Useful Life

Report
Useful Life
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Gary Quinn, CPPM
Mike Smart, CPPS
University of Texas Southwestern Medical Center
Dallas, Texas
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Are you expecting an
Inspirational or Motivational
Discourse that will make you
feel better about your life?
Making your life ~ “useful”?
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
You have come to the right
class!
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
This presentation will make
you better understand the
importance of the Useful Life
of your assets!
Isn’t that Inspirational?
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
An estimate of how long one can expect to
use an income-producing item in a trade or
business setting. Useful life usually refers to
the duration for which the item will be useful
(to the business), and not how long the
property will actually last.
Investopedia.com
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
An asset generally depreciates in value
from its original cost to a point at which it
is no longer valuable to the organization.
It may still have monetary value… this
value is known as “residual value.”
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
The GFOA recommends useful
life should take into account
 Quality
 Application
 Environment
GFOA = government finance officers association
Value Through Professional Asset Management
2013 NPMA Spring Conference
Why do we care about
Useful Life?
• It drives depreciation of an asset
• It is required in order to determine Net Book
Value (NBV)
• It needs to be consistent for like assets
• The life usage convention you are using
must be supportable
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life Conventions
 Use an industry standard
• Really? What industry standard?
 What does the IRS say?
• Part 1, Chapter 35, Section 6.10 Property and
Equipment Capitalization has some standards
 Servers – 7 years
 Computers – 3 years
 Vehicles – 5 years
 Other Equipment – 10 years
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life Conventions
 The IRS? If you can’t come up with anything
else…
 Are there others?
• National Stock Numbers (NSN)
• United Nations Standard Products and Services Code
(UNSPSC)
• National Institute of Government Procurement (NIGP)
• American Hospital Association (AHA)
• North American Industry Classification System (NAICS)
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life Conventions
 Cross reference is available from UNSPSC at the 8 digit
level to the NIGP 3 or 5 digit level
 NAICS has been cross referenced to the NIGP 5 digit level
• NAICS replaced the SIC (Standard Industrial Code)
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life Conventions
 Based upon the classification of the Asset
• Buildings have components (shell, roof, HVAC, elevators,
Electrical and Lighting system, Sprinkler system,
Plumbing, Network Cabling, Fire Protection)
 Each component may depreciate uniquely (based
upon a different useful life)
 Each component may have a unique residual value
percentage
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life

•
•
•
•
•
X-Ray Equipment
Original value: $7,795,000
NAICS useful life = 132 months
AHA useful life = 84 months
Age = 60 months
Residual value = $0
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life Conventions
What impact does the difference in the two
Useful Life conventions have in this case?
Value Through Professional Asset Management
2013 NPMA Spring Conference
Accumulated Depreciation
What is the formula for accumulated depreciation?
Value Through Professional Asset Management
2013 NPMA Spring Conference
Accumulated Depreciation
Calculation
Calculations:
• Accumulated depreciation = ((Original value
– Residual Value) / useful life) x age
Value Through Professional Asset Management
2013 NPMA Spring Conference
Accumulated Depreciation
Calculation
NAICS
• (($7,795,000 - $0)/132) x 60 = $3,543,182
Value Through Professional Asset Management
2013 NPMA Spring Conference
Accumulated Depreciation
Calculation
AHA
• (($7,795,000 - $0)/84) x 60 = $5,567,857
Value Through Professional Asset Management
2013 NPMA Spring Conference
Impact of Useful Life
Convention
AHA Accumulated depreciation of one asset per year
is $1,113,571
NAICS Accumulated depreciation of one asset per
year is $708,636
In an organization that has $500 million in depreciable
assets that is a lot of potential difference in annual
depreciation
Value Through Professional Asset Management
2013 NPMA Spring Conference
Impact of Useful Life
Convention
Auditors look for
• Useful Life that is supportable and consistent by
classification
• Depreciation method that is acceptable and
consistent
• Residual Values that are consistent by
classification and supportable
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
 Receiving, tagging, recording, inventorying, and
disposing of equipment is no longer sufficient for a
real Asset Manager.
 Asset Managers must understand the impacts of the
financial side of the asset record and be able to
intelligently discuss it with your organizational
leadership and auditors
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Now don’t you feel better about your life knowing that
you can lead the way for your organization to
understand how your useful life convention is well
thought out and consistent?
Value Through Professional Asset Management
2013 NPMA Spring Conference
Useful Life
Value Through Professional Asset Management
2013 NPMA Spring Conference

similar documents