IAS 16 §6 · §53 · ASC 360
Residual Value & Salvage Value: A Complete Guide
Residual value is one of the smallest numbers in your fixed-asset register — and one of the easiest to get wrong. It quietly sets how much of an asset's cost you depreciate, when depreciation stops, and what gain or loss you book on disposal. This guide explains what it is, how to estimate it, and the rules that govern it.
1Residual Value, Salvage Value, Scrap Value — What's the Difference?
The three terms are often used interchangeably, but precision matters. "Salvage value" and "scrap value" are the older US-GAAP and engineering terms; IFRS uses "residual value." All three describe the same idea: what the asset will be worth at the end of its useful life. Critically, residual value is a net figure — the expected disposal proceeds minus the expected costs of disposal.
IAS 16 §6 — Definition
"The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life." — IAS 16, paragraph 6
Two subtleties flow from that definition. First, residual value is measured in today's prices and conditions — you do not inflate it to a forecast future market price. Second, it is net of dismantling, removal, and selling costs, so an asset that costs more to scrap than it fetches can have a residual value of zero — with any separate decommissioning obligation recognised under IAS 37.
2Why Residual Value Matters: The Depreciable Amount
You never depreciate the full cost of an asset. You depreciate the depreciable amount — cost less residual value — over the asset's useful life. A higher residual value therefore means a smaller depreciable amount and a lower annual depreciation charge, which directly raises reported profit in every year of the asset's life.
Depreciable Amount
Depreciable Amount = Cost − Residual Value
Worked Example
A delivery van costs $45,000. Management expects to sell it for $9,000 after 6 years and estimates $500 of selling and removal costs. Residual value = $9,000 − $500 = $8,500. Depreciable amount = $45,000 − $8,500 = $36,500. Straight-line annual depreciation = $36,500 ÷ 6 = $6,083.
Ignoring residual value entirely would charge $7,500 a year ($45,000 ÷ 6) — overstating depreciation by $1,417 every year and understating both profit and the asset's carrying amount.
3How to Estimate Residual Value
Estimation depends on whether an active second-hand market exists for the asset. Vehicles and aircraft have deep resale markets and meaningful residual values; bespoke plant and IT equipment usually do not. The table below gives indicative residual values as a percentage of original cost — useful as a sanity check, never as a substitute for asset-specific evidence.
| Asset Category | Typical Estimation Basis | Indicative Residual |
|---|---|---|
| Buildings & Structures | Market resale of land-and-shell; structural salvage | 10–30% |
| Plant & Heavy Machinery | Second-hand market or scrap-metal weight | 5–15% |
| Vehicles & Fleet | Used-vehicle guides (auction / trade-in value) | 10–40% |
| IT & Office Equipment | Negligible resale; rapid technical obsolescence | 0–5% |
| Furniture, Fixtures & Fittings | Limited second-hand value | 0–10% |
| Specialised / Bespoke Plant | Scrap value only — no secondary market | 0–5% |
| Leasehold Improvements | Reverts to landlord — no recoverable proceeds | Nil |
| Aircraft & Marine Vessels | Active global resale market; part-out value | 10–25% |
Percentages are indicative only and must be supported by entity-specific evidence — dealer quotes, auction data, OEM buy-back terms, or a qualified valuer's report. Leasehold improvements typically have nil residual value because they revert to the landlord. Land is not depreciated, so residual value is not relevant to it.
4The Annual Review Rule
Residual value is an estimate, and estimates go stale. IAS 16 requires you to revisit it — a residual value set at acquisition and never touched again is one of the most common audit findings on the fixed-asset register.
IAS 16 §51 — Annual Review
"The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate." — IAS 16, paragraph 51
IAS 16 §54 — Depreciation does not stop just because an asset is old. But it does stop when the residual value rises to equal or exceed the asset's carrying amount — at that point the depreciable amount is zero, so no further depreciation is charged until residual value falls below carrying amount again.
A revision to residual value is a change in accounting estimate, not an error. It is applied prospectively: the remaining carrying amount, less the revised residual value, is depreciated over the remaining useful life. Prior periods are not restated.
5Common Pitfalls & Best Practice
Most residual-value problems come down to five recurring mistakes. Avoiding them keeps depreciation accurate and your auditors comfortable:
Defaulting to zero without justification
Setting residual value to nil is acceptable only when expected disposal proceeds are genuinely immaterial. Applying a blanket zero to vehicles, aircraft, or property overstates depreciation and understates profit — and is hard to defend when the assets clearly have resale value.
Forgetting disposal costs
Residual value is net of dismantling, removal, and selling costs (IAS 16 §6). Booking the gross resale price as residual value inflates it and understates depreciation. For assets with decommissioning obligations, those costs can wipe out residual value entirely.
Confusing today's estimate with a future price
Residual value is measured in current prices and conditions, not as an inflation-adjusted forecast of the future market. Projecting a higher nominal future selling price into residual value understates depreciation and overstates profit.
Never revising the estimate
IAS 16 §51 requires at least an annual review. Market shifts, technology changes, and revised disposal plans all move residual value. An estimate fixed at acquisition and never revisited drifts away from reality and is a frequent audit exception.
Depreciating past the depreciable amount
If a revised residual value equals or exceeds carrying amount, IAS 16 §54 requires depreciation to stop. Continuing to charge depreciation in that situation is an error, not a change in estimate, and must be corrected retrospectively.
IAS 8 §39 — Disclose the nature and amount of a change in an accounting estimate — including changes to residual values and useful lives — that has a material effect in the current period or is expected to have a material effect in future periods.