Let us say you’ve determined a useful life for an asset and as it happens, you want to change it.
Generally saying the reasons for changing the useful life is pretty straightforward – an event has triggered the asset to be used for a shorter or a longer period. This event can be a few things:
- The management changed it’s initial views on the renovation plans in a way that the asset won’t be replaced as soon as initially planned;
- The management changed it’s views on the needs of the business in a way that the asset will be replaced sooner;
- The management decides to cease a production line the asset is part off.
There may obviously be other specific business related events, which may trigger such change, but fact of the matter is that changing an asset’s useful life is possible.
Technically speaking, when it comes to accounting for it, at the time of the decision, when you’ve got the new useful life determined, you have to find the depreciation rate. The way to achieving it, is as follows:
- You take the carrying value of the asset at the time the decision was made;
- You subtract the residual value of the asset from the carrying value (and as it is, also assess whether the residual value is still valid);
- You divide the carrying value less any residual value with the months left for the asset to be used.
This procedure will give you the new monthly depreciation to be accounted onto your statements from the period the decision was made. Note here that change in an asset’s useful life is always prospective as it’s a change in management’s estimates.