Depreciated replacement cost (DRC)

Depreciated replacement cost is a method of valuation that is based on an estimate of:

1) In the case of property:
o The fair value of land; plus
o The current gross replacement costs of improvements less allowances for
physical deterioration, and optimization for obsolescence and relevant surplus
capacity,
2) In the case of plant and equipment owned by public benefit entities, the current gross
replacement cost less allowances for physical deterioration, and optimization for
obsolescence and relevant surplus capacity
Fair value
Fair value is the amount for which an asset could be exchanged between knowledgeable,
willing parties in an arm’s length transaction.
Land and buildings are recorded at fair value less impairment losses
The following life estimates are required to determine DRC:
o Useful life
o Asset age
o Remaining useful life
useful life as being either:
a) The period over which an asset is expected to be available for use by an entity, or
b) The number of production or similar units expected to be obtained from the asset by
an entity.
The following factors need to be considered in determining the useful life of an item of
property, plant and equipment:
a) expected usage of the asset. Usage is assessed by reference to the assets expected
capacity or physical output
b) expected physical wear and tear, which depends on operational factors such as the
number of shifts for which the asset is to be used, the repair and maintenance
programme, and the care and maintenance of the machinery while idle
c) technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service output
of the asset
d) legal or similar limits on the use of the asset, such as the expiry dates of related
leases.
Other key principles in determining an asset’s useful life are:
1) The remaining useful life, which can be assessed by either:
o Assessing the expected useful life and deducting the asset age, or
 o Assessing the remaining life of the asset using condition and economic information
(this is
considered the more robust option but is often limited by the availability of condition
data).
2) The useful life used must be the minimum of:
o The physical life, which is the period of time until the asset ceases to provide the
required
level of service (or be the lowest cost alternative to do so) because of physical deterioration
of the asset, and
o The economic life, which is the life until the asset ceases to be the lowest cost
alternative to
satisfy a particular level of service due to any other factors.
3) Determination of the asset’s useful life is a matter of judgement based on the
experience of the entity / valuer with similar assets.
4) Useful lives are assessed for existing assets while replacement costs are calculated
for modern equivalent assets (or reproduced assets in the case of heritage items).
5) Useful lives must be assessed for groups of assets with similar lives.
6) Assets not currently being used to provide services (such as those held for standby
services) will still have a useful economic life.
7) In estimating the useful life, ongoing maintenance is expected to occur throughout
the life of the asset.
An asset’s physical life is the maximum possible useful life. However, there are factors,
other than
physical deterioration, that may cause the asset to be replaced at an earlier date. Such
factors
might include:
o Demand either increasing or decreasing, which may drive replacement/upgrade
programmes or decommissioning prior to the end of the asset’s physical capability to
provide the service.
o Legislative, regulatory and environment changes, which can often affect operational
practices and therefore asset lives.
o Technological redundancy, which should be considered as an economic factor only if the
entity has a formal replacement programme for the technologically redundant assets.
o The fact that operational and maintenance costs typically increase with age, which may
result in the cost of keeping the asset in operation becoming higher than the cost of
replacement.
A cost-benefit analysis may demonstrate that the replacement is justified prior to reaching
the
physical life.
Valuers and reporting entities may also have regard to information on expected lives issued
by
individual asset manufacturers, physical lives, whether assessed as a useful life or remaining
physical life as at the date of valuation (and useful life representing the actual age plus the
estimated remaining physical life), should be adopted unless there are economic factors
which suggest with reasonable certainty that the life is something less.
Where an asset has undergone major refurbishment works, the actual age of the asset will
usually
need to be revised at the completion date of the works. This is particularly applicable in the
case of heritage buildings, which will often undergo major refurbishment near the end of
their physical life. The approach to lives set out above applies for all items of property, plant
and equipment,
including, where applicable, components within assets.
Determine depreciation and calculate DRC
For valuation purposes, depreciation is calculated on the depreciable portion of an asset (its
optimized replacement cost less the estimated residual value).
Residual value
The residual value is the estimated net amount that will be received when the asset is
removed
from service. residual value as “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”
Residual values for plant and equipment are to be based on:
o The experience of the valuer obtained whilst valuing similar assets, and
o The experience of the reporting entity in terms of the level of net costs achieved when
disposing of such assets, and will usually be expressed as a percentage of ORC.
When undertaking valuations of property, plant and equipment which have restoration,
dismantling or removal obligations associated with them (essentially a negative residual
value), the valuer must request guidance from the entity from whom valuation instructions
are received about how such obligations are to be dealt with in the valuation.
Depreciation
The way in which depreciation is allocated over the life of the asset (for accounting or
valuation
purposes) shall reflect the pattern in which the assets future economic benefits are
expected to be consumed by the entity.
In property valuation, elements of depreciation may be classified as:
o Physical deterioration
o Functional obsolescence, or
o Economic obsolescence.
Physical deterioration in improvements is a result of wear and tear over the years, combined
with a lack of necessary maintenance. Functional obsolescence is caused by advances in
technology
that create new assets capable of more efficient delivery of goods and services. Modern
production methods may render previously existing assets fully or partially obsolete in terms
of current cost equivalents. Economic obsolescence is the result of external influences
affecting the value of the subject asset. External factors may include changes in the
economy, which affect the demand for goods and services.
Key principles to consider in establishing the depreciation rates are:
o How the asset is consumed – is it due to the passing of time or usage (at the aggregate
or
component level, whichever is applicable).
o The depreciation pattern is proportional to the predominant factor that impacts on the
length of time that the asset can continue to provide the service.
o The pattern of the physical deterioration of an asset is not an appropriate technique to
represent the depreciation of the asset, as the physical deterioration will not necessarily
represent the pattern of consumption of economic benefits.
o The chosen method is to be consistently applied from period to period unless there is a
change
in the expected pattern of consumption of economic benefits from that item.
o When the pattern of economic consumption does not materially differ from straight line,
or
where the pattern cannot be reasonably determined and demonstrated, straight line
depreciation is recommended as a reasonable basis for approximating the consumption of
economic benefits.
The depreciation methods considered most relevant for valuation purposes are:
Straight line:
Annual depreciation = depreciable amount/estimated useful life
This method allocates the depreciable amount as a function of time, which produces a
constant
expense charge. The major assumption associated with this method is that the asset’s
economic
usefulness (decline in service potential) is the same each year.
For valuation purposes, this is the usual approach adopted for property assets.
Reducing balance (or diminishing value):
Annual depreciation = carrying amount (opening) x depreciation rate
This method uses a constant depreciation rate and applies it to the carrying amount (the
original
cost less accumulated depreciation) of the asset at the beginning of the period. The amount
of
depreciation charge will be higher in the initial periods and reduce over the periods. Once
the asset’s carrying amount reaches the residual value, depreciation will stop.
This method is sometimes applied to plant and equipment, as many of these types of assets
tend
to depreciate more quickly in their earlier years. However, in the case of specialized plant
and equipment, straight line depreciation is generally considered to more appropriately
reflect the consumption of economic benefits embodied in the asset (unless the production
unit method, as detailed below, is more applicable).
For DRC valuation purposes, depreciation is the portion of depreciable amount (optimized
replacement cost – residual value) applicable to the period, based on the consumption of
service
potential/economic benefits as at the date of valuation. The DRC valuation calculations for
the
above mentioned depreciation methods are:
Straight line:
DRC = (depreciable amount x (remaining useful life/useful life)) + residual value
Reducing balance (or diminishing value):
DRC = optimized replacement cost x (1-rate) ^age
“Rate” is the rate of annual valuation depreciation applicable and is calculated according to
the
formula:
(1-residual value percentage) ^ (1/useful life)
Depreciable amount: Depreciable amount is simply HOW MUCH you are going to
depreciate. It is the cost of an asset, or other amount substituted for cost, less its
residual value.
Assess land value
The fair value of land is always its market value even when applying the DRC approach to
the property. Implicit within the definition of market value is the concept of highest and
best use. This is the most probable use of an asset which is physically possible,
appropriately justified, legally permissible, financially feasible, and which results in the
highest value of the asset being valued. The existing use of the land may or may not,
represent the highest and best use. It is therefore, the responsibility of the valuer to
consider different uses and corresponding land values in
estimating highest and best use and market value. Where there is no evidence of market
land
values for the existing use of the land, alternative highest and best land uses need to be
considered depreciated replacement cost (DRC)
The current cost of the replacing an asset with its modern equivalent asset less deductions
for physical deterioration and all relevant forms of obsolescence and optimization.

Where:
 Cost of the asset is the purchase price of the asset
 Salvage value is the value of the asset at the end of its useful life
 Useful life of asset represents the number of periods/years in which the asset is
expected to be used by the company
Additionally, the straight-line depreciation rate can be calculated as follows:

How to Calculate Straight Line Depreciation

The straight-line calculation steps are:
1. Determine the cost of the asset.
2. Subtract the estimated salvage value of the asset from the cost of the asset to get
the total depreciable amount.
3. Determine the useful life of the asset.
4. Divide the sum of step (2) by the number arrived at in step (3) to get the annual
depreciation amount.
Straight Line Example
Company A purchases a machine for $100,000 with an estimated salvage value of $20,000
and a useful life of 5 years.
The straight-line depreciation for the machine would be calculated as follows:
1. Cost of the asset: $100,000
2. Cost of the asset – Estimated salvage value: $100,000 – $20,000 = $80,000 total
depreciable cost
3. Useful life of the asset: 5 years
4. Divide step (2) by step (3): $80,000 / 5 years = $16,000 annual depreciation amount
Therefore, Company A would depreciate the machine at the amount of $16,000 annually for
5 years. The depreciation rate can also be calculated if the annual depreciation amount is
known. The depreciation rate is the annual depreciation amount / total depreciable cost. In
this case, the machine has a straight-line depreciation rate of $16,000 / $80,000 = 20%.

Note how the book value of the machine at the end of year 5 is the same as the salvage
value. Over the useful life of an asset, the value of an asset should depreciate to its salvage
value
Salvage Value

What is Salvage Value (Scrap value)?

Salvage value or Scrap Value is the estimated value of an asset after its useful life is over
and therefore cannot be used for its original purpose. For example, if the machinery of a
company has a life of 5 years and at the end of 5 years, its value is only $5000, then $5000
is the salvage value.
Another name of this value is scrap value. And this is a mere estimate only. No-one knows
what a piece of equipment or machinery would cost after 10 years. The piece of an asset
may end up in a junkyard as well.
Salvage Value Example
Let’s take an example to understand this.
  Let’s say that Treat Inc. has purchased equipment at $100,000. The company finds
out that the useful life of this equipment is 10 years and at the end of 10 years, the
value of the equipment would be $10,000. So, the scrap value of the equipment is
$10,000.
 Now, as we know that the value of the equipment is $10,000, the depreciation for
this equipment will be calculated on = ($100,000 – $10,000) = $90,000.

Here, P = Original cost of the asset, i = depreciation rate, y = number of years

So, to find out the scrap value, you first need to make sure that the depreciation rate should
be determined. Along with that you also need to know how many years the asset will last
(the useful life of the asset). When a company purchases an asset, first, it calculates the
salvage value of the asset. Thereafter this value is deducted from the total cost of the assets
and then the depreciation is charged on the remaining amount.
In this example, we have been given the original price of the asset, i.e. $1 million. The
useful life of the asset is also given, i.e. 20 years and the depreciation rate is also provided
with, i.e. 20%. Salvage value Formula = P (1 – i) y = $1 million (1 – 0.20) 20 = $1 million
(0.8) 20 = $11,529.22
What if the Salvage Value of any Asset is Zero?
What if the value of an asset at the end of its useful life is zero? What should one do then?
 As per the US Income Tax Regulations, while depreciating an asset, you need to
assume that the scrap value of the asset would be zero.
 If we assume that the scrap value is zero and if we find that at the end of the useful
life, we can get a value, we can account for it as a gain of the company instead of
estimating it beforehand.
 As a result, there would be no estimation error in finding out the scrap value and no-
one would be able to use this value as an excuse to encourage/support fraudulent
practices.
How is Scrap value seen in Cost Accounting?
 In cost accounting, the idea of scrap value is slightly different than the concept in
financial accounting.
 In cost accounting, the scrap value is the raw materials of the product that the
manufacturer will sell off as scraps.
 That means it has nothing to do with the obsolescence of an asset. Rather it’s the
raw materials that are of no value to the manufacturing company.
If you want to learn Cost Accounting professionally, then you may want to look at 14+ video
hours of Course on Cost Accounting
Why is Scrap Value Not Reduced to the Present Value?
Scrap Value is a projected value of an asset that can’t be used any longer for original
purposes. Or even if we can use the asset, there would be no efficiency.
 Let’s say that we buy a car for business at $100,000. And we project that the salvage
value of the car after 15 years would be $10,000. Now this means two things –
 First, the used car can be sold at $10,000 after 15 years.
 Second, the used car can’t offer enough efficiency to keep it for business purpose.
 Now, if we discount the scrap value to its present value, it wouldn’t be the right
estimation; because then at today’s date, the scrap value would be very less. Plus,
how would we find the right discounted rate?
That’s why it’s wiser to go for zero value while applying depreciation on the asset. If we
imagine that this value would be nil, there would be no chance of any reduction in
depreciation. And as a result, the profit of a company can’t be inflated.
Salvage Value in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. You need to provide the three inputs of the original cost of the asset,
depreciation rate and the number of years.
You can easily calculate the SV in the template provided.
You can download this template here – Salvage Value Excel Template
Conclusion
There is confusion between salvage value, scrap value, and residual value. In accounting,
they all are one and the same.
To summarize, it is the value of an asset after its usefulness is over. Scrap value is an
estimated figure. It can be calculated if we can determine the depreciation rate and the
useful life. In the US, for tax purposes, the depreciation is calculated by assuming the scrap
value as zero.
The cost of an item of property, plant and equipment comprises:
1. Its purchase price including import duties, non-refundable purchase taxes, after
deducting trade discounts and rebates
2. Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
Examples of these costs are: costs of site preparation, professional fees, initial delivery
and handling, installation and assembly, etc.,
3. The initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located.
A casualty loss is damage, destruction, or property loss resulting from one of these
identifiable events:
  Sudden event — swift, rather than gradual or progressive
 Unexpected event — ordinarily unanticipated and unintended
 Unusual event — not a day-to-day occurrence
Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
Active market
A market in which transactions for the asset or liability take place with sufficient frequency
and volume to provide pricing information on an ongoing basis
Exit price
The price that would be received to sell an asset or paid to transfer a liability
Highest and best use
The use of a non-financial asset by market participants that would maximize the value of the
asset or the group of assets and liabilities (e.g. a business) within which the asset would be
used
Movans t
Fair value hierarchy
IFRS 13 seeks to increase consistency and comparability in fair value measurements and
related disclosures through a 'fair value hierarchy'. The hierarchy categorizes the inputs
used in valuation techniques into three levels. The hierarchy gives the highest priority to
(unadjusted) quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs.
If the inputs used to measure fair value are categorized into different levels of the fair value
hierarchy, the fair value measurement is categorized in its entirety in the level of the lowest
level input that is significant to the entire measurement (based on the application of
judgement).
Level 1 inputs
Level 1 inputs are: -
o quoted prices in active markets for identical assets or liabilities that the entity can
access at the measurement date.
o A quoted market price in an active market provides the most reliable evidence of fair
value and is used without adjustment to measure fair value whenever available, with
limited exceptions.
If an entity holds a position in a single asset or liability and the asset or liability is traded in
an active market, the fair value of the asset or liability is measured within Level 1 as the
product of the quoted price for the individual asset or liability and the quantity held by the
entity, even if the market's normal daily trading volume is not sufficient to absorb the
quantity held and placing orders to sell the position in a single transaction might affect the
quoted price.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly.
Level 2 inputs include:
o quoted prices for similar assets or liabilities in active markets
o quoted prices for identical or similar assets or liabilities in markets that are not active
inputs other than quoted prices that are observable for the asset or liability, for
example

interest rates and yield curves observable at commonly quoted intervals implied volatili-
ties credit spreads. inputs that are derived principally from or corroborated by observ-
able market data by correlation or other means ('market-corroborated inputs').
Level 3 inputs
Level 3 inputs are unobservable inputs for the asset or liability.
Unobservable inputs are used to measure fair value to the extent that relevant observable
inputs are not available, thereby allowing for situations in which there is little, if any, market
activity for the asset or liability at the measurement date. An entity develops unobservable
inputs using the best information available in the circumstances, which might include the
entity's own data, taking into account all information about market participant assumptions
that is reasonably available.

Reimbursement or recovery from any source is not considered.

If business or income-producing property, such as rental property, was completely destroyed

or lost because of a disaster, the loss deduction is:

The adjusted basis in the property – (Any salvage value + Any insurance or other
reimbursement, received or expected)

1.1 Terminology

Definitions of Condition

New Condition: -The term used to describe equipment’s which is judged to be either new or near new;
otherwise unused; or in the process of being installed. This equipment is capable of being used to its full
specified utilization for its designed purpose for its entire normal useful life.
Very Good (VG): -This term describes an item of equipment in excellent condition capable of being used
to its fully specified utilization for its designated purpose without being modified and not requiring any
repairs or abnormal maintenance at the time of inspection or within the foreseeable future.

Good Condition (GC):-This term describes those items of equipment which have been modified or
repaired and are being used at or near their fully specified utilization but the effects of age and/or
utilization indicate that some minor repairs may have to be made or that the item may have to be used
to some slightly lesser degree than its fully specified utilization in the foreseeable future.

Fair Condition (FC):-This term describes those items of equipment which are being used at some point
below their fully specified utilization because of the effects of age and/or application and which require
general repairs and some replacement of minor elements in the foreseeable future to raise their level of
utilization to or near their original specifications.

Poor Condition (PC):-This term is used to describe those items of equipment which can only be used at
some point well below their fully specified utilization and it is not possible to realize full capability in
their current condition without extensive repairs and/or replacement of major elements in the very near
future.

Scrap Condition (X):- This term is used to describe those items of equipment which are no longer
serviceable and which cannot be utilized to any practical degree regardless of the extent of the repairs
or modifications to which they may be subjected. This condition applies to items of equipment which
have been used for 100% of their useful life or which are 100% technologically or functionally
obsolescent

Brand new
100%
90 % to 99% Excellent Condition
75 % to 89% Very Good
60 % to 74% Good
45 % to 60% Fair
30% to 44% Poor
Less than 30% Scrap
 Straight Line Depreciation Overview

Straight line depreciation is the default method used to recognize the carrying amount of a
fixed asset evenly over its useful life. It is employed when there is no particular pattern to
the manner in which an asset is to be utilized over time. Use of the straight-line method is
highly recommended, since it is the easiest depreciation method to calculate, and so results
in few calculation errors. The straight-line calculation steps are:

1. Determine the initial cost of the asset that has been recognized as a fixed asset.

2. Subtract the estimated salvage value of the asset from the amount at which it is recorded
on the books.

3. Determine the estimated useful life of the asset. It is easiest to use a standard useful life for
each class of assets.

4. Divide the estimated useful life (in years) into 1 to arrive at the straight-line depreciation
rate.

5. Multiply the depreciation rate by the asset cost (less salvage value).

Once calculated, depreciation expense is recorded in the accounting records as a debit to

the depreciation expense account and a credit to the accumulated depreciation account.
Accumulated depreciation is a contra asset account, which means that it is paired with and
reduces the fixed asset account.

Straight Line Depreciation Example

 Pensive Corporation purchases the Procrastinator Deluxe machine for $60,000. It has an
estimated salvage value of $10,000 and a useful life of five years. Pensive calculates the
annual straight-line depreciation for the machine as:

1. Purchase cost of $60,000 – estimated salvage value of $10,000 = Depreciable asset cost of
$50,000

2. 1 / 5-year useful life = 20% depreciation rate per year

3. 20% depreciation rate x $50,000 depreciable asset cost = $10,000 annual depreciation

Definitions of Condition
Condition is a characteristic that can be determined only through observation. It is advisable
for the appraiser to relay in the appraisal report a clear understanding as to the various
definitions of condition. The subject of condition can be an area of disagreement. Several
individuals could inspect an item of equipment and have differing descriptions as to its
condition. The overall condition of an item should be discussed in the appraisal report and, if
appropriate, an explanation of condition should also be included in the appraisal report. A
suggested set of terms and symbols is given below.
New (N) This term describes new items that have not been used before.
Excellent (E) This term describes those items that are in near-new condition and have had
very little use.
Very Good (VG) This term describes an item of equipment in excellent condition capable of
being used to its fully specified utilization for its designed purpose without being modified
and without requiring any repairs or abnormal maintenance at the time of inspection or
within the foreseeable future.
Good (G) This term describes those items of equipment which are in good operating
condition. They may or may not have been modified or repaired and are capable of being
used at or near their full designed and specified utilization.
Fair (F) This term describes those items of equipment which because of their condition are
being used at some point below their full designed and specified utilization because of the
effects of age and/or application and that may require general repairs and some
replacement of minor elements in the foreseeable future to raise them to be capable of
being utilized to or near their original specifications.
Poor (P) This term is used to describe those items of equipment which because of their
condition can be used only at some point well below their full designed and specified
utilization, and it is not possible to realize full capacity in their current condition without
extensive repairs and/or the replacement of major elements in the near future.
Salvage (S) This term is used to describe those items of equipment whose value remains in
the whole property or a component of the whole property that has been retired from service.
Scrap (X) This term is used to describe those items of equipment which are no longer
serviceable and which cannot be utilized to any practical degree regardless of the extent of
the repairs or modifications to which they may be subjected. This condition applies to items
of equipment which have been used for 100% of their useful life or which are 100%
technologically, functionally or economically obsolete and are no longer serviceable and
have no value other than for their material content.
Chronological age is the number of years that have elapsed since a property was originally
built or placed in service.
Effective age is the apparent age of a property in comparison with a new property of like
kind; that is, the age indicated by the actual condition of a property. In estimating effective
age, the appraiser considers the effect that overhauls, rebuilds, and above-average or
below-average maintenance may have had on the property’s current condition. If a property
has received regular overhauls, its effective age will normally be less, often significantly
less, than its chronological age. Effective age is often the more appropriate numerator in the
age/life ratio than is chronological age. The effective age can also be estimated based on
the weighted average age of the trended historical cost.
Normal useful life is the physical life, usually estimated in terms of years, that a new
property will actually be used before it is retired from service. A property’s normal useful life
relates to how long similar properties actually tend to be used, as opposed to the more
theoretical economic life calculation of how long a property can profitably be used. The best
evidence of normal useful life is statistical or actuarial data derived from the study of
properties that are similar to the subject under actual operating conditions. An asset’s useful
life may be longer than its economic life because the owner may elect not to retire the asset
from service upon expiration of the asset’s theoretical economic life.
Remaining useful life is the estimated period during which a property of a certain
effective age is expected to actually be used before it is retired from service. The best
evidence of remaining useful life is statistical or actuarial data derived from the study of
properties that are similar to the subject under actual operating conditions. Remaining
useful life can sometimes be approximated by deducting the asset’s effective age from its
normal useful life; however, this is an oversimplification and not technically correct in some
situations, for the same reason that a person who had a 72-year life expectancy when born,
and is now 70 years old, has more than a 2-year remaining life expectancy according to
human mortality tables. Statistical and actuarial studies of asset useful lives indicate that
many assets follow a similar pattern.
Physical life is the estimated period of time, usually stated in number of years, that a new
property will physically endure before it deteriorates or fatigues to an unusable condition
purely from physical causes, without considering the possibility of earlier retirement due to
functional or economic obsolescence.
Remaining physical life is the estimated period during which a property of a certain
effective age is expected to physically endure before it deteriorates or fatigues to an
unusable condition purely from physical causes, without considering the possibility of earlier
retirement due to functional or
economic obsolescence.
Economic useful life is the estimated period of time, usually stated in number of years,
that a new property may be profitably used for the purpose for which it was intended. Stated
another way, economic life is the period of time, usually stated in of years, that a new
property can be used before it would pay the owner to replace it with the most economical
replacement property that could perform an equivalent service. Functional or economic
obsolescence factors may limit a property’s economic life. An asset’s economic life will often
be less than its normal useful life.
Remaining economic life is the estimated period of time, usually stated in number of
years, during which a property of a certain effective age is expected to continue to be
profitably used for the purpose for which it was intended. It can be approximated by
deducting the asset’s effective age from its economic life, although this is an over-
simplification and not technically correct in some situations for the same reasons given
above with respect to remaining useful life.

Percent of physical deterioration= Effective age/physical life

The residual value, also known as salvage value, is the estimated value of a fixed asset at
the end of its lease term or useful life. ... As a general rule, the longer the useful life or lease
period of an asset, the lower its residual value.

Casualties, Thefts

Parts of leased agricultural machinery are lost or stolen

How to determine the amount of loss recognized for legal purposes

If, because of loss insurance recovery, or other compensation due to destruction, theft, or
condemnation results in a gain we are not pretty sure.
Casualty losses
FMV before theft/loss
FMV after theft/loss
Theft loss
Property misplaced or lost

 physically possible; legally permissible; financially feasible

 usually, but not always, current use
 no active market
 no quoted price
 inactive supplier

 Observable
 Quoted; similar items in active markets
 Quoted; identical/similar items, no active market
 Unobservable inputs (e.g., a company’s own data)
 Market perspective is still required