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Useful life
An asset's useful life is the period over which
the entity expects to consume economic benefits
from the asset [IAS16.6(R.05)]. The useful life, therefore,
will often be less than the economic life [IAS16.57(R.05)].
The economic life is the total period over which
the asset is capable of providing economic benefits,
whether to the entity or to a subsequent owner .
The useful life should be reviewed at least at
each financial year-end [IAS16.51(R.05)]. It should be
revised to reflect any changes in circumstances
since the previous assessment. The change in useful
life is treated as a change in estimate, and reflected
prospectively in a revised depreciation charge over
the remaining, revised, useful life [IAS16.51(R.05)].
The only element of PPE against which no depreciation
is charged is freehold land. The passage of time and usage
do not affect its future ability to provide economic
benefits [IAS16.58(R.05)]. The exception is in respect
of land held for its mineral content, against which
a charge would be made for the extraction of minerals.
Depreciation methods
The depreciation method is the basis on which the
carrying value is reduced to residual value over
the asset's useful life. The method chosen should
reflect the pattern of economic benefits consumed
and should be systematic [IAS16.50,60(R.05)] .
The more common methods used are:
| Method |
Characteristic |
| Straight line |
Equal consumption of benefits
over time |
| Sum of the digits |
Greater consumption of benefits
in earlier periods |
| Unit of production |
Reflects estimated total productive
capacity of the asset |
The method of depreciation used should be reviewed
at least at each financial year-end. The method
should be changed to a more appropriate one if there
has been a change in the pattern of consuming economic
benefits. The change in method should be treated
as a change in estimate and applied prospectively
[IAS16.61(R.05)].
Residual value
The residual value is the estimated proceeds from
disposal after disposal costs. The estimate is based
on what would currently be obtained for an asset
of the age and in the condition expected at the
end of the asset's useful life [IAS16.6(R05)] . Residual
value should be reviewed at least at each financial
year-end and, where necessary, revised. Any revision
to residual value will give rise to a change in
the depreciation charge. This should be treated
as a change in estimate and applied prospectively
[IAS16.51(R.05)].
Disclosure
The depreciation methods used should be disclosed,
as should the range of useful lives (or rates) for
each class of assets within PPE [IAS16.73(R.05)].
The accumulated depreciation at the beginning and
end of the period should be given for each class
of assets, together with the charge for the period
[IAS16.73(R.05)].
Material changes made to the depreciation methods,
useful lives or residual values of an entity's assets
should be disclosed and explained in the notes to
the financial statements [IAS8.39(R.05)].
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