Residual value

Learning objectives

• Determine whether a residual value other than zero may be used.L2
• Calculate the depreciable amount with a supported residual value.L2, L3
• Review the residual value and determine its consequences for the amortisation charge, which is zero if the residual value reaches the carrying amount.L2, L3

Normative references

• IAS 38 §100The residual value of an intangible asset with a finite useful life is assumed to be zero unless: (a) there is a commitment by a third party to purchase the asset at the end of its useful life; or (b) there is an active market for the asset and both the residual value can be determined by reference to that market and it is probable that such a market will exist at the end of the useful life.
• IAS 38 §101The depreciable amount of an asset with a finite useful life is determined after deducting its residual value. A residual value other than zero implies that the entity expects to dispose of the asset before the end of its economic life.
• IAS 38 §102The residual value is estimated using prices prevailing at the date of the estimate for the sale of a similar asset that has reached the end of its useful life and has operated under conditions similar to those in which the asset will be used. It is reviewed at least at each financial year-end; a change in residual value is accounted for as a change in an accounting estimate in accordance with IAS 8.
• IAS 38 §103The residual value may increase to an amount equal to or greater than the carrying amount of the asset; the amortisation charge is then zero until the residual value subsequently decreases to an amount below the carrying amount.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

12 questions

• In which situation may an entity use a non-zero residual value for an intangible asset with a finite useful life?L2
• Lumivert acquires a licence to operate a lighting process for 900,000 and will use it for 6 years. A competitor has contractually committed to buy the licence back for 180,000 at the end of those 6 years. The benefits are consumed evenly and the straight-line method is used. The intern calculates an annual charge of 150,000. What is the correct annual charge?L3
• True or false? A mutual insurer has had bespoke claims management software developed. It estimates that it could resell it for 20% of its cost at the end of its use, although no buyer has made any commitment and there is no active market for this type of software. It may use this residual value.L2
• True or false? Vinéa holds a manufacturing licence that it will use for 5 years. A distributor has contractually committed to buy this licence back for 50,000 at the end of those 5 years. Vinéa may use a residual value of 50,000 to calculate the depreciable amount.L2
• A services group holds the following intangible assets with a finite useful life. For which one may it use a non-zero residual value?L2
• A testing laboratory acquires a licence to use a screening method for {licence_cost} and will operate it for {useful_life} years. A peer laboratory has contractually committed to buy the licence back for {buyback_price} at the end of that period. The straight-line method is used. Calculate the depreciable amount and the annual charge.L2
• The Marée Haute fishing company acquires a transferable fishing quota for {quota_cost} and will use it for {quota_life} years. These quotas are traded on an active market, by reference to which the residual value at the end of use is determined at {market_residual}; that market will probably still exist at the end of the quota's use. The quota is available for use on 1 October 20X1, that is {months_first_year} months before the year-end of 31 December 20X1. The straight-line method is used. Calculate the depreciable amount and the charge for 20X1.L3
• A travel agency acquires an online booking platform for {platform_cost} and will use it for {platform_life} years, on a straight-line basis. Its director believes it could be resold for {hoped_resale} at the end of that period, but no buyer has made any commitment and there is no active market for this type of asset. What is the annual amortisation charge?L2
• On 1 January 20X1, Tissavel acquires a right to use a patented textile pattern for 1,000,000 and will exploit it for 4 years. A competing manufacturer has contractually committed to buy this right back for 200,000 at the end of the 4 years. The entity applies the cost model and the straight-line method. What is the carrying amount of the right at 31 December 20X2?L3
• True or false? Once set at initial recognition, the residual value of an intangible asset with a finite useful life can no longer be changed, so as to preserve the consistency of the amortisation plan.L2
• Sylvarène amortises a broadcasting licence that a third party has contractually committed to buy back from it at the end of its useful life. At 1 January 20X4, the carrying amount of the licence is {opening_carrying_amount} and its remaining useful life is {remaining_life} years. On that date, the buy-back commitment is renegotiated and the revised residual value is {residual_value}. No other event affects the licence in 20X4. Calculate the amortisation charge for 20X4 and the carrying amount of the licence at 31 December 20X4.L3
• Corbanne acquired for {cost} an operating right amortised on a straight-line basis over {useful_life} years. As a third party has committed to buy back the right at the end of that period, Corbanne used a residual value of {initial_residual_value}. After {years_elapsed} years of amortisation, the buy-back commitment is renegotiated and the residual value is reduced to {revised_residual_value}; the total useful life and the amortisation method are unchanged. Calculate the carrying amount of the right at the date of the revision and the new annual amortisation charge.L2