AAT Level 4 Drafting and Interpreting Financial Statements Practice Test

When thinking about depreciation, the numbers that most influence how much expense you record each year are how long the asset is expected to be useful and what value you expect to recover at the end of its useful life. These two estimates are reviewed annually because they can change as the asset wears, becomes obsolete, or as usage patterns and market conditions shift. If the useful life is revised, the remaining depreciation period changes and the annual depreciation charge may rise or fall. If the residual value changes, the amount that's depreciable (cost minus residual value) changes, which directly alters the depreciation expense going forward.

The other elements—cost and market value—aren’t adjusted for depreciation in the same way. The cost used in depreciation is the amount originally recognized, not revalued each year under the cost model. Market value isn’t used to calculate depreciation under that model. The depreciation method, while important, is not typically updated every year unless there’s a change in estimates or accounting policy, so it isn’t the standard annual one to review alongside depreciation.