Residual Value… there’s real value in there

Accounting rules mean your profits get hit by Depreciation… but you don’t have to take that lying down.

Ask your accountant how they handle the Residual Value of your assets… it could boost your Profits… tax free.

Residual Value… definitions

Your company’s depreciation policy is “the systematic allocation of the depreciable amount of an asset over its useful life”*…

… a few strange technical phrases in there.. but it’s the ‘depreciable amount’ that I’m interested in here… because that’s defined as “the cost of an asset… less its residual value“*

and ‘residual value’ is in turn defined as “the estimated amount that an entity would currently obtain from disposal of an asset… if the asset were already of the age and in the condition expected at the end of its useful life”*

What’s it mean?

You take the cost of your asset… and then deduct the expected value of that asset when you stop using it… before working out the annual Depreciation cost of using that asset

… say this year you bought a company Car that cost you £100,000… and you expect to use it for 4 years…

… some accountants would charge £25,000 Depreciation against this year’s profits for using the car… (£100,000 spread over 4 years)

BUT

… at the end of the 4 years the car still has Residual (second hand) Value… estimated today to be, say, £40,000

So the REAL cost of using the car this year should be…

Original Cost £100,000 – £40,00 Residual Cost … =  £60,000  spread over the 4 years you’ll be using it…

That would make this year’s Depreciation charge £15,000… instead of £25,000

So accounting for the Residual Value of your company car when you stop using it has generated an extra £10,000 Profit… tax free… and a stronger Balance Sheet too.

Who decides the Residual Values… & how?

You’re responsible for your accounts so it’s really up to you.. but best to get your accountant on board…

…  under the new FRS102 rules Residual Value is calculated by looking at the price your asset will fetch at your year end date… but making allowance for the age & condition it will be in when you stop using it…

(so… your £100,000 car may have been new this year … but at your year end you can figure out its Residual Value by looking at prices for a 4 year old version of the same car)

Objections?

How can there be?… rules is rules and the new FRS102 says Residual Values should be considered regularly to make sure they stay up to date… so you can revisit any old Residual Values your accountant’s been using…

… and if your accountant hasn’t been using Residual Values before… get them to start doing it… changing the way they depreciate your assets would be considered a change in an ‘estimate’ so needs no extra disclosure or any restating of old numbers…

FWIW

The old rules said Residual Values should be based on prices prevailing at the date of acquisition (or revaluation)….

The new rules say Residual Values should be based on prices prevailing at the Balance Sheet date*

*FRS102 Glossary of Terms

also FWIW…

A change in depreciation method is accounted for as a change in an estimate … IFRS 102 para 17.23

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  1. […] but they may change the expected Useful Life of the asset and so will either impact the Residual Value.. or prolong the period that the company will use the asset (and so reduce the Depreciation charge […]

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