How Often Should Fixed Assets’ Useful Life be Reviewed? (Explained)

Fixed assets are normally referred to as property, plant, and equipment with a useful life of more than one year. In order words, they are expected to be converted into cash in more than one year due to their usages.

Fixed assets costs are not directly charged into the entity’s income statement immediately when purchasing. But the costs will be charged as depreciation expenses in the systematic depreciation methods over the useful life of assets.

Useful life, depreciation rate, depreciation methods, and a residual value of assets are the factors that affected the amounts of depreciation expenses during the periods.

Based on IAS 16, Useful life is:

(a) The period over which an asset is expected to be available for use by an entity; or

(b) The number of production or similar units expected to be obtained from the asset by an entity.

To ensure that the assets’ useful life is defined accurately over the life of assets, an entity should at least review useful life one per year. This will help to ensure that the depreciation charges are accurately and reflected in the economic value that asset contributes to the entity. And assets stated in the balance sheet are at their fair value.

When an entity reviews its asset’s useful life and found that the useful life is changing, the entity should account for the change according to the IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors.

Useful life assets can be shorter or longer than economic life assets. For example, the computer can be used for five years, but the entity could determine the useful life of computers based on its experiences or policy for three years.

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Some assets like lands have an indefinite useful life, not like building and other assets. Buildings have limited useful life, and therefore they are depreciated. Lands are not depreciated because they have an indefinite useful life.