Residual value

Residual value is the value an asset will have after it has been depreciated (or amortised). It has a slightly different meaning in the context of leases.

Under IFRS, residual value should be the value an asset should have if it were in the same condition it is expected to have at the end of its useful life, and of that age, and after leaving for the cost of selling them. Residual values should be reviewed annually (as should useful lives) and depreciation adjusted if residual values have changed.

In theory, the residual values used for calculating depreciation should be separately considered for each asset, and even for components of an asset. For example, if a building contains lifts that have a shorter expected life than the building, they should be depreciated separately. In practice, companies are likely to simplify these complex requirements as far as possible.

Intangible assets often have a residual value of zero — expired patents have no value. This is less common with tangible assets, but many will not be resalable or may have costs associated with disposal that absorb the sales price.

In the case of assets that are leased, the residual value is the cost of the asset less repayments of capital (i.e. payments excluding the interest component) made over the life of the lease. It is common to allow lessees to purchase leased assets at the residual value. The accounting treatment depends on whether it is a finance lease or an operating lease.

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