Now that you have decided to change the useful lives, there’s that little extra work which needs to be done and you’re all sorted.
We are going to show how to do it through an example – we are changing a laptop’s useful life from 2 years to 3 years. Let’s say that after the first year the laptop with cost price of a 1,000 has been amortized to 500. It has a remaining useful life of 1 year.
As of this the management has estimated that this laptop will still be in use after this year has elapsed and in fact according to management’s best judgment, the remaining period is now 2 years. In fixed assets accounting the cost price is now set as 500, which was the carrying value when the change was done and the useful life is now 2 years. In total the useful life is 3 years, of which 1 has elapsed already.
So the new depreciable value is 500 and it is spread over 2 years – annual depreciation charge is 250 instead of 500 which would have been when we had kept the useful life we previously had. As you can see, we have a bit of a cost save there.
And obviously this change should also be disclosed and described in the annual report. You do need to state the changes, their effects and the reason behind it.