There is an explicit requirement under IFRS to review the residual value and useful life of an asset on an annual basis. Useful life is the number of years over which an asset is depreciated, while residual value is the amount you expect to sell the asset for at the end of its life.
The requirement to review residual value and useful life under IFRS can create issues for Canadian companies. For instance, if companies have depreciable assets, as you probably know, depreciation should be calculated on the difference between the capital cost and the residual value of the asset. If a Canadian entity has fully depreciated assets and the assets are still in use, this means the useful life was not correctly estimated, and the entity will need to go back and adjust this.
There was an error in the estimated useful life or residual value if the asset is fully depreciated and yet the asset is still in use, that is providing ongoing future benefits to the company. Ideally, the estimate should have been adjusted “prospectively”, as it become known that the original estimate was inaccurate.
The requirement to review useful life and residual value on an annual basis is different than Canadian GAAP, wherein the focus has been primarily on “asset impairment”, or in other words, ensuring that the fair value of an asset, or asset group, exceeds its net book value.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the GFS Consulting web-site and please remember to contact your CGA or other accounting professional for further guidance.
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Tags: Canadian GAAP, IFRS, PP&E, Residual Value, Useful Life
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