Important Features of an Asset
The important features of an asset are depicted in the following image.
The six important features of an asset are briefly listed as follows:
- Asset has a price or value in the market.
- It must generate some revenue.
- It has maintenance or repair cost.
- It undergoes depreciation over a period of time.
- It has an estimated useful life span.
- It also has a scrap value.
Now let's discuss each important feature of an asset one by one.
1. Price or Value
An asset usually has a price or value in the market. Such price, i.e. value of an asset may be either paid or is to be payable.
Based on price or value the asset can be classified as follows:
- Owned asset is that asset whose price or value is already paid.
- Loaned assets is that asset whose price or value is to be payable.
The payments made for the loaned assets are usually known as EMI i.e. Equated Monthly Installments.
2. Generate Revenue
An asset must have a capacity or potential to generate revenue.
For example, an asset such as a plant with modern machineries can be used effectively to increase the production of goods. The organization shall always try to achieve the installed capacity of such an asset in the production of goods. This will bring higher revenue to the organization.
3. Maintenance Cost
An asset usually has a maintenance or repair cost.
Maintenance done frequently helps to avoid the irregular standstills in the business operations which if not done timely can result in loss of revenue to the organization.
The maintenance cost occurs due to urgent repair requirements and regular sessions of AMC (Annual Maintenance Contract). This cost must be absorbed (sustained) to keep the asset function smoothly.
4. Depreciation of an asset
An asset usually undergoes depreciation over a period of time.
Depreciation is the distribution of the total cost of the asset over the useful life of the asset.
Another name of Depreciation is Amortization.
The depreciation (amortization) is calculated on the purchase value of a fixed asset because of reasons as follows:
- The asset was used over time.
- Certain amount of time has passed since its purchase.
- The asset is not longer in its original new state and has to some extend degraded due to wear and tear, environmental factors, storage, etc.
The depreciation which an asset has undergone in a year (annum) can be calculated using formula shown in the following image.
Note: click on the above image to get its zoomed preview in your browser.
5. Estimated Useful Life
An asset usually has an estimated useful life. It is an approximate life span of an asset to carry out and perform various operations and tasks for which it is designed or made. It is generally measured in years.
The seller (vendor) always communicates the estimated useful life of an asset to its purchaser. The purchaser can be either an individual or organization. This communication is done at the time of sale of the asset.
If the estimation of useful life is impossible to ascertain by the vendor, or when a buyer disagrees with the seller, then advise of an expert (recognised qualified professional) is considered to derive such estimation.
6. Scrap Value
As an asset is used over time to perform various functions, it starts losing its shell life. That is, its estimated useful life gradually starts falling. After its life ends, it is no longer capable of performing tasks, operations or functions for which it was originally designed. It becomes a scarp but still holds some value in it. This final remaining value of a dead asset is called a Scarp Value.
Scrap value is in the nature of cash receipt to the owner of a dead asset.
The scrap value generated is also a source of indirect (not regular) income of the business.
Conclusion on Asset Evaluation
Based on above discussion, we can conclude that important features of an asset must be considered while evaluating an asset.
With this understanding, an asset must be evaluated during:
- Its acquisition or purchase.
- While it is being used or is under operation.
- At the time of its realization or sale.
However, such an evaluation must be analysed and reviewed properly and promptly under the professional guidance of experts.