At the year-end, accounting departments in municipalities have a number of mandatory procedures to complete, which often remain “behind the scenes” for other employees. One of these is the review of the useful life and residual value of fixed assets. While the process may appear technical, it enables institutions to accurately reflect the status of their assets, avoid errors and plan expenses realistically.
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At the end of the reporting year, in case of a change in the expected economic benefits from the use of a fixed asset, the useful life and residual value are revised (Clause 5, Section IV of the National Regulation (Standard) of Accounting in the Public Sector 121 (Inventories) (hereinafter NP(S)BODS 121 (Fixed Assets)). This means that reviewing the residual value and useful life of fixed assets on the annual balance sheet date is mandatory.
When changing the useful life of a fixed asset, factor in the following (Clause 4, Section IV of NP(S)BODS 121 (Fixed Assets)):
- Expected use of the fixed asset by a public sector entity. Use is assessed based on the expected capacity or physical productivity of the fixed asset;
- Expected obsolescence and physical wear and tear, which depend on the intensity of use of the fixed asset, the availability and quality of maintenance services;
- Technical obsolescence due to changes and improvements in production or changes in market demand for the product or services provided by the fixed asset;
- Legal or similar restrictions on the use of the fixed asset.
Depreciation of a fixed asset is calculated taking into account the new period of useful life and residual value, starting from the month following the month of the change of the period of useful life and/or residual value.
A change in the useful life and a change in the residual value of a fixed asset must be reflected as changes in accounting estimates in compliance with NP(S)BODS 125 (Changes in Accounting Estimates and Correction of Errors) approved by Order of the Ministry of Finance of Ukraine No. 1629 dated 24 December 2010.
The residual value and useful life of fixed assets are to be reviewed by the institution’s commission approved by the order of the head. This may be an inventory commission.
Thus, the review of the residual value and useful life of fixed assets as of the date of the annual balance sheet is a mandatory measure that ensures the correct reflection of expected economic benefits and depreciation of assets. Changes in useful life and residual value result from the expected use, obsolescence, physical deterioration, technical obsolescence and legal restrictions. Depreciation is calculated according to the new estimates, and the review itself is done by a commission of the institution, approved by order of the head, with the changes reflected as adjustments to accounting estimates.
