Asset Details
€120.000
€5.000
IAS 16 Depreciation Audit Working Paper Template — free PDF
Practical audit guide covering all four depreciation methods with worked examples, component depreciation checklist, change-in-estimate documentation template, and useful life benchmarks by asset class.
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IAS 16 Depreciation for Retail
Retail entities have a distinctive PP&E profile dominated by leasehold improvements, store fixtures, POS technology, and — for food retailers — refrigeration and specialised storage equipment. Unlike manufacturing where heavy machinery dominates, retail PP&E is characterised by frequent renovation cycles, technology refreshes, and the critical interaction between owned assets and leased premises. Depreciation policy in retail directly affects store-level profitability analysis, which drives strategic decisions about store openings, closures, and refurbishment timing.
The most important IAS 16 consideration for retail is the treatment of leasehold improvements. These are improvements made to leased premises — store fit-outs, HVAC installations, signage, and flooring. Under IAS 16, leasehold improvements are depreciated over the shorter of their useful life or the remaining lease term (including reasonably certain extension periods per IFRS 16). This creates a direct dependency on the IFRS 16 lease term assessment: if the lease term is revised upward (e.g., an extension becomes reasonably certain), the depreciation period for related leasehold improvements may also change — a prospective change in estimate under IAS 8.
Impairment is a recurring concern for retail PP&E. When a store underperforms, the PP&E associated with that store (leasehold improvements, fixtures, equipment) forms a cash-generating unit that must be tested for impairment under IAS 36. Store closure decisions often trigger immediate write-downs of remaining leasehold improvement balances. Retailers with large store networks should have systematic processes for identifying impairment indicators at the individual store level, particularly when lease renewal decisions approach.
Typical Asset Classes — Retail
| Asset | Useful Life | Method | Notes |
|---|---|---|---|
| Store fixtures and fittings | 5–10 years | Straight-line | Shelving, display units, lighting installations |
| POS systems | 3–5 years | Straight-line | Rapid technology cycles, low residual value |
| Leasehold improvements | Shorter of lease term or useful life | Straight-line | Critical to align with IFRS 16 lease term — cross-reference lease calculator |
| Refrigeration equipment | 8–12 years | Straight-line | For food retailers; component approach for compressors vs. display cases |
| Fit-out costs | 5–10 years | Straight-line | Full store refurbishments; may need to assess impairment on store closure |
Key IAS 16 Considerations — Retail
Leasehold improvements depreciated over shorter of useful life or lease term
IFRS 16 lease term directly affects depreciation period for improvements
Store closure triggers impairment testing under IAS 36
POS system replacements require derecognition of old assets (IAS 16.67)
Frequent renovation cycles mean capitalisation vs expense judgment is critical
Worked Example: Retail Store Fit-Out
A retailer completes a store fit-out in April 2025 for €120,000. The remaining lease term including a reasonably certain extension is 8 years. Estimated residual value of the fit-out is €5,000. The entity uses straight-line depreciation with a December year-end.
Cost: €120,000
Residual value: €5,000
Depreciable amount: €115,000
Annual depreciation: €14,375 (straight-line over 8 years)
First year depreciation: €10,781 (pro-rata: 9 months — April to December)
Audit Considerations
Auditors of retail entities should focus on the consistency between IFRS 16 lease term assessments and leasehold improvement depreciation periods. Impairment testing at the store level requires particular attention for underperforming locations. The capitalisation threshold for store maintenance vs. improvement expenditure is a common area of management judgment.