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Documentation – useful life of an asset

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Documentation – useful life of an asset

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by Kim Smith.
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  • July 13, 2021 at 2:30 am #627556
    Noah098
    Member
    • Topics: 935
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    • ☆☆☆☆☆

    Ma’am can any “supporting documentation” be used to assess the useful life of an asset?

    If so which is that document?

    Cause my understanding from F7 has been that useful life of an asset varies from entity to entity, depending on how long they think they can extract economic benefits from it.

    July 13, 2021 at 7:26 am #627572
    Kim Smith
    Keymaster
    • Topics: 100
    • Replies: 6804
    • ☆☆☆☆☆

    Possibly, but you would have to be specific about what it is. For example, it the asset was an item of plant or equipment that according to its technical specification has an operating capacity expressed as 10,000 hours – then if the machine is operated 8 hours a day, 5 days a week for 52 weeks a year, i.e. 2,080 hours, the useful life would be 5 years. (Remember – it should never be thought of as “exact” because useful life is an accounting estimate.)

    Indeed it does vary from entity to entity and asset to asset. So IT equipment might be 2-3 year, cars might be 5 years, etc, etc. Management should have a basis for estimates not only of uselife but method – straight-line or reducing balance – and in the case of straight-line, residual value (if any).

    The auditor then audits management’s justification – so if, for example, management asserts that cars are replaced after every 5 years, seeing that written in an accounting manual or concluded on in a board minute would not be sufficient evidence. The auditor would example the disposals of cars – how old are they when disposed of? Also, selecting from the asset register, inspect cars that have been fully-depreciated (i.e. > 5 years old). Are they still being used in the business? etc, etc

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