Salvage value definition
/What is Salvage Value?
Salvage value is the estimated resale value of an asset at the end of its useful life. It is subtracted from the cost of a fixed asset to determine the amount of the asset cost that will be depreciated. Thus, salvage value is used as a component of the depreciation calculation.
If it is too difficult to determine a salvage value, or if the salvage value is expected to be minimal, then it is not necessary to include a salvage value in depreciation calculations. Instead, simply depreciate the entire cost of the fixed asset over its useful life. Any proceeds from the eventual disposition of the asset would then be recorded as a gain.
Is Salvage Value Discounted to its Present Value?
Salvage value is not discounted to its present value. This would increase the labor cost associated with recording fixed assets, so it has been accepted that salvage value will not be discounted. If discounting were required, then the salvage values of long-duration assets would be much lower, resulting in more depreciation expense being reported in each period.
Related AccountingTools Courses
Fraudulent Use of Salvage Value
The salvage value concept can be used in a fraudulent manner to estimate a high salvage value for certain assets, which results in the under-reporting of depreciation and therefore of higher profits than would normally be the case. When this happens, a loss will eventually be recorded when the assets are eventually dispositioned at the end of their useful lives. Auditors should examine salvage value levels as part of their year-end audit procedures relating to fixed assets, to see if they are reasonable.
Example of Salvage Value
ABC Company buys an asset for $100,000, and estimates that its salvage value will be $10,000 in five years, when it plans to dispose of the asset. This means that ABC will depreciate $90,000 of the asset cost over five years, leaving $10,000 of the cost remaining at the end of that time. ABC expects to then sell the asset for $10,000, which will eliminate the asset from ABC's accounting records.
Terms Similar to Salvage Value
Salvage value is also known as residual value.