salvage value

(noun)

also known as residual value; the remaining value of an asset after it has been fully depreciated.

Related Terms

Examples of salvage value in the following topics:

  • Factors for Calculating Depreciation

    • There are four main factors that affect the calculation of depreciation expense: asset cost, salvage value, useful life, and obsolescence.
    • The estimated salvage value of the asset.
    • Salvage value (or residual value) is the amount of money the company expects to recover, less disposal costs, on the date the asset is scrapped, sold, or traded in.
    • Ignore salvage value in making the calculations.
    • At the point where book value is equal to the salvage value, no more depreciation is taken.

  • Methods of Depreciation

    • The straight-line formula used to calculate depreciation expense is: (asset's historical cost - the asset's estimated salvage value) / the asset's useful life.
    • The formula to calculate depreciation expense involves two steps: (1) determine depreciation per unit ((asset's historical cost - estimated salvage value) / estimated total units of production during the asset's useful life); (2) determine the expense for the accounting period (depreciation per unit X number of units produced in the period).
    • For example, suppose a business has an asset with a cost of 1,000, 100 salvage value, and 5 years useful life.
    • Apply the rate to the book value of the asset (cost subtracted by accumulated depreciation) and ignore salvage value.
    • At the point where book value is equal to the salvage value, no more depreciation is taken.

  • Impact of Depreciation Method

    • Assume a purchased truck is valued at $10,000, has a residual value of $5,000, and a useful life of 5 years.
    • Assume a piece of machinery is purchased for USD 100,000 with a residual value of $40,000 and a useful life of 5 years.
    • For year 4, the calculation uses the asset's book value  ($$100,000 - $20,000$) subtracted by its residual value ($$40,000$) and multiplied by the rate for year 4 $\left( \frac{4}{15} \right)$.
    • Ignore salvage value in making the calculations.
    • At the point where book value is equal to the salvage value, no more depreciation is taken.

  • Mechanics of a Disclosure

    • Accounting errors can result for a variety of reasons including transposition, mathematical computation, and incorrect application of GAAP or failing to revalue assets using fair market value.
    • The procedure for retiring an asset requires the company to obtain both a fair market value and salvage value for the asset.
    • Usually, the difference between the sale price and the asset's salvage value results in a net loss.
    • Since companies use the balance sheet to determine the total economic value added by their company's operations.

  • Resource Cost Write-Off

    • The term write-off describes removing an asset whose value is zero and is no longer in use from the balance sheet.
    • The term write-off describes a reduction in recognized value.
    • In accounting terminology, it refers to recognition of the reduced or zero value of an asset no longer in use.
    • When the asset has been depleted to a value of zero or its value has dropped to less than its salvage value, the asset's remaining book value, as calculated by the original historical cost minus the depletion of prior years, is removed from the balance sheet through a write-off.
    • When natural resources have their value reduced to zero they are written off.

  • Valuing Repairs, Maintenance, and Additions

    • Assume now that USD 6,000 in repairs expense is incurred for a plant asset that originally cost USD 40,000 and had a useful life of four years and no estimated salvage value.
    • This asset had been depreciated using the straight-line method for one year and had a book value of USD 30,000 (USD 40,000 cost—USD 10,000 first-year depreciation) at the beginning of 2010.
    • Under US GAAP (FAS 157), fair value is the amount at which an asset and its related costs could be bought or sold in a current market transaction between willing parties or transferred to an equivalent party other than in a liquidation sale.
    • Therefore, asset repairs and maintenance are expensed on the income statement at the market value paid for the services rendered.
    • Asset additions/improvements are capitalized to their respective asset accounts on the balance sheet at the market value of the addition.

  • Cost of Improvements

    • Depending on the nature of the improvement, it is also possible that the asset's useful life and salvage value may change as a result.
    • For example, costs expended to place the company logo on a delivery truck or to expand the space on a warehouse would be capitalized because the value they provide will extend into future accounting periods.

  • Loss Restoration

    • Fixed asset values can be revised to reflect an increase or decrease in value; upward revisions can recover earlier impairment losses.
    • Under US GAAP, once an asset is impaired its value cannot be increased regardless of what its fair market value is; once the value of an asset is decreased, it stays at that value unless its market value declines again.
    • The asset account is debited (increased) for the increase in value or credited (decreased) for a decrease in value.
    • The revaluation surplus account accounts for increases in asset value, and it also offsets any downward revisions, such as an impairment loss, in asset value.
    • Only assets accounted for under the revaluation model can have their book value adjusted to market value.

  • Basic Components of Asset Valuation

    • Assets are valued using absolute value, relative value, or option pricing models, which require different inputs.
    • Absolute value models that determine the present value of an asset's expected future cash flows.
    • Relative value models determine value based on the observation of market prices of similar assets.
    • Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value.
    • Differentiate between the absolute value, relative value, fair value and option pricing methods of valuing an asset

  • Goodwill Impairment

    • A software company has net assets valued at $1 million, but the company's overall value (including brand, customers, intellectual capital) is valued at $10 million.
    • In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable "prudent value" in a business.
    • Instead of deducting the value of goodwill annually over a period of maximal 40 years ( amortization ), companies are now required to determine the fair value of the reporting units, using the present value of future cash flow , and compare it to their carrying value (book value of assets + goodwill - liabilities. ).
    • If the fair value is less than carrying value (impaired), the goodwill value will need to be reduced so that the fair value is equal to carrying value.
    • If there is an indication that the book value of goodwill is greater than the recoverable value of net assets, an assessment of the recoverable value is made, and if the suspicion is correct, then an impairment expense is recorded.