Climate and the useful lives of assets

Why does climate risk affect useful lives?

An asset's useful life is the period over which the company expects to use it, not its physical life. Climate-related rules and markets can cut that period short: a city that bans diesel vehicles, a carbon price that makes an old furnace uneconomic, minimum energy performance standards that make a building unlettable without refurbishment, or customers who stop buying high-emission products. A company's own transition plan is often the clearest evidence: if it has decided on the early retirement of equipment by a date, the accounts should depreciate it to that date. Physical risks matter too, as heat, flooding and storms can shorten the lives of assets in exposed locations. See climate risk in the financial statements.

What does IAS 16 require?

IAS 16 requires the residual value and useful life of an asset to be reviewed at least at each financial year-end, and the depreciation method to reflect the pattern in which the asset's benefits are consumed. In judging useful life, a company considers expected usage, physical wear and tear, technical or commercial obsolescence, including from changes in market demand for the product or service, and legal or similar limits on use. If expectations change, the change is accounted for as a change in accounting estimate under IAS 8: prospectively, over the remaining life, without restating prior years. IAS 38 applies the same approach to intangible assets with finite lives. See IAS 16 explained and depreciation methods.

Useful lives in practice: a diesel truck fleet

A logistics company bought a fleet of diesel trucks for EUR 70 million on 1 January 2024, depreciating it straight-line over 10 years to a residual value of EUR 10 million: EUR 6 million a year. At the end of 2026, its newly published transition plan commits it to an electric fleet by the end of 2030, two of its largest customers require zero-emission deliveries from 2031, and used diesel truck prices have fallen.

The carrying amount of EUR 52 million is now depreciated to EUR 4 million over 4 years, so depreciation doubles to EUR 12 million a year from 2027, with no restatement of 2024 to 2026. Because the company now plans to dispose of the fleet earlier than expected, it also tests the trucks for impairment; their value in use over the four remaining years exceeds EUR 52 million, so no impairment arises. The company discloses the change in estimate and its effect, and its sustainability report and accounts now tell the same story. See IAS 36 impairment.

Which assets are most exposed?

• Fossil-fuel power plants, refineries and coal mines facing phase-out dates or falling demand.
• Combustion-engine vehicles and the production lines that make them.
• Gas networks, boilers and heating equipment where rules favour heat pumps and electrification.
• Buildings that will not meet minimum energy performance standards without major work.
• Oil and gas fields depreciated on a units-of-production basis, where lower reserve estimates under transition scenarios raise the rate.
• Assets in places exposed to floods, storms or extreme heat. See useful lives in manufacturing.

What about intangibles, leases and decommissioning?

Licences, permits and brands tied to high-emission products may need shorter amortisation periods under IAS 38. Right-of-use assets are depreciated over the shorter of the lease term and the asset's useful life, so an earlier retirement can shorten that too. If retirement comes forward, decommissioning and restoration costs are discounted over a shorter period, so the provision rises and, under the cost model, the asset's cost rises with it, increasing future depreciation. See decommissioning costs.

What should be disclosed?

IAS 16 requires the useful lives or depreciation rates used, and IAS 8 requires the nature and amount of a change in estimate. Where useful lives depend on climate assumptions that could change materially, companies should explain the judgement and its sensitivity as a source of estimation uncertainty, as the IASB's 2025 illustrative examples show. Regulators look for consistency between retirement dates in the accounts and in transition plans. See climate transition plans.

This guide is general information. It is not tax or legal advice for your situation.