Fixed assets are the group of assets that have useful life more than one year and they are records and report in the entity’s balance sheet.
These assets are not records as expenses in the entity income statement at the time of purchasing but they are charges as expenses based on their usage over their useful life.
Fixed assets depreciable value and residual value are identify at the time entity capitalize the assets. The identification will help entity in calculating depreciation for the period that assets are using.
There are many factors that might affect the depreciation expenses. Those factors including the depreciation rate, useful life, depreciation methods, and residual value. The depreciable value is not affected by the methods and rate we use.
To ensure that the depreciable value, depreciation expenses, and assets values that report and present in the financial statements reflect to the assets’ economic value, accounting standards require fixed assets’ residual value to be reviewed by entity management at least once a year.
Entity might review assets useful life and residual value more frequently than this.
Once entity review assets residual value and noted that the change is required. Then entity should account for the change of assets residual value and others affect like depreciation expenses, as well as assets carrying value as per ISA 8.
- 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.
- Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
- Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.