Residual value

IAS 16 Definition: 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.

Following are areas in which residual value is used in IFRSs.

IFRS 15 Revenue from contracts with customers

Under a residual value guarantee, Original Equipment Manufacturers agree to compensate the customer (‘make whole’) for the difference between the resale price the customer obtains in an open market and the guaranteed minimum resale value. Customer in these cases is a importer, distributor or reseller.

IAS 16 Property, Plant and Equipment

In most cases the residual-value of an asset is likely to be immaterial. If it is likely to be of any significant value, that value must be estimated at the date of purchase or any subsequent revaluation. The amount of residual-value should be estimated based on the current situation with other similar assets, used in the same way, which are now at the end of their useful lives. Any expected costs of disposal should be offset against the gross residual value.

IAS 16 Definition: Depreciable amount of a depreciable asset is the historical cost or other amount substituted for cost in the financial statements, less the estimated residual value.

The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. (IAS 16 51)

IAS 38 Intangible assets

The residual-value of an intangible asset with a finite useful life shall be assumed to be zero unless:

  1. there is a commitment by a third party to purchase the asset at the end of its useful life; or
  2. there is an active market (as defined in IFRS 13) for the asset and:
    1. residual value can be determined by reference to that market; and
    2. it is probable that such a market will exist at the end of the asset’s useful life. (IAS 38 100)

A residual value other than zero implies that an entity expects to dispose of the intangible asset before the end of its economic life.

IFRS 16 Leases

Residual-value of a leased asset is the estimated fair value of the asset at the end of the lease term.

Guaranteed residual value is:

  1. in the case of the lessee, that part of the residual value which is guaranteed by the lessee or by a party on behalf of the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and
  2. in the case of the lessor, that part of the residual value which is guaranteed by or on behalf of the lessee, or by an independent third party who is financially capable of discharging the obligations under the guarantee.

Un-guaranteed residual value of a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residual value.

Present value calculation techniques

In the definition of entity-specific value or value in use a ending value similar to residual value is used as follows:

Entityspecific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.

Value in use is almost identical: Value in use is the present value of the cash flows that an entity expects to derive from the continuing use of an asset or cash-generating unit and from its ultimate disposal.

Residual value

Residual value

Annualreporting.info provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting.info is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

Leave a comment