Reviewing useful lives and residual values

FRS 102 requires useful lives, residual values and depreciation methods to be reviewed whenever there is an indication that they have changed since the last annual reporting date. A revision is a change in accounting estimate, so it is applied prospectively: the remaining carrying amount, less the new residual value, is spread over the remaining life, and earlier years are not restated.

When does FRS 102 require a review?

Paragraph 17.19 lists factors that may indicate a change in residual value or useful life since the most recent annual reporting date: a change in how an asset is used, significant unexpected wear and tear, technological advancement, and changes in market prices. If such indicators are present, the company must review its previous estimates and, if current expectations differ, amend the residual value, depreciation method or useful life.

The trigger is the indicator, not the calendar. Paragraph 17.23 applies the same approach to the depreciation method where there has been a significant change in the pattern in which the asset’s benefits are expected to be consumed. For intangible assets, paragraph 18.24 contains an equivalent rule, and micro entities using FRS 105 have the same test at paragraph 12.18.

Impairment work can also prompt a review. Paragraph 27.10 says that an indication an asset may be impaired may mean the remaining useful life, depreciation method or residual value should be reviewed and adjusted, even if no impairment loss is recognised.

In practice, asking the question at every year end is the simplest way to show the indicators were considered. It does not mean every life must be changed every year; it means the company can explain why the existing estimates still hold.

What signs suggest a life or residual value is out of date?

• Assets routinely outlast their book lives. If the register is full of fully depreciated items still working, the lives being used for new additions are probably too short. See fully depreciated assets still in use.
• Heavier or lighter use. A machine moved from one shift to three will wear out faster. Paragraph 17.21 lists the number of shifts and the repair and maintenance programme as factors in physical wear and tear.
• Technology and obsolescence. Paragraph 17.21(c) points to technical or commercial obsolescence, including expected falls in the selling price of what the asset produces.
• Legal limits. A lease of the premises that ends sooner than expected caps the life of fit out work, under paragraph 17.21(d).
• Second hand prices. A sustained change in what similar used vehicles or equipment sell for changes the residual value.
• Plans to dispose early. Paragraph 27.9(f) treats a plan to dispose of an asset before the previously expected date as an impairment indicator, and it also shortens the useful life.

How should residual value be measured?

The FRS 102 glossary defines residual value as the amount the entity would currently obtain from disposing of the asset, after deducting estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Two points follow from the word “currently”. First, the estimate uses today’s prices for a similar asset that is already old, not a forecast price inflated for future years. Second, because current prices move, residual values can change from year to year without anything happening to the asset itself.

The depreciable amount is cost less residual value. If a revised residual value is equal to or higher than the asset’s carrying amount, there is nothing left to depreciate and the charge is nil until the estimate falls again. For intangible assets, paragraph 18.23 starts from a presumption that residual value is zero unless specific conditions are met.

How is a change applied?

Paragraph 17.19 tells the company to account for the change as a change in accounting estimate under paragraphs 10.14D to 10.18. Paragraph 10.16 requires the effect to be recognised prospectively by including it in profit or loss in the period of the change, and in future periods if the change affects both. Prior years are not restated and the opening balance on the reserves is not adjusted.

The working is straightforward:

1. Take the carrying amount at the point the estimate changes.
2. Deduct the revised residual value.
3. Divide by the revised remaining useful life (or apply the revised method).

Illustration only. A machine cost £100,000 and was being depreciated straight line over 10 years to a nil residual value. At the start of year 5 its carrying amount is £60,000. Heavier use means management now expects only three more years, with a resale value of £6,000 at today’s prices.

	Old estimate	Revised estimate
Carrying amount at start of year 5	£60,000	£60,000
Residual value	Nil	£6,000
Remaining life	6 years	3 years
Annual charge	£10,000	£18,000

The year 5 charge is £8,000 higher than it would have been. Years 1 to 4 are left as they were.

Is it a change in estimate or the correction of an error?

Paragraph 10.14D says an estimate may need to change because circumstances have changed, or as a result of new information, new developments or more experience. Those are changes in estimate. Paragraph 10.19 defines prior period errors as omissions and misstatements arising from a failure to use, or misuse of, reliable information that was available when the earlier accounts were approved and could reasonably have been obtained. If a life was plainly wrong when it was set, for example a building depreciated over three years by a keying mistake, that is an error, corrected retrospectively under paragraph 10.21 if material.

Paragraph 10.15 adds that where it is difficult to distinguish a change in policy from a change in estimate, it is treated as a change in estimate. A change in depreciation method is also an estimate change under paragraph 17.23, not a change of accounting policy. See FRS 102 Section 10 for the wider framework.

What has to be disclosed?

• Nature and effect. Paragraph 10.18 requires disclosure of the nature of the change and its effect on assets, liabilities, income and expense for the current period, and the effect on future periods where it is practicable to estimate it.
• Lives used. Paragraph 17.31(c) requires the useful lives or depreciation rates for each class of property, plant and equipment.
• Estimation uncertainty. Where an estimate has a significant risk of causing a material adjustment to carrying amounts within the next financial year, paragraph 8.7 requires disclosure of the key assumptions.
• Small companies. Paragraph 1A.17 says a small entity is not specifically required to give the disclosures in Sections 8 to 35, but may need to give those relevant to material transactions to show a true and fair view. The accounting policy note must still state the depreciation policies under paragraph 1AC.3.

Does a change affect tax?

For tangible assets, BIM35201 confirms depreciation is not an allowable deduction, so a revised life does not change taxable trading profit directly; capital allowances continue on their own basis. It can change deferred tax, because paragraph 29.6 requires deferred tax on timing differences and the gap between the carrying amount and the tax written down value moves. See deferred tax under FRS 102.

Intangible fixed assets held by companies are different. CIRD10115 explains that the corporate intangibles regime links tax to the accounts, and sums written off intangible fixed assets are usually deductible so long as the treatment follows GAAP. Shortening the life of a software licence or acquired customer list can therefore change the tax deduction as well as the accounting charge. See goodwill useful life and amortisation.

What mistakes come up most often?

• Restating prior years or putting a catch up adjustment through reserves.
• Setting residual values using expected future prices rather than current prices.
• Changing lives to smooth profit without an indicator to support the change.
• Updating the accounts but not the fixed asset register, so the next year’s charge reverts.
• Forgetting that a review of one component, such as a roof, does not change the life of the rest of the building. See depreciation methods.

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Related Accountapedia entries

• Goodwill: useful life and amortisation
• Residual income vs ROI for divisions
• Reviewing the client base: which clients to let go
• Who owns an accountant’s working papers
• When a client company becomes insolvent

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• Financial Reporting Council: FRS 105 September 2024
• GOV.UK: Manual page BIM35201
• GOV.UK: Manual page CIRD10115

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.