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Useful Life

Useful Life. Useful Life. Gary Quinn, CPPM Mike Smart, CPPS University of Texas Southwestern Medical Center Dallas, Texas. Useful Life. Are you expecting an Inspirational or Motivational Discourse that will make you feel better about your life?. Making your life ~ “ useful ”?.

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Useful Life

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  1. Useful Life

  2. Useful Life Gary Quinn, CPPM Mike Smart, CPPS University of Texas Southwestern Medical Center Dallas, Texas

  3. Useful Life Are you expecting an Inspirational or Motivational Discourse that will make you feel better about your life? Making your life ~ “useful”?

  4. Useful Life You have come to the right class!

  5. Useful Life This presentation will make you better understand the importance of the Useful Life of your assets! Isn’t that Inspirational?

  6. 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

  7. Useful Life Darn! And I thought I was in a class that was one of those Inspirational classes to make me feel better about my life… to make me feel more… USEFUL

  8. Useful Life You will feel more USEFUL because you will be Smarter…your LIFE will become more USEFUL

  9. 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.”

  10. Useful Life The GFOA recommends useful life should take into account • Quality • Application • Environment GFOA = government finance officers association

  11. 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

  12. 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

  13. 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)

  14. 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)

  15. 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

  16. Useful Life Get your pencil out. It is time to see why Useful Life is important

  17. 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

  18. Useful Life Conventions What impact does the difference in the two Useful Life conventions have in this case?

  19. Accumulated Depreciation What is the formula for accumulated depreciation?

  20. Accumulated DepreciationCalculation Calculations: • Accumulated depreciation = ((Original value – Residual Value) / useful life) x age

  21. Accumulated DepreciationCalculation • NAICS • (($7,795,000 - $0)/132) x 60 = $3,543,182

  22. Accumulated DepreciationCalculation • AHA • (($7,795,000 - $0)/84) x 60 = $5,567,857

  23. 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

  24. 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

  25. 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

  26. 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?

  27. Useful Life

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