets and depreciation refers to tangible assets. There is
another term called impairment for a write down in value of an asset due to damage or sudden
decrease in market value or discounted net present value.
Be very careful as in English we refer to an impairment test for intangible assets. But in French we
refer to a test of depreciation. Which is very confusing since in English depreciation is applied only to
Tangible assets not intangible assets.

English is also of course confusing since amortisation also refers to the reduction of debt by regular
payments of interest and principal sufficient to pay off a loan by maturity. Just to make it even more
confusing for you.

So be careful with English terms they are very flexible and malleable and there are many confusions
in English.

See Compass group note 10 and Note 12 on Intantible assets (Amortisation charge) and Tangibles
assets (Depreciation charge). Page 173 and 175 https://www.compass-
group.com/content/dam/compass-group/corporate/Investors/Annual-
reports/CompassGroup_Annual%20Report2019.pdf.downloadasset.pdf

But look at LVMH French report note 3 on page 30 and 6 page 32 they talk about both amortisations
and depreciations for both Intangible and Tangible fixed assets.

https://r.lvmh-static.com/uploads/2020/06/lvmh-rapport-financier-semestriel-2020_vf.pdf

For impairment see IAS 38 (108) in English:

"In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful
life for impairment by comparing its recoverable amount with its carrying amount (a) annually, and

(b) whenever there is an indication that the intangible asset may be impaired."

For Impairment in French see IAS 38 (108) in French:

"Selon IAS 36, une entité est tenue d’effectuer un test de dépréciation d’une immobilisation
incorporelle à durée d’utilité indéterminée en comparant sa valeur recouvrable à sa valeur
comptable : (a) annuellement ; et (b) chaque fois qu’il y a une indication que l’immobilisation
incorporelle peut s’être dépréciée. "
AMORTISATION VERSUS DEPRECIATION - EXAMPLE IN FINANCIAL STATEMENTS

On the balance sheet you have the historic fixed cost and the accumulated depreciation the net is
your net fixed assets value.

https://corporate.ferrari.com/en/annual-report-2019
TYPES OF DEPRECIATON
See policy company and group

Company:

Straight line
Sum of digits
Reducing balance
Double declining balance
Usage base
https://www.accountingtools.com/articles/what-are-the-methods-of-
depreciation.html#:~:text=The%20following%20are%20the%20general%20methods%20of%20depre
ciation,rapidly-declining%20amount%20being%20...%203%20Usage%20based.%20

IAS 16 details Fixed Assets methods:

http://eifrs.ifrs.org/eifrs/bnstandards/en/IAS16.pdf
INTANGGIBLE ASSETS POLICY: