Salvage value, called residual value under IFRS, is the estimated amount a business expects to recover for an asset when it stops using it, after deducting the costs of disposing of it. It matters because depreciation is charged on cost minus salvage value, not on the full cost. The asset's net book value should never be depreciated below it.
Salvage value formula
IAS 16 is specific about the first line. Residual value is what you would get today for the asset if it were already the age and condition it will be at the end of its useful life. So you look at current prices for similar older assets, not a forecast of future inflation.
How to find the salvage value of an asset
- Decide when you will stop using it. Salvage value depends on useful life. A van sold after 4 years is worth more than one run for 10.
- Find current prices for similar used assets. Dealer quotes, auction results, used-equipment listings or a manufacturer buy-back price.
- Deduct disposal costs. Preparation, transport, agent fees, data wiping, decommissioning.
- Use zero where resale is unlikely or small. Many organizations do this for IT, furniture and specialist fit-out. Immaterial residual values can be ignored.
- Document the basis so the next review starts from evidence, not memory.
Worked example
A business buys a van for $40,000 and plans to use it for 5 years. Similar five-year-old vans sell today for about $11,000, and preparing and selling one costs about $1,500.
How salvage value changes depreciation
The same $40,000 van over 5 years, straight-line, with three different estimates:
| Salvage value | Depreciable base | Annual depreciation | NBV after 5 years |
|---|---|---|---|
| $0 | $40,000 | $8,000 | $0 |
| $9,500 | $30,500 | $6,100 | $9,500 |
| $15,000 | $25,000 | $5,000 | $15,000 |
Review it every year
IAS 16 requires residual value and useful life to be reviewed at least at each financial year-end. A change is a change in accounting estimate: you do not restate past years, you spread the remaining amount over the remaining life.
If residual value rises to equal or exceed the carrying amount, depreciation is zero until it falls back below.
Residual value vs salvage value vs scrap value
| Term | Usual meaning |
|---|---|
| Salvage value | US term for the expected net amount at the end of useful life |
| Residual value | IFRS term for the same estimate; also used in leasing for the expected value at the end of a lease |
| Scrap value | What the materials are worth if the asset is broken up; often lower than resale value |
Examples by sector
- Logistics: trucks have an active resale market, so fleet policies often set a residual value from dealer data.
- IT team: laptops are depreciated to zero because resale after a refresh cycle is small and data-wiping costs eat into it.
Common mistakes
- Setting it once and never reviewing it.
- Ignoring disposal costs, which overstates salvage value and understates depreciation.
- Using optimistic resale prices to flatter profit.
Spreadsheet vs software
A spreadsheet handles one salvage value per row easily. It struggles when the value is revised mid-life, because each formula after the change has to be rebuilt by hand. Software stores the estimate on the asset or as a category default and recalculates the remaining schedule. Try different salvage values in the free depreciation calculator.
Salvage value in Asetavo
In Asetavo, residual value is set on each asset or as a default on its category, and every depreciation method uses it. NBV is floored at residual value, so a schedule cannot depreciate below it. Book and tax profiles are separate. See Asetavo depreciation (Business plan).
