Assessment of residual value of fully depreciated assets under IAS 16

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Yousaf
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Assessment of residual value of fully depreciated assets under IAS 16

Post by Yousaf »

Hi !

As per IAS 16,

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant (zero) and therefore immaterial in the calculation of the depreciable amount. The residual value of an asset may increase to an amount equal to or greater than the asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount.

Question is that:


1. Whether, we review the residual value of fully depreciated tangible assets under IAS 16 (Residual value of such fully depreciated assets were take at zero) ?
2. If we review the residual value in current year, and such value is more than zero and material, what will accounting treatment of such fully depreciated assets?
JRSB
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by JRSB »

is a strange case, guess you'd have to make sure it wasn't an error (ie was it correct to treat the residual value as 0 in previous years)? potentially you have something with 0 nil value subsequently having a market and therefore a residual value I guess
Yousaf
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by Yousaf »

Review of residual value of asset is a estimate, which is not an error. If management consider, at the end of useful life of an assts its residual value will be very immaterial, it may consider it as zero value.
JRSB
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by JRSB »

It's an error if you failed to take account of information which was available when making the earlier estimate
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Marek Muc
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by Marek Muc »

The residual value, the useful life and the depreciation method should be reviewed at least at each financial year-end (IAS 16.51,61; IAS 38.104-106).

If it wasn't an error, you do nothing with fully depreciated assets other than consider a disclosure under IAS 16.79(b)
JRSB
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by JRSB »

Marek would you suggest an immediate credit to P&L then as an effective reversal of previous depreciation to take the nil NBV back up to the residual value?
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Marek Muc
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by Marek Muc »

No, that would be a retrospective adjustment resulting from a change in estimates (which is obviously not allowed)
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by JRSB »

Why would that be retrospective? Adjusted in the current year up to the estimated residual value, in light of the new estimate.
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Marek Muc
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by Marek Muc »

I guess IAS 8.38 is key here. As I read it, you cannot reverse depreciation expense that you already recognised. And debiting an item of PP&E would effectively mean taking the already recognised depreciation out of the P&L and adding it back to the carrying amount of the related asset. But I agree it's not crystal clear in IAS 8/IAS 16.
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by JRSB »

It gives the example of the useful life, then refers to the changes being 'income or expense' which implies credit is possible but not crystal clear no.
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Marek Muc
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Re: Assessment of residual value of fully depreciated assets under IAS 16

Post by Marek Muc »

Additional point to consider: I would say that IAS 16.79(b) implies that you cannot add back depreciation recognised in prevoius periods, otherwise it would be incorrect to have fully depreciated assets that are still in use.
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