International Accounting Standard 16 (IAS 16) defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

Before Brazil adopted IFRS, companies in Brazil used to depreciate assets based on the useful lifetime table provided by the Department of Federal Revenue of Brazil, English for Secretaria da Receita Federal do Brasil.

Currently, big corporations do not depreciate their assets based on Department of Federal Revenue of Brazil guidance anymore. They depreciate them based on the correct useful life — the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity — which is different from the tax table and different from one company to another.

As the depreciation expense account in the Financial Statements has a different balance from the depreciation expense according to the tax table, companies have two options:

1) Adjust the income tax calculation based on the tax table

This will cause a difference between financial accounting and tax accounting that will result in a deferred tax asset or liability.

2) Proof for tax authorities that the useful life chosen by the company is the correct one.

In this case, as the financial accounting and tax accounting will be the same, there is no deferred tax liability.

There are small companies that still depreciate assets based on Department of Federal Revenue of Brazil guidance because it is the easiest way. But it is not the correct way to account for depreciation and this will negatively impact the financial statement.

The main useful lives for tax depreciation

Building – 25 years

Office Furniture – 10 years

Computers – 5 years

Cars – 5 years

Fixtures – 10 years

See Local law IN 1.700/2017 for the useful life table:

IN RFB 1700

In some situations the Department of Federal Revenue of Brazil allows for the immediate expense of assets up to a specific amount.

It is fundamental that the business has a good internal control of fixed assets to estimate what will be the correct useful life for each asset class. It may impact the taxes and will certainly impact the financial statements.

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Written by Thiago M. Silveira

Thiago M. Silveira is a Brazilian Chartered Certified Accountant (CRC) with more than 10 years of success in the accounting field, with insightful understanding in all aspects of accounting, financial reports preparation, local taxes and compliance in Brazil.

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