Residual value

Residual value (utrangeringsverdi), also known as scrap value, is the estimated value an asset is expected to have at the end of its useful economic life. It is the price a business can expect to receive on selling or otherwise disposing of the asset, once it has served its purpose and is no longer useful in the business's day-to-day operations. For small and medium-sized businesses, residual value is an important accounting estimate that contributes to correct depreciation and to financial planning.

Why is residual value important?

• Accurate depreciation. Residual value helps determine the correct depreciation charge over the asset's useful life, which affects the business's profitability and tax liabilities.
• Financial planning. Knowing an asset's residual value puts businesses in a better position to plan future investments and budgets.
• Extracting value. By maximising the residual value, businesses can extract the remaining value from assets, which can be reinvested in new acquisitions.

How is residual value determined?

Determining an asset's residual value is often based on several factors, including historical data, industry benchmarks, expected useful life, and market conditions. In some cases it may be necessary to consult experts or use specialised valuation services in order to estimate the most accurate residual value.

Residual value plays a key role in calculating an asset's depreciation. By deducting the residual value from the acquisition cost, you get the amount to be depreciated over the asset's assumed useful life. This affects both the business's profit and loss account and its balance sheet.

An example of calculating residual value

Let us say that a business buys a company car for NOK 100,000 and expects it to be worth NOK 20,000 after 5 years of use. The residual value of the car will then be NOK 20,000. The total depreciation over the car's useful life will be NOK 80,000, spread across the 5 years according to the chosen depreciation method.

Strategies for maximising residual value

1. Maintenance. Regular, preventive maintenance can extend the useful life of assets and increase their residual value.
2. Upgrading. In some cases it can be cost-effective to upgrade older equipment in order to improve its functionality and residual value.
3. Sales channels. Explore different channels for the sale or disposal of retired assets in order to find those offering the best price.