In accordance with ASC 350-30-35-9
and ASC 350-30-35-16
, a reporting entity should evaluate the remaining useful life of an intangible asset each reporting period to determine whether events or circumstances may indicate that a revision to the useful life (presumably shorter) is warranted to reflect the remaining expected use of the asset.
Unlike the guidance that exists for intangible assets, there is no explicit requirement to evaluate the useful lives of long-lived tangible assets each reporting period. However, we believe the useful lives of long-lived tangible assets should be reassessed whenever events or circumstances indicate that a revision to the useful life is warranted. It may be necessary to reassess the useful life of a long-lived tangible asset even if no impairment indicators exist or if the asset group passes step one of the impairment test.
In accordance with ASC 360-10-35-22
, when a long-lived asset (asset group) is tested for recoverability, it also may be necessary to review the estimated useful life. A change in the estimated useful life or salvage value of a long-lived asset is a change in accounting estimate and should be accounted for prospectively in the period of change and future periods in accordance with ASC 250-10
. ASC 360-10-35-47
also emphasizes that if a reporting entity commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, depreciation expense should be accelerated to reflect the use of the asset over its shortened useful life. The need to shorten the useful life of an asset may also be a triggering event to test for impairment under ASC 360
. See PPE 6.4.1
for further information on accounting for long-lived assets to be abandoned.
A reporting entity should not cease depreciating an asset that is to be held and used even if it expects to sell the asset at a gain. Although fair value may be higher than book value, depreciation should continue until the asset either is disposed of (or meets the held for sale criteria) or is depreciated to its salvage value. Long-lived assets should not be written up to reflect appraisal, market, or current values above the book value. As noted in ASC 360-10-35-4
, depreciation is “a process of allocation, not of valuation.” Unless an asset is disposed of (or meets the held for sale criteria), ceasing depreciation would distort the allocation of the initial cost of the asset over its useful life.
Example PPE 4-1 illustrates the accounting for changes in useful life and salvage value.
EXAMPLE PPE 4-1
Change in useful life and salvage value
PPE Corp has equipment with an original cost of $32,000 and expected salvage value of $2,000. The equipment is being depreciated on a straight-line basis over its expected useful life of 10 years, which is the same as the equipment’s expected economic life. At the end of the fourth year, the equipment has a carrying value of $20,000 ($32,000 - (($32,000 - $2,000) / 10 × 4)). Due to a change in product offering, the entity expects to use the equipment in its operations for only 12 more months and expects to receive $5,000 of proceeds from the sale of the equipment. The equipment’s remaining economic life is 6 years.
Should PPE Corp revise its depreciation of the equipment?
In determining depreciation expense, PPE Corp should consider the remaining useful life of the equipment.
If PPE Corp expects to use the equipment in its operations for only the next 12 months, PPE Corp should depreciate the equipment over that period such that the remaining balance equals the expected salvage value (proceeds from the sale of the equipment). Since the equipment has a book value of $20,000 and PPE Corp expects to receive $5,000 in proceeds from the equipment's sale, PPE Corp must record depreciation expense of $15,000 ($20,000 carrying value less $5,000 salvage value) over the next 12 months (the remaining useful life).
If PPE Corp expected the proceeds to be $21,000 instead of $5,000, it may not stop depreciating the asset even though its fair value exceeds its carrying amount. One year of the economic life of the asset will be utilized over the next 12 months. Accordingly, it is appropriate for PPE Corp to record depreciation commensurate with one year of economic life, or $3,000 ($32,000 original cost less $2,000 original estimated salvage divided by the economic life of 10 years) over the remaining year of useful life.
In the assessment of useful life, a reporting entity may change its assessment of the life of an intangible asset between finite and indefinite. See BCG 8.2.1
for information about the accounting for the reclassification of intangible assets between indefinite-lived and finite-lived categories.