I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

usage 

 Expected 

physical wear and tear 

 

Obsolescence  

 

Legal or other limits on the use of the assets 

(IAS 16, para. 56) 

Once decided, the useful life should be reviewed at least each financial year-end (IAS 16, para. 51) 

and depreciation rates adjusted for the current and future periods if expectations vary significantly from 

the original estimates. The effect of the change should be disclosed in the accounting period in which 

the change takes place. 

The assessment of useful life requires judgement based on previous experience with similar assets or 

classes of asset (IAS 16, para. 57). When a completely new type of asset is acquired (ie through 

technological advancement or through use in producing a brand new product or service) it is still 

necessary to estimate useful life, even though the exercise will be much more difficult. 

The physical life of the asset might be longer than its useful life to the enterprise in question. One of the 

main factors to be taken into consideration is the physical wear and tear the asset is likely to endure. 

This will depend on various circumstances, including the number of shifts for which the asset will be 

used and the enterprise's repair and maintenance programme. Other factors to be considered include 

obsolescence (due to technological advances/improvements in production/reduction in demand for the 

product/service produced by the asset) and legal restrictions, eg length of a related lease. 

4.4 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.' 

(IAS 16, para. 6) 

 

In most cases the residual value of an asset is likely to be immaterial. If it is likely to be of any 

significant value, that value must be estimated at the date of purchase or any subsequent revaluation. 

The amount of residual value should be estimated based on the current situation with other similar 

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