Asset Life. A different Approach.
Asset life? What asset life? You know that number you use for planning your renewals, calculating the deprecation and often a bunch of other things. The Useful life (UL) or Remaining useful life (RUL) But how often do you really look at the validity of the number? We review Useful life every year for the purposes of accounting, but is there a benefit not realised?
Consider this scenario. An organisation has a critical piece of infrastructure that services a large number of their clients. The infrastructure has built in redundancy to mitigate the risk of failure. The organisation also has the same infrastructure in other situations that is non-critical. For the critical infrastructure there are maintenance plans, renewal plans, and scheduled inspections. For the non-critical infrastructure, the same plans and routines exist, but instead of renewal the plan is to run to service failure. The asset life for both groups of infrastructure is the same number or specified time period.
In this scenario, the likely outcome is that the non-critical infrastructure is keep well beyond the Useful Life. The consequences of this are that the financial value of the infrastructure is written down to its lowest point, renewal planning is likely over budgeted. Now multiple that by the proportion of non-critical to critical infrastructure. The financial implications are not insignificant!
Just one example, depreciation is an expense which has a direct effect on the Profit and Loss statement. But before you go and change your Useful life parameter to reduce the deprecation, there are rules. The Australian Accounting Standards Board (AASB) has a set of rules all around deprecation, for just one stakeholder.
CED Consultants has worked with our clients utilising a completely different way of setting Useful life. The benefit for one client was the ability to maintain service charges at the same level for a number of years. The adjustment of Useful life was just one component of many strategies, but it delivered a large portion of the benefit.