Any company cannot operate without fixed assets (hereinafter – FA), which have their useful life. Recognition of existing assets is not an end in itself, but their exploitation must be properly reflected in the company’s balance sheet. How to properly count FA and what indicators should be taken into account?
Determination of the useful life of FA
The useful life is:
a) the period of time during which the asset is expected to be used by the company;
b) the number of units of products or similar units that an enterprise expects to receive from the use of the asset.
In accordance with IAS 16, the useful life of FA is determined according to:
- expected period of its use according to the expected capacity or actual productivity;
- expected physical depreciation due to the influence of production factors - the number of changes, repair programs, etc., as well as its storage and maintenance conditions during the downtime;
- moral or commercial aging resulting from various changes in the production process or market demand for products or services produced using such an object;
- legal and similar restrictions on the use of the object, such as the terms of the lease.
The future amount of depreciation deductions depends on the value of the asset, as well as on the estimated useful life of the asset.
In accordance with para. 25 Accounting Standards, the period of FA useful use is reviewed if the expected economic benefits from its use are changed. At the same time, the depreciation of an object of FA is calculated based on a new useful life period, starting from the period that occurs after the date of its change.
Calculation of depreciation
According to para. 138.3.3 of the Tax Code of Ukraine (hereinafter – TCU), when the useful life (exploitation) of FA object in accounting is less than the minimum acceptable periods of depreciation of FA and other non-current assets, the minimum allowable time limits are used to calculate depreciation.
If the terms of useful use (operation) of the object of FA in accounting are equal to or greater than the minimum allowable, then for the calculation of depreciation used terms of useful use (operation) of the object of FA, established in the accounting.
There are no fixed dates for calculating the depreciation of intangible assets in TCU norms. If, in accordance with the title document, the right to use an intangible asset is not specified, the useful life period is determined by the taxpayer individually, but it cannot be less than two years or more than 10 years.
Useful life rescheduling
IFRS 16 requires an asset useful life to be rescheduled for at least the end of each fiscal year. If the expectations differ from previous estimates, the change (changes) should be reflected as a change in the accounting estimate in accordance with IFRS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It is not forbidden to change the useful life of FA at any other time when an entity needs this, IFRS 16 does not prohibit also. For these works, employees of the company (economists and operators), as well as third-party organizations are involved.
Determination of FA residual lifetime
- Under the guidance of a third-party consulting firm, the company’s responsible persons are consulted on the substance, as well as methods for determining the residual lifetime.
- There is a survey of responsible specialists on the remaining life expectancy projected by them.
- Next, the consulting firm by economic and mathematical methods conducts a comparative and statistical analysis of the data obtained. In case of discrepancy and substantial deviations from the actual terms of exploitation of such assets, clarification of information is made.
- Adjustment of the amount of depreciation deductions is made according to the updated information on the predicted useful life of FA directly in the accounting of the company.
