Accounting

What Is Residual Value Of An Asset?

The residual value of an asset cannot be determined as your own method. Para 6 of IAS 16 provided the guidelines as to how residual value of an asset have to be determined or calculated:

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.

In accounting, residual value is the synonym for salvage value. It is the remaining value of an asset after it has been fully depreciated or completed the economic life. The residual value derives its calculation from a base price, calculated after depreciation.

In case of a lease for example 1: A Toyota Car is sold at a listed price of $50,000. After having the usage of 5 years and 50,000 miles its value is contractually defined as $5,000 or 10%. The credited amount, on which the interest is applied, thus is $50,000 present value minus $5,000 future value.

Example 2: A company has an equipment which was bought for $20,000. This equipment has a useful life of five years which has just ended. The company knows that if it sells the equipment now it will be able to recover 10% of the purchase price.

How does an entity choose between depreciation methods, for example, straight-line versus diminishing-balance models?

 Para 60 of IAS 16 states:

The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

Choice is based on which method best reflects the pattern of benefits expected to be consumed by a specific asset given its use in a specific entity.

The residual value of an asset is the estimated amount that an entity would currently obtain from sale or 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.

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