The scrap value definition, also known as salvage value, is the value of an asset after it is fully depreciated. Once an asset reaches the point where it is fully depreciated, has lost the vast majority of production efficiency due to use, and is ready to be resold, it has reached the scrap value. At this point, managers must make the decision of whether to sell the asset for it’s material, or recyclable value, continue using it despite the fact that it is no longer in good operating condition, or trash the asset.
Scrap value, explained as the value an asset has on the open market after it has surpassed it’s useful lifetime, is very important in the eyes of accountants and CFO’s. Because financial planners in a company deal closely with assets and their depreciation schedules, they are the main monitoring body which decides when a piece of equipment has reached it’s scrap value in accounting. These financial managers, working with GAAP and any government requirements placed upon them, decide the amount of use an item can take before it becomes useless. With this they decide how much of this use happens per year, known as depreciation, and when a piece of equipment can no longer be used.
Once an item reaches it’s final scrap value, accounting professionals see several available options. First, the item can be sold to another company which can still make use of the asset, despite the less-than-optimal condition it is in. This depends on the chosen depreciation schedule and whether the item can still operate, in some ways, as designed.
Second, the item can be sold for it’s value in raw materials. For example, a large printing press can be sold for it’s metal content to a recycling facility after it is no longer able to be used for printing purposes. Though this item will be sold for a relatively small amount of money it will still create some value for the company.
Third, the item can be trashed if it has no real scrap value. In this scenario, the item has such little value that it creates more cost in resale than it does when thrown away. An example of this would be an old computer: the man hours spent to resell the computer often outweigh the income gained from selling it.
Only material assets have a scrap value. To simplify, if an asset does not depreciate it does not have a scrap value. For example, this scrap value wiki will never depreciate and thus has no scrap value in accounting.
There is no simple method for scrap value calculation. More, scrap value is a result of market factors. On one hand, one must figure out the market value for an almost useless asset. This will provide the scrap value if it is sold for use.
Whichever of these values is greater will become the scrap value for the asset. The reasoning behind this is simple: company controllers will, obviously, choose to sell the item for more rather than less money.
For example, Leo is the head accountant at a company which prints marketing messages on common items: hats, cups, silverware, and other items designed to attract attention for a business when they are used. Leo likes his work because it allows him to bring value to his company through the decisions and analysis he performs.
Then, Leo, performing his monthly tasks, notices that one of the company assets is nearing the end of it’s depreciation schedule. Once it reaches the end of this schedule it will be at scrap value. Leo, the ever-active analyst, must make the decision of how to gain maximum value from the scrapped piece of equipment.
Leo notices that he recorded a market value for the scrapped piece of equipment in recycling. He notes this value as he moves forward with his work. Leo explores other options before he makes a decision.
Leo does a bit of networking and finds a potential buyer for the scrapped printer which is nearing the end of it’s lifetime. This buyer, knowing that the item will not be able to perform some of the functions it was originally designed for, is willing to offer $5,000.
Next, Leo talks with a decision maker at a local scrap metal company. The item is found to have $2,500 in value for the metal it is made of. The scrap metal company, however, can not pick up the item. It will have to be shipped to their headquarters. This salvage value is less than Leo initially found. He attributes this difference to changes in the market value for metals.
Leo calculates the total cost for his company to sell the item. What he finds is shocking. The company will gain more monetary value from trashing the item than it will selling it. The math is simple: disassembling and shipping the item to his buyer will cost $5,015. Though his company only saves $15, Leo knows that “a penny saved is a penny earned”.
Conversely, to disassemble and ship the large printer to the scrap metal company will be slightly less than this. This, combined with the negotiating time spent at the scrap metal company will result in a loss of $5. Once again, Leo will make the prudent financial decision even if it is a small one.
Leo completes his decision. He is happy that he did the proper research. His work results in a greater company value than if he had not. Leo loves his work for this very reason: he can make a difference in the lives of the company employees and shareholders.
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