Useful life
Useful life is the period over which an asset is expected to generate economic benefits for its owner, forming the denominator of its depreciation or amortisation charge and reviewed at each year end.
FrameworkIAS 16
What it is
See it move
A company buys a machine for €80,000, expects a €8,000 residual value, and estimates an 8-year useful life. Straight-line depreciation is (€80,000 − €8,000) divided by 8, giving an annual charge of €9,000, spread evenly across the machine's estimated productive life for that company.
The formula
Variables
- Annual depreciation charge (€)
- Cost of the asset (€)
- Residual value (€)
- Useful life (years)
Spreads an asset's depreciable amount evenly over its estimated useful life to give the annual charge.
Check yourself
Equipment costs €54,000, has an estimated residual value of €4,000, and an original useful life of 5 years. Straight-line depreciation runs for exactly 2 years as planned. At the start of year 3, the company re-estimates the equipment's remaining useful life at 2 years (down from the 3 years originally left), with the residual value unchanged. What is the revised annual depreciation charge from year 3 onward?