BC28 During its discussion of depreciation principles, the Board noted the concern that, under the cost model, the previous version of IAS 16 does not state clearly why an entity deducts an asset’s residual value from its cost to determine the asset’s depreciable amount. Some argue that the objective is one of precision, ie reducing the amount of depreciation so that it reflects the item’s net cost. Others argue that the objective is one of economics, ie stopping depreciation if, because of inflation or otherwise, an entity expects that during its useful life an asset will increase in value by an amount greater than it will diminish.

BC29 The Board decided to improve the previous version of IAS 16 by making clear the objective of deducting a residual value in determining an asset’s depreciable amount. In doing so, the Board did not adopt completely either the ‘net cost’ or the ‘economics’ objective. Given the concept of depreciation as a cost allocation technique, the Board concluded that an entity’s expectation of increases in an asset’s value, because of inflation or otherwise, does not override the need to depreciate it. Thus, the Board changed the definition of residual value to the amount an entity could receive for the asset currently (at the financial reporting date) if the asset were already as old and worn as it will be when the entity expects to dispose of it. Thus, an increase in the expected residual value of an asset because of past events will affect the depreciable amount; expectations of future changes in residual value other than the effects of expected wear and tear will not.