Machine depreciation : ready to use but not used

[Lasa1]

Hi,

We produce cell phones with cases. Cell phones are not sold without cases, they are sold together as one product. We cannot sell the cases or the cell phone independently.
We have an equipment ready to produce cases for cell phones.
The design of cell phones is not final but won’t impact the design of cases. We put on hold the production of cases until the cell phone is fully designed.
Shall we start to depreciate the equipment because the it is in its intended location and condition to produce cases or shall we wait for the start for the cell phone production?
In one hand, the equipment can already produce the cases , in the other hand if we start the depreciation before the production of cell phones, we will have the expense depreciation but not the income from the sale of finished product.

Thanks!

[JRSB]

It's ready to use, so its capacity is open to you between now and the end of its useful life. So I'd say so.

[Lasa1]

Thanks. By "So I'd say so" , do you mean that equipment should start to be depreciated even though the cell phones production is not started, right?

We are concerned about getting the costs and revenue in different accounting periods...is this not a reason to postpone the beginning of the depreciation?

I have been checking in IAS 16 but could not find any paragraph that could help on this. Is there any ?

Thanks

[exIFRS]

I think the key paragraphs are in the basis for conclusions to IAS 16 specifically:

BC30: The Board decided that the useful life of an asset should encompass the entire time it is available for use, regardless of whether during that time it is in use or is idle. Idle periods most commonly occur just after an asset is acquired and just before it is disposed of, the latter while the asset is held either for sale or for another form of disposal.

BC31: The Board concluded that, whether idle or not, it is appropriate to depreciate an asset with a limited useful life so that the financial statements reflect the consumption of the asset’s service potential that occurs while the asset is held.

[JRSB]

In terms of matching the revenue and expenses, I would think it is typical to incur costs before revenue starts. I assume you also had outgoings in setting up your cell phone production processes etc. The depreciation on the temporary idle time is part of that

[Marek Muc]

Conceptually I agree with exIFRS and JRSB.

In your scenario, you can reconsider whether the production line for phone cases can be said to be ready for use if the phone isn't fully designed yet

[Lasa1]

That s the point. Cases will never be produced if the cell phone is not. This is why we think that the production line (which includes the machine to produce cases) is not ready for use.

It is also fair to say that the machine to produce cases is located in a different site (A) than the machines producing the cellphone and assembling the case to the cellphone( B). When Cases are produced, they are shipped from A to B and added to the 2nd phase of the production process.

Based on the above, any reference we could use to justify that the depreciation starts only when the design of the cell phone is final?
Thanks

[Marek Muc]

you missed my point I'm afraid, decisions about timing are different from the conclusion on whether the machine is ready for use or not

[Lasa1]

Yes, I do not follow... would you mind to try to explain it again? sorry..

[Marek Muc]

I was just saying that in your scenario you may argue that the final design of the phone may necessitate some changes to the design of cases. If this was true, you could say that the machine producing phone cases is not yet in its final condition

[Kounta-kinte]

I would like to contribute about this machine depreciation issue. As described earlier , the machine is in condition and location to operate effectively i would therefore suggest that the machine should be depreciated as soon as the above condition is met . However , in order to reamin in line with the matching concept , the depreciation method to be used must reflect the economic pattern of consumption of the equipment . The number of units produced in my opinion is the apppropriate method of depreciation to be used . In this way , the depreciation figure charged in the P/L woud be nil .

[Marek Muc]

that's a good idea to use the units of production depreciation method!