How to Calculate Equipment Depreciation Life and Why It’s Important
Most assets in a facility, including equipment, machinery and line items, are used on a daily basis and will wear down over time. Facility equipment won’t last forever, so it’s important for facility managers to determine the average number of years an asset will be useful before its value is fully depreciated. This concept is known as an asset’s estimated useful life.
In this article, we’ll take a look at the definition of asset useful life, why it’s important and how it can impact your budget and preventive maintenance planning. We’ll also show you how to calculate asset useful life. After reading this article, you’ll be on your way to actively extending the useful life of your most critical assets.
The Facility Manager’s Guide to Asset Useful lIfe
Before we dive in to asset useful life, it’s important to know the difference between tangible and intangible assets in facility management. Let’s take a look at how the two differ from one another.
What is a tangible asset?
A tangible asset in facility management is an item or resource of value in physical form. This may include land, buildings, machinery, security equipment, work vehicles, furniture and other objects within and around a building. Tangible assets can also include tools, spare parts and inventory in a facility management department.
What is an intangible asset?
Intangible assets, on the other hand, are items and resources of value in non-physical form. Examples in facility management may include contract-based assets (such as service contracts, lease agreements and employment contracts), technology-based assets (such as patents and computer software) and financial-based assets (including departmental revenue and budgets).
For the sake of this article, we will focus on tangible assets, since physical equipment will experience wear-and-tear over time.
What is asset useful life?
A tangible asset’s useful life is the period of time a company can expect an asset to remain functional and earn revenue. Useful life is impacted by many factors, including the asset’s age when it was purchased and how often the asset is used. Useful life is also affected by physical factors and economic factors:
- Physical factors that impact useful life may include asset expiration date, wear-and-tear, decay and unexpected casualties like fire, flood and theft.
- Economic factors that impact useful life may include changes in asset demand, replacement of the asset with a more efficient version and unforeseen physical/technical degradation.
The severity of each factor plays a role in an asset’s useful life. For example, an asset that receives little-to-no preventive maintenance will likely experience high wear-and-tear and a shorter useful lifespan.
There are many variables in determining an asset’s useful life, but determining this data doesn’t need to be difficult or stressful. Keep reading to learn how facility managers can determine asset useful life for each of their most critical assets.
How to Calculate Equipment Depreciation Life
There is no simple mathematical equation that facility managers can use to come up with accurate estimated useful life data, since many variables exist in determining this information. Facility managers can instead rely on resources from industry leaders and organizations to determine useful life for their equipment. Let’s take a look at three top resources you’ll want to explore.
- RSMeans Database
RSMeans is a database offered by Gordian that contains over 85,000 line items to help facility managers determine accurate useful life data for their assets. Costs listed in the database are validated by cost engineers and account for materials, labor and equipment used. You can access the database via print, CD or estimating software. Click here to learn more about the RSMeans database or click here to start a free trial of the software.
- ASHRAE Owning and Operating Cost Database
The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) offers an interactive, web-based database that is free for facility managers to access. ASHRAE says the purpose of the database is to provide current information on service life and maintenance costs of typical HVAC equipment. Main features include equipment service life evaluation, HVAC maintenance cost evaluation and access to HVAC data. Click here to explore the database’s features.
- BOMA Office Experience Exchange Report (Office EER)
The Building Owners and Managers Association (BOMA) offers the industry’s largest and most comprehensive benchmarking resource for the commercial real estate industry. Facility managers can use the data found in these reports to evaluate and refine operations, build better budgets, identify opportunities for cost savings and discover market trends. Click here to learn more about this year’s report.
Why is asset useful life important?
Now that you’ve calculated useful life for your assets, it’s important to understand why this data will come in handy down the road. Here are three ways that depreciation information can impact your department’s success
- Estimated useful life of assets helps determine financial stability and profitability in your department. Your organization’s financial teams will want to know equipment depreciation rates and record that data on income and balance statements. Rates of depreciation also inform how much money will need to be budgeted for upcoming preventive maintenance and replacement costs.
- Estimated useful life of assets impacts your preventive maintenance program. The goal of preventive maintenance is to predict and prevent catastrophic equipment failures before they occur by conducting routine inspections, maintenance and repairs. Preventive maintenance can significantly extend the useful life of assets, since facility equipment is kept in optimal working order. Extended useful life can lead to budget savings in your department and can easily be tracked in your maintenance software.
- Estimated useful life of assets is useful in determining asset salvage value. Salvage value is the estimated resale value of an asset at the end of its useful life. For example, if an asset is purchased for $100,000 and its salvage value is $10,000 after five years, a facility can expect the asset to depreciate by $90,000 throughout those five years. They’ll also expect to sell the asset for approximately $10,000. Salvage value is an important part of calculating depreciation and is subtracted from the cost of a fixed asset.
The Key to Extending Your Assets’ Useful Life
Asset useful life is only one piece of the proactive building management puzzle. This data can be used as a baseline for your preventive maintenance program, which can keep your building continuing to run safely and efficiently. To learn more about the benefits of preventive maintenance, read AkitaBox’s online guide or download The Facility Management Preventive Maintenance Guide, a free resource that will help you discover how to create a program that’s sustainable and profitable for your business.