Wasting Asset

Updated on April 22, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Wasting Asset?

A wasting asset is a type of asset whose useful life is limited. Therefore, its value decreases over time, including fixed assets like vehicles, plants, property, and equipment or financial instruments like options.

What Is Wasting Asset

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Wasting assets are very commonly encountered in everyday life. Unfortunately, most of the assets we can think of, natural resources like petroleum, car, or even a life insurance policy, most of the assets depreciate with time and usage. Therefore, it is up to the analyst to understand the asset and its usage to determine the method to decrease the asset’s value over time.

Key Takeaways

  • Wasting assets are a type of asset whose value decreases over time due to limited useful life. Examples of wasting assets include fixed assets like vehicles, plants, property, and equipment or financial instruments like options.
  • The ownership of wasting assets can provide advantages, including tax savings, by claiming depreciation against the equipment bought. However, the maintenance cost of an asset may be quite high, especially in the latter stages of its life.
  • Options are also considered wasting assets, with their value decreasing over time due to the option’s expiration.

Wasting Asset Explained

The wasting assets in accounting are also called depleting assets and can be explain to be the ones that have a very limited useful life. The business expects to consume or use them up within a short time or they get depleted over time on their own. They also reduce due to usage, extraction or through any natural process.

These kinds of assets decrease in their value as they are continuously used. Some very common examples are mines, natural resources, etc, that get exhausted due to extraction. It is important to conder these type of assets both from environmental and economic perspective.

There are various industries that rely to a huge extent on these types of assets, leading to continuous usage. Therefore, these industries should manage and control their operation in a very sustainable manner so that the resources or assets can be used for a longer time frame and available to all equally.

Over extraction or usage also harms the environment in a negative way. Wasting assets like vehicles, or equipment needs energy extracted from natural resources to work properly. Thus, over usage leads to resource depletion on one hand and pollution on the other. Plants also fall under the category of such assets, whose depletion can disturb the balance of nature.

Types And Formula

Now let us look at different kinds of wasting assets and how to calculate their decrease in value over some time (also known as depreciation in some cases)

different kinds of Wasting Asset

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You can download this Wasting Asset Excel Template here – Wasting Asset Excel Template

#1 – Factory/ Buildings / Office Furniture

These wasting assets in accounting are types of fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more are generally depreciated equally over their useful life. The straight-line depreciation methodStraight-line Depreciation MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more is used in this scenario. This is the simplest method of calculating depreciation, and the depreciation expense is the same each year, evenly spread over the years. The formula used for calculating depreciation is

Depreciation Expense = (Cost – Salvage Value) / Useful Life

where,

salvage value is the value (can be the selling value) of the asset at the end of its life.

#2 – Vehicles

Vehicles like cars and trucks also fall under the list of wasting assets and are generally used very heavily in the initial years and, as such, should be depreciated rapidly in the initial years. We use the double-declining method in that case, which is very similar to the straight-line method apart from the fact that the depreciation rate is twice that of the first method. It assumes that the equipment depreciation rate is higher in the initial years as the machine is used more initially. The formula used for calculating depreciation is

Depreciation Expense = Beginning book value x Rate of Depreciation

where,

Rate of depreciation = 100%*2/Useful Life

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#3 – Machinery

The value of plant and machinery decreases over time due to depreciation. Depreciation is the term used to describe the rreduction in the value of these assets and needs to be accounted for in the books of accounts of wasting asset corporation so that the fair value of the asset is reflected in the financial statements.

Machines/production equipment and the depreciation is calculated based on the number of units produced and are depreciated by the Units of Production method.

Depreciation Expense = (Number of Units Produced / Life in Number of Units) x (Cost – Salvage Value)

#4 – Options

Enough of depreciation, we have completely ignored the other type of wasting asset called options, which we will briefly describe.

In layman’s terms, a term option is a type of instrument which allows the owner of the option to buy or sell a share at a certain price called the strike price. The price of an option depends on a few factors, the most important of which are

option's value becomes zero on the day of expiry

#5 – Natural Resource

Natural resources like petroleum reserves, coal mines, etc., are depleted over time based on the quantity extracted. This is because they are finite in nature and takes an extremely long time period to get replenished. But compared to the time taken to get replenished, the usage takes place faster.

Examples

Let us understand the concept with the help of some suitable examples.

Example #1

Consider a building with an initial value of $1000 and a useful life of four years. Then, considering a salvage value of $200 at the end of its life, we can calculate the depreciation expense each year as (1000-200)/4 = $200 and create a depreciation schedule as given in the following table.

Wasting Asset Example 1.0

Example #2

Consider a car with an initial value of $1000 and a useful life of four years.

In this method, the rate of depreciationRate Of DepreciationThe depreciation rate is the percent rate at which an asset depreciates during its estimated useful life. It can also be defined as the percentage of a company's long-term investment in an asset that the firm claims as a tax-deductible expense throughout the asset's useful life.read more is 2*100%/4 = 50% each year. So in the first year, the depreciation expense will be 1000*.5 = $500; in the 2nd year, it will be $500*.5 = $250, and so on.

Example 2.0

Another method of calculating accelerated depreciationAccelerated DepreciationAccelerated depreciation is a way of depreciating assets at a faster rate than the straight-line method, resulting in higher depreciation expenses in the early years of the asset's useful life than in the later years. The assumption that assets are more productive in the early years than in later years is the main motivation for using this method. read more is the sum of the years’ depreciation methodSum Of The Years' Depreciation MethodThe sum of years digits method is an accelerated depreciation method whereby the method declines the asset's value at an accelerated rate. Therefore, greater deductions are allowed in the starting life of the assets than in subsequent years.read more.

In this method

Depreciation Expense = (No of Years Remaining / Sum of Years) x (Cost – Salvage Value)

Consider a car with an initial value of $1000, a salvage value of $100, and a useful life of four years.

So in the first year, the remaining years will be 4, and the sum of the years will be 1+2+3+4 =10, and the depreciation will be four*(1000-100)/10 = $360.

Wasting Asset Example 2.1

Example#3

Let us suppose a piece of equipment of wasting asset corporation that produces five, six, four, and ten units respectively in the four years and has a salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000.read more of $100.

The depreciation expense for the first year would be given as five*(1000-100)/(5+6+4+10)= $180 and so on.

Wasting Asset Example 3

Example#4

Consider a coal mine in which a mining company acquired for $10 million and used another $5 million to develop the site. Finally, consider the mining company that can sell the mine after it has extracted the coal for a certain period for a residual value of $3 million.

Now consider the mining company’s plans to extract 1000 tons of coal from the mine.

Then the depletion per ton is (10+5-3)*10^6/1000 = $12,000

This is then multiplied by the tons of coal extracted per year to calculate the yearly depletion expenseCalculate The Yearly Depletion ExpenseDepletion expense is the cost allocated on natural resources (like oil, natural gas, coal) when they have been extracted. It includes the purchase price or the cost of the resource, cost of rights and anything required for preparing it for suitable extraction of resources.read more.

If you can remember, this method is very similar to the method of units of production used for equipment described above.

Wasting Asset Example 5

Therefore, the above examples give us a very clear idea about the various types of list of wasting assets and assets that are finite in nature and how they are accounting for in the books. The calculations state the formula used in various situations for calculating the amount of reduction in value that takes place at regular intervals.

Please refer to the above template for the detailed calculation of wasting assets.

Problems

Let us try to understand the problems of the concept.

  • Buying an asset may not be possible for a business with low capital if the initial cost of an asset is high.
  • The maintenance cost of an asset may be quite high, especially in the latter stages of its life.
  • Since most of such assets are finite, they can be overexploitation can lead to very fast depletion and fall in future availability.
  • Excess use and lead to environmental effects like pollution, habitat loss and disturbance in the balance of nature.
  • Over reliance of such assets can be detrimental to the business because if they are not available on time, then they affect the business process negatively causing disruption and rise in costs.
  • Technological advancemets may lead to overuse of wasting assets because there is an increase in demand for better productivity and efficiency.
  • Wasting assets often face the problem of demand and supply due to price fluctuation in the market and assets like plant, machinery or equipment becoming obsolete due to technological advancement.

Solutions

Some important solutions to the problems of such kind of assets are as given below:

Thus, the above details give us an idea about the various factors responsible for negative impact of such assets and how it is possible to efficiently solve them without causing much damage. It is necessary to address these problems and solutions within a combination of regulatory framework, sustainanble practice, social engagement and strategic long term planning. All stakeholders should collaborate with each other in a responsible way.

Frequently Asked Questions

1. Is a patent a wasting asset?

A patent is not typically considered a wasting asset as it can have a lifespan of up to 20 years from the filing date, during which the patent holder can exclusively exploit the patented invention.

2. Is livestock a wasting asset?

Livestock can be considered a wasting asset as its value may decrease over time due to factors such as aging, disease, or market fluctuations, resulting in a loss of economic value. Therefore, farmers and livestock owners must constantly monitor and manage their inventory to ensure optimal economic returns.

3. Is goodwill a wasting asset?

Goodwill, which represents the intangible value of a business such as its reputation, customer base, and brand recognition, is not considered a wasting asset as it does not have a finite lifespan and can continue to generate value for a business indefinitely, as long as the business remains operational and successful.

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