2.3 Steps in Calculating Asset Value

2.3 Steps in Calculating Asset Value

This section outlines the basic steps in calculating asset value. Though they are intended to support the different applications described in Section 2.1, the steps are the same regardless of the specific application, and regardless of which perspective described in Section 2.2 one assumes. The steps explicitly acknowledge the different applications and perspectives, and they walk the analyst through the key decisions for calculating asset value. Figure 2-5 summarizes the steps to calculate asset value, and the following subsections describe each step further.

six steps to calculate asset value
Figure 2-5. Calculation Steps
Description of the Steps

Define the Analysis Scope

The first step is to determine the scope of the analysis. Here, one must determine the assets for which they will calculate value, and the level of detail at which the calculations will be performed. The selected approach depends upon the intended application of the asset value calculation.

When deciding which assets to incorporate, one must consider both the specific asset classes and the systems or networks included in the analysis. For example, to comply with Federal requirements for TAMPs, State DOTs must calculate asset value for two asset classes – pavements and bridges – under one system – the NHS.

All asset classes identified in the requirements should be included in the calculations, and no asset should be included in multiple classes. However, when calculating the value for pavement, one must decide if this includes the value of shoulders, guardrails, signs and traffic signals, and Intelligent Transportation Systems (ITS). Ideally, the decision of what asset types to include is supported by a review of a comprehensive asset register and a consideration of the available data.

The level of detail required for the analysis is a function of the intended applications of the asset value calculation and the availability of data. In concept, the level of detail should be sufficient for specifying the impact of different treatments considered in the calculation, though this topic is discussed further in Step 3 – Determine Treatment Effects. Ideally, one should include treatments that add life to an asset and analyze assets at a level of detail that accounts for treatment effects. For instance, it may be necessary to consider major components of a bridge (deck, superstructure, substructure) separately in the analysis, given these components have different lifespans and some treatments may extend the life one component but not another (e.g., deck replacement or substructure repair).

Establish Initial Value

Once the analysis scope has been established, the next step is to decide how to calculate the initial value of an asset. This step accounts for the different applications and perspectives of asset value.

For many TAM applications, the preferred approach is to establish the initial value based on the asset current replacement cost in today’s dollars. As discussed in Section 2.2, this approach supports decisions regarding how an agency should spend its available budget on its assets. This approach tends to be the most straightforward to implement, and it is recommended as a default.

However, for certain applications it may be preferable to use an alternative approach to establish asset value. For U.S. agencies that seek to maintain consistency with their approach to financial reporting, it may be necessary to establish initial value based on purchase price, consistent with GASB 34. For applications that involve considering which assets should be constructed or maintained, an economic perspective may yield a more defensible result. Where market value is available, this is usually preferable, particularly given the ease of calculation relative to other approaches.

Determine Treatment Effects

Another important step in calculating asset value is determining treatment effects. Here, one must establish what treatments will be explicitly considered in the analysis, treatment costs, the assets that a treatment impacts, and the effects of treatment. Depending on the depreciation approach, one may specify treatment effects in terms of change in asset life or change in asset condition (which can then be converted to a change in effective life).

The major question to answer in this step is what treatments to consider. At a minimum one should consider asset replacement or reconstruction, and the treatments identified in an asset’s life cycle analysis should be reviewed as well. Frequently, it is necessary to consider other treatments short of replacement or reconstruction to support TAM applications. For example, when trying to demonstrate the value of performing preventive maintenance activities for pavement, one approach is to show how asset value for a representative pavement section changes over time with and without preventive maintenance.

Once the treatments are established, one must specify treatment costs, what assets or asset components are addressed by a given treatment, and the effects of treatment on asset or component life or condition. Treatments that are assumed to occur but not explicitly considered should be reflected in estimates of asset life; preventive maintenance activities often fall within this category. For instance, an estimate of the life of a new pavement should assume preventive maintenance treatments occur as scheduled.

Establish Depreciation Approach

Depreciation is necessary when calculating how asset value changes with time. Any asset with a finite life loses value over time. As in the case of calculating initial asset value, there are many different approaches to calculating depreciation. The best approach to use depends on the intended application of the calculation, one’s perspective on what value represents, and the data available to support the calculation.

While depreciation tends to increase as an asset ages, the specific relationship between age and depreciation is complex. The most straightforward assumption – and often the best assumption, unless one has the data necessary to define a nonlinear depreciation – is to assume a linear relationship. In a linear relationship, asset value declines at a uniform rate across its lifetime until it reaches a residual or salvage value at the end of its useful life.

Where an asset owner has information on the condition of their assets, they can use this information to establish an effective asset age. An asset may last longer than initially expected because it is deteriorating at a lower rate or because it receives treatments to maintain it. In these cases, the asset may have an effective age much lower than its actual age. Conversely, the effective age of an asset may be greater than its actual age, if it is in poor condition, such as that resulting from accelerated deterioration.

One may need to calculate depreciation in a different manner for certain applications. In particular, a more fine-grained calculation of the pattern of consumption of economic benefits may be needed in some cases, particularly if one is calculating initial value considering the stream of future benefits yielded by an asset based on an economic perspective. Chapter 6 presents additional details on the approaches to calculating depreciation, including guidance and examples.

Calculate Value and Supporting Measures

At this point in the process, all of the decisions about how to determine asset value have been made, and only the calculation remains. Every asset valuation requires calculating the initial value for all assets and components, and typically includes some approach to depreciating that value to obtain a current value. Depending on the specific application, this step may also include calculating:

  • The cost to maintain asset value;
  • Asset Sustainability Ratio (ASR);
  • Asset Consumption Ratio (ACR);
  • Asset Funding Ratio (AFR);
  • NPV for an asset or group of assets; and/or
  • Other measures.

Communicate and Apply the Results

Once asset value has been calculated, the final step is to communicate and apply the results. Various approaches have utilized asset value as a communication tool, with several such examples illustrated in Section 2.1. Also in this step, one may need to interpret the results of an analysis to evaluate the significance of any changes in asset value and the values of supporting performance measures.

It is important to document the approach used for calculating asset value, and the key assumptions made in the calculation process. Depending on the specific application, one may wish to perform a sensitivity analysis to establish the impact of changes in key parameter values on the results of an analysis. A sensitivity analysis is useful for describing the accuracy of the asset valuation calculation and highlighting any variables which have a significant impact on the asset value. While sensitivity analyses are always applicable, they are most beneficial in cases where there are numerous assumptions leading up to the final calculation. Many calculation parameters that are presumed to be invariant and known with uncertainty are, in truth, uncertain and prone to vary in the future.