What is My Asset Worth?

The fourth element in The Life Cycle Asset is The Asset Valuation, where we discover how to determine the asset’s remaining life.

Asset Valuation – Revaluation

A Revaluation of Assets exercise can be described as a change in asset market value, whether increasing or decreasing. This change should trigger evaluations which should be generally carried out whenever there is a difference between the asset’s current market value and its value on the company’s balance sheet.

Revaluation figures should be recorded on the Asset Management System to maintain up-to-date records, and Assets, in general, should be revalued regularly.

Asset Valuation – Index

When we talk about Asset Valuation, we need to be aware of the following areas, all of which we are going to discuss in further detail

• Information sources
• Replacement costs, which we have just discussed
• Depreciation
• Obsolescence
• Remaining life expectancy
• Historical statistical and managerial information
• Local circumstances
• Management information
• Sustain and/or abusive usage

Asset Valuation – Sources

We can investigate several sources to assist in ascertaining the asset replacement costs.

• Research Corporate Database
• Research Industrial Databases
• Research Manufacturers Databases
• Management Information Reporting 

Asset Valuation – Replacement Costs

We discussed this topic in the previous chapter, but to refresh our memories, it is the current cost to substitute an identified asset with a new or equivalent asset without enhancement of capabilities. Replacement Costs are often viewed as a strategy to hunt down cost-saving measures, which is quite interesting. I believe we could extend this to state that most things we do regarding Asset Management are about hunting down cost-saving measures.

Asset Valuation – Depreciation

This is the asset value determined using generally accepted depreciation accounting principles as reflected on the balance sheet, often referred to as the book value.

When a new asset is acquired, it is normally the job of the finance department of the organization to agree on a depreciation value or percentage. This depreciated value will be kept in the organization’s financial records and should also be updated to the Asset Management System.

Asset Valuation – Obsolescence

The obsolescence of the asset can be categorized into these areas, all of which exclude the physical deterioration, which we will deal with in a few moments.

• Technological Obsolescence
  • Out of date and not meeting new technology standards
• Functional Obsolescence
  • Not meeting current functional product requirements
• Legal Obsolescence
  • Dangerous to work with or outlawed product
• Style/Aesthetic Obsolescence         
  • Does not meet advancing organization environmental requirements
• Economic Obsolescence
  • Too expensive to continue operating

Asset Valuation = Life Expectancy

The life expectancy of an asset can be calculated by subtracting the projected period of use from the normal useful life. An asset appraiser can deliver an estimate for the remaining useful life.

Other factors that can affect asset lifespans are:

• Age and condition
• Need for increased capacity
• Frequency and severity of repairs
• Levels of service in life
• Availability of parts or rebuild services

Asset Valuation – Historical Statistical and Management Information

Other factors affecting the calculations are the history of regular maintenance and repairs, which should be available from the Asset management system, and any other maintenance or management records available. Good Servicing will reflect extended lifespans, whereas Bad Servicing will reflect reduced lifespans.

Asset Valuation – Local Circumstances

There can be a huge difference in the lifespan of a piece of equipment based solely on the conditions where it is stored and used. Equipment kept in a dusty warehouse with extremes of temperature and a leaking roof will almost certainly have a much shorter lifespan than one kept in a clean, dry workshop with climate-controlled temperatures. Moisture and humidity can lead to corrosion while being used in hot, dusty conditions will lead to early breakdown of lubricants and cause excessive wear. Better conditions lead to a longer useful lifespan.

Asset Valuation – Suitability

If the equipment you’re using is underpowered for the work, it will be used at the high end of its range for most of its lifespan. That means it will overheat more often, breaking down lubricants and causing excessive wear on the components. This, in turn, leads to other parts failing and a shorter overall lifespan than may be expected of a piece of machinery better suited to the work at hand.

Asset Valuation –Abusive Usage

Is the equipment being used with care to preserve its condition? If it’s being used incautiously or beaten onto work controls, this level of abuse will quickly shorten its overall useful lifespan. For example, we have all seen heavy equipment that has been bashed, dented, and torqued early in its lifespan, quickly leading to early failure.

Asset Valuation – Summary

There are many factors to consider when completing the Asset Value exercise. A good tip may be to concentrate initially on the critical Assets.

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