Reviewing useful lives and residual values
Why IAS 16 asks for a review of useful lives and residual values every year end, and how a revised estimate flows through a client's statements.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client's fixed asset register is often the most copied-forward schedule in the file. The lives were set when each asset was bought, the depreciation runs every month, and nobody looks at the assumptions again until the auditor asks why half the delivery fleet is fully written off and still on the road.
That question has a real answer in the standards. The estimates behind depreciation are not set once and left alone; they are meant to be looked at again every year end, and a change is put through in a particular way. For a firm preparing or auditing a client's statements in South Africa, Nigeria or Kenya under IFRS, the mechanics are the same.
What the year-end review involves
ACCA's technical article on measuring depreciation explains that IAS 16 requires both the useful life and the residual value of an asset to be reviewed at the end of each reporting period. Where the change is significant, it is accounted for over the remaining useful life as a change in accounting estimate. The same article notes that IAS 16 requires each significant part of an asset to be depreciated separately, which matters when the review finds that one component, an engine or a roof, wears out on a different timetable from the rest. ACCA's article on measuring depreciation sets this out with worked illustrations.
In practice the review is a conversation with the client, supported by evidence. Useful questions:
- Which asset classes are being replaced sooner or later than the register assumes?
- Has the client changed how it uses anything: more shifts on a machine, a vehicle moved from town deliveries to long-distance routes?
- Are any fully depreciated assets still working?
- What does the client realistically expect to get for assets at the end of their use, compared with the residual values in the register?
- Has anything been damaged, idle or earmarked for disposal?
The answers, and who gave them, belong on the working paper.
Useful life is about the client's use
A common slip is to treat useful life as how long an asset can physically last. Investopedia's explanation of depreciation draws the line clearly: useful life is the period the business expects to use the asset productively, not necessarily how long the equipment will physically survive.
That distinction changes the review. A client that replaces its laptops on a fixed cycle should depreciate them over that cycle, even if the machines would run for years longer. A transport business that keeps its trucks well beyond the manufacturer's suggested life, because it maintains them carefully, may need longer lives than the industry norm.
Residual value works alongside it. Investopedia describes the depreciable base as cost less salvage value, and carrying value as original cost less accumulated depreciation. If the client now expects to sell its vehicles for more at the end of their use than it once assumed, the depreciable base shrinks and so does the annual charge.
Putting a revision through: forward, not back
Under IAS 8, the effect of a change in an accounting estimate is recognised prospectively, in profit or loss in the period of the change and in future periods if the change affects both. IAS 8 also says changes in estimates come from new information or new developments and are therefore not corrections of errors.
A worked example in words: a client bought a machine some years ago and expected to use it for a certain period. At this year end, the review shows it will be used for longer than planned. The firm does not go back and restate the earlier years. Instead, it takes the machine's carrying amount at the start of the year, deducts the revised residual value, and spreads what remains over the revised remaining life, starting with the current year. The earlier charges stand as they were.
The note on the change should say what estimate was revised, why, and the effect on the current year. Where it is practicable to estimate, the effect on future years helps readers too.
Fully depreciated assets that are still in use
A register full of assets at nil carrying amount that the client is still using is a sign that past lives were too short. It is not usually an error to correct backwards, because the estimates were reasonable on what was known at the time. But it is evidence for the current review.
For assets already at their residual value, a revision has nothing left to spread. The value of the finding is elsewhere: similar assets that are still being depreciated probably carry the same short life, and those are where a revision now makes a difference. Record the conclusion either way, so next year's team does not repeat the debate from scratch.
Handling the revised charge in Achekam
Achekam does not calculate depreciation. It presents the depreciation in the client's trial balance, flags when the charge does not agree with the movement in accumulated depreciation, and lets staff post a year-end adjusting entry. A wrong adjusting entry is reversed with a record of who did it and why, never deleted.
That flag is a useful prompt for this review. If the client's register was updated mid-year for a revised life but the accumulated depreciation account tells a different story, the mismatch surfaces when the statements are built, rather than in a review note after the draft has gone to the partner.
Carrying the decision into next year needs care. Staff can roll a set of statements forward, carrying its settings, policies, notes and wording and rebuilding every figure from the new trial balance. Adjusting entries, typed comparatives and signatures are not carried forward. So:
- If the revised charge was posted only as a Studio adjusting entry, it will not appear in next year's set. Make sure the client's own fixed asset register and ledger use the revised life and residual value from now on.
- The accounting policy wording on useful lives does roll forward. If the review changed the lives disclosed for an asset class, edit the policy text this year so next year starts from the right words.
- Keep the review working paper with the engagement so the reasoning survives the roll-forward.
Before signing off
The questions to close the review on:
- Has every significant asset class been considered, not just the large items?
- Is each revised life based on the client's expected use, with evidence?
- Have revised residual values been compared with realistic disposal proceeds?
- Has the change been applied prospectively from the current year, without restating earlier ones?
- Does the policy note match the lives now in use?
If you are unsure whether a change belongs in this category at all, change in estimate or policy sets out the line between the two, and depreciation methods under IAS 16 covers the related question of how the charge is spread. Put the annual review on the year-end checklist for every client with a meaningful fixed asset base, and ask the client the questions before the trial balance arrives.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
