Changes in the useful lives of fixed assets
This article looks at calculating the depreciation on a fixed asset when the useful life changes and how to appropriately account for those changes.
Keywords: Mazars, Thailand,Accounting, Fixed Assets, Change in useful life, depreciation, TFRS, NPAEs, FAP
14 January 2021
Scenario
In 2018, Company A bought machinery from overseas. The cost of the machinery was THB 2 million. Company A depreciated the machinery over its expected useful life of 8 years (from 2018 to the projected year 2025). The machinery was not expected to have any residual value at the end of its useful life. Therefore, annual depreciation was THB 0.25 million.
On 1 January 2020, Company A reviewed the useful life of the machinery and realized that the machinery had a useful life of only three more years. Therefore, depreciation for current and future periods should be revised.
Issue
In the scenario set out above, how can Company A calculate and adjust depreciation for current and future periods?
Response
Paragraphs 50 and 62 of the TFRS for NPAEs state the following:
A change in an accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
The entity shall recognize the effect of a change in an accounting estimate prospectively by including it in profit and loss in the period of the change and future periods affected by the change.
Changing the useful lives of machinery is a change in the accounting estimate. No adjustment is required to restate the depreciation charge in previous accounting periods
Company A must account for the change in estimate prospectively by allocating the net carrying amount of the asset over its remaining useful life. Although the expected useful life of the machine has decreased at the end of the second year, depreciation recorded in previous years is not affected. Instead, the depreciation expense is increased accordingly in years 3 to 5.
As a result, depreciation charges for the machinery would be as follows (all amounts in Thai baht):
| Cost | Annual depreciation charge | Accumulated depreciation | Net book value | Calculation |
Year 1 | 2,000,000 | 250,000 | 250,000 | 1,750,000 | (2,000,000 / 8 years) |
Year 2 | 2,000,000 | 250,000 | 500,000 | 1,500,000 | (2,000,000 / 8 years) |
Year 3 | 2,000,000 | 500,000 | 1,000,000 | 1,000,000 | (1,500,000 / 3 years) |
Year 4 | 2,000,000 | 500,000 | 1,500,000 | 500,000 |
|
Year 5 | 2,000,000 | 500,000 | 2,000,000 | - |
|
Total |
| 2,000,000 |
|
|
|
References: FAP and TFRS for NPAEs
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