Depreciation Rate Dilemmas in Francophone West and Central Africa
Aligning the expected useful lives of your assets to tax-allowable depreciation rates is not correct — here is why.
It is not uncommon to hear finance teams in the francophone West and Central Africa (OHADA) zone explain that the depreciation rates applied to assets in the fixed assets register are derived directly from the tax code. This approach, in my view, defeats the very purpose of determining a depreciation rate in the first place.
The expected useful life of an asset is an estimate subject to professional judgement. It reflects the rate at which an asset is consumed or utilised within an organisation and will naturally differ from one entity to another depending on usage patterns, maintenance practices, and operating conditions.
Refer to the definition of depreciation in the revised SYSCOHADA framework below. I have chosen not to translate this so the message remains unaltered.
L’amortissement est défini, comme la répartition systématique sur la durée d’utilité du bien de la différence entre le coût d’entrée et la valeur résiduelle prévisionnelle (article 45 de l’Acte uniforme). Le choix du mode de répartition (linéaire, dégressif, unités d’œuvre ou de production …) relève de la politique et de la gestion de l’entité, dans le respect des conventions comptables retenues, de la prudence tout particulièrement. Le plus souvent, compte tenu de l’incertitude de l’avenir, les entités seront sans doute amenées à prévoir une durée d’utilité du bien égale à sa durée de vie, donc une valeur résiduelle nulle. Cette pratique doit être cependant considérée comme une simplification d’une approche plus économique qui implique, dans le cadre d’une continuité d’exploitation, la recherche et parfois le choix d’une durée d’utilisation différente.
This definition could not be clearer. The depreciation rate is a management decision and an estimate subject to professional judgement. Tax codes serve an entirely different purpose and should not be relied upon for determining accounting depreciation rates. Furthermore, tax-allowable depreciation rates represent a ceiling beyond which the expense is not deductible for income tax purposes. For example, if an entity depreciates vehicles over three years at 33%, but the tax-allowable rate is 25%, the excess of 8% is disallowed for tax purposes. Under IFRS, this scenario gives rise to a temporary difference with deferred tax implications (IAS 12). However, the revised SYSCOHADA framework (Acte Uniforme, effective 1 January 2018) has not explicitly addressed deferred tax, leaving a significant gap for entities operating in the OHADA zone.
Most assets continue to generate revenue well beyond their expected useful lives, which could indicate that the useful lives initially determined were incorrect and that depreciation has been accelerated. This should not be overlooked. The impact on management reporting can be significant.
- Reported profits are almost always understated, leading to distorted performance metrics and misinformed decision-making
- Tax is always paid on understated profits, meaning the entity bears a higher effective tax burden than necessary, reducing cash available for reinvestment
The following best practices can help finance teams establish more accurate and defensible depreciation rates.
- Consult with the original equipment manufacturer (OEM) to obtain an informed opinion on the estimated useful life of the asset. The OEM is better placed to assess the expected lifespan based on intended usage patterns and operating conditions.
- Review useful lives periodically. IAS 16 requires that the useful life of an asset be reviewed at least at each financial year-end. Even under SYSCOHADA, good practice demands that initial estimates be revisited as circumstances evolve.
- Document the assumptions underlying each depreciation rate. A well-documented rationale protects the entity during audits and ensures consistency when staff turnover occurs.
- Benchmark against industry peers. Where possible, compare your depreciation policies with those of similar entities in your sector to ensure your estimates are reasonable and defensible.
- Engage operations and engineering teams. The people who use and maintain the assets on a daily basis often have the most realistic view of how long an asset will remain productive.
Conclusion
The practice of defaulting to tax-allowable depreciation rates as a substitute for professional judgement is widespread in the OHADA zone, but it is fundamentally flawed. Depreciation is an accounting estimate that should reflect the economic reality of how an asset is consumed within a specific entity. Tax rates, by contrast, are fiscal instruments designed to regulate deductibility. Conflating the two leads to understated profits, higher effective tax burdens, and unreliable management information. Finance professionals in our region must take ownership of this estimate, apply the guidance within the revised SYSCOHADA framework, and where applicable, align with the principles of IAS 16. The credibility of our financial reporting depends on it.