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An asset won’t be worth the same amount as it was when you bought it, no matter how well you maintain it. Every asset, whether it’s of significant importance or minor value, will inevitably depreciate. The extent of the decrease will depend on the asset, its use, and how it is depreciated.
Tracking asset depreciation is a critical part of maintaining a building and its equipment, and it’s a vital step in planning future projects. Read on to learn more about how tracking your equipment depreciation will help you improve the life and usability of your facility assets and more.
An overview of equipment depreciation
If you have an accounting background, your first interpretation of depreciation may be as a bookkeeping procedure in financial reporting. When a piece of equipment is purchased, you must record the fixed asset or capital asset in the books. By opting to allocate the depreciation expense over the estimated life of the depreciable asset, businesses can provide a more accurate reflection of the asset’s true value at any given time. It also reduces income for tax purposes.
The above is only one aspect of equipment depreciation. In facilities management, production depreciation can also be used to plan future projects, such as replacing an aging piece of equipment or planning a renovation as a small business.
The term depreciation refers to multiple factors that impact the gradual decrease in the value of an asset due to wear and tear, usage age and so on. Once you’ve calculated the asset’s original value, which is the purchase price or the fair market value, you can use a depreciation schedule that will show the cost of depreciation over the estimated useful life of the asset.
You can track the rate at which an asset will depreciate and make the necessary adjustments to your maintenance management strategy much more effectively through your capital planning software.
Through careful planning, you can use this information to track and predict repairs, replacements, and a host of other matters related to the condition of your assets—all with the main objective of making the best possible decisions for the future of your facility.
Depreciation and asset management
Understanding depreciation and its significance within your asset management plan is key to maintaining a cost-effective and efficient facility. When your team can proactively anticipate issues, you can mitigate them before they become significant problems. This includes ensuring you have the right amount of replacement parts on hand and scheduling preventive maintenance on a regular basis.
It’s important to note that not all assets can be depreciated, and some shouldn’t be. For example, permanent, fixed assets, like property or buildings, aren’t depreciable. Copyrights, patents, and trademarks are also considered intangible assets and therefore meet the same criteria. Other disposable parts, from lightbulbs to small machinery, with a useful life of only a few years or less, should be expensed and replaced instead of depreciated.
How can FCAs help with effective equipment depreciation?
Facility condition assessments (FCAs) have become a popular tool in facility management. They’re an evaluation of the condition of a building or system, based on a set of predetermined criteria that can identify existing problems and forecast future maintenance needs. While the entirety of a facility may not be included in your depreciation schedule, FCAs provide an overview of the condition of key areas and the assets within them, allowing you to make better decisions about where to focus your energy and resources.
Calculating the year, salvage value, and other important depreciation metrics
There are several depreciation methods that can be used for equipment. Your organization may use one of the following popular methods or have a custom depreciation strategy that it relies on. Each technique has its own set of advantages and disadvantages. Your organization will have to decide which method will work best and provide the most benefit to your maintenance management strategy.
The top two depreciation methods are:
1. Straight-line depreciation
This is the easiest and most common method and is used when the cost of the equipment is easily known. This method is based on the theory that the cost of the equipment is spread out evenly over the useful life of the equipment. The asset is assigned a salvage value, which is the asset’s expected worth at the end of its life (this number can very well be zero).
While the straight line method is easy to use, it doesn’t consider any changes in the value of the equipment. As time passes, the equipment will lose value due to wear and tear, usage, technological obsolescence, and the fact that the asset could be worth varying amounts at different times due to market conditions and other factors.
How do you calculate the salvage value of an asset?
The salvage value of a piece of equipment depends on several factors, including your facility’s plans for the equipment at the end of its useful life (for example, resale or disposal), market trends, the asset’s condition while in use, and more. Your estimated salvage value may change over time. Therefore, it is important to continually monitor and update it as new information becomes available.
2. Double-declining depreciation
Double-declining depreciation, or the declining balance method, is similar to straight-line, except that it gives a smaller depreciation each year. It adheres to the concept that the equipment will lose value much faster in its first years and then more slowly as the asset approaches the end of its life. This method is a little more complex to calculate and requires a detailed depreciation schedule. For each annual depreciation you’re calculating, you will need to input the expected book value (how much the asset will be worth at the end of the fiscal year) into the equation.
Best practices when calculating depreciation
There are multiple considerations to take into account when calculating depreciation. Here are a few best practices to keep in mind:
- Do enough research to pinpoint the right depreciation method. Your decision should be based on the life span of the equipment and how fast the asset is expected to depreciate.
- Obtain an accurate estimate of useful life. If you don’t, the depreciation schedule you calculate may be inaccurate and cause an overstatement of the equipment’s condition.
- Stay up to date on your assets’ condition. The actual condition of your assets is a key factor in determining their salvage and book value. If the assets become outdated, you should reevaluate the depreciation.
A good rule of thumb is to review your equipment annually to make sure you are up to date on your assets’ condition.
Tracking depreciation with asset and equipment management software
The idea of calculating and managing depreciation can be a bit daunting, especially when relying on spreadsheets and manual calculations. Asset and equipment management software can help you simplify the process, saving you time and money in the long run. With a built-in depreciation calculator and depreciation report, you can quickly and easily track your chosen depreciation method and view statements for different periods.
FMX software is user-friendly and easy to learn. It merges seamlessly with other building management systems and can be used for a variety of purposes, from scheduling to inspections and more. Plus it’s a cost-effective solution to managing your equipment and other assets.
By integrating your depreciation calculations with FMX, your organization can ensure a more efficient and accurate equipment management process. Its several benefits include:
- Automated calculations: The software can calculate depreciation based on different methods, allowing you to easily view the real-time value of your equipment.
- Accurate records: Generate various reports that provide you with detailed information about your equipment – all in a centralized location.
- Better decision-making: Get a better view of your assets and make more informed decisions about the future.
FMX’s equipment maintenance capabilities can be a key tool in helping you make sound financial decisions and ensure the longevity of your facility assets. Plus, it can help reduce operational costs by minimizing downtime and maximizing efficiency. Let FMX put our expertise to work for you and sign up for a demo.
Written by
Dana Grove
Manager, Brand and Content at FMX