Useful Life Hacks

Understand the useful life of your assets….it may pay-off.

Recently, Google prolonged the estimated useful life of their servers and network equipment by up to 2 years.

That change...

👉 reduced the depreciation expense for the financial year 2023 by $3.9 billion,

and consequently,

👉 increased net income by $3.0 billion*.

NVIDIA happened to think in the same direction (a coincidence)?

Useful lives of server and other equipment were prolonged by up to 2 years in the financial year 2023, leading to:

➕ in the operating income figure of $135 million,

and

➕ in net income of $114 million after tax.

Amazon: 4️⃣ to 5️⃣ and 5️⃣ to 6️⃣ (years).

Amazon adjusted estimated useful life of their servers and network equipment for two years in a row, due to “continuous improvements” in their hard- and software.

In 2022, that change reduced depreciation expense by $3.6 billion and benefitted the net loss by $2.8 billion.

🤔 Interestingly, in the same year, Amazon presented the net loss of $2.7 billion (compared to 2021: net profit was $33 billion high).

📉 Simply put, the loss would have been twice as big without that adjustment.

An IFRS bit(e):

The IFRS, as principle-based regulation, do not prescribe any exact values or bandwidths for useful life of assets.

Instead, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets list factors to consider when making the judgement:

☑ capacity or physical output,

☑ physical wear and tear,

☑ technical or commercial obsolescence,

☑ legal or similar limits on the use of the asset (e.g. patents).

The change is to be done prospectively, in the period of the change in line with Hashtag#IAS8 Accounting Estimates.

📍 Practical aspects:

Change of the useful life cannot be deliberate or too frequent.

Judgement must be based on data - usage and capacity reports, documented improvements, historical records.

You might reconsider changing the accounting useful life under a local GAAP as well. In that case, compliance with respective tax rules must be ensured.

No cherry picking! You must reassess the whole asset category (e.g. buildings), not just individual assets.

The concept of useful life is entity-specific. Your server might hold shorter or longer than the same one used by your competitors.

Make sure the assets will hold up to their job for an extended period of time.

Possible pros of changing the useful life:

Completely ok from the regulatory point of view.

Fairly painless - good systems will recalculate and adjust prospectively.

Being the matter of judgement, the change might be difficult to be challenged by others.

BUT:

📍 Be aware of trade-offs and think long-term:

"Saving" your depreciation expense by stretching it, might boomerang back through an increase of your maintenance and related costs (e.g. insurance).

*Form 10-K for the Fiscal Year Ended December 31, 2023