Disposal value in accounting terms is the value of an asset or belonging, at which this asset should be sold or disposed off without incurring any loss to the company. For example, a machine has been installed in a factory and after a useful working on its life period needs to be replaced with a new model. It represents the amount for which an asset can be sold or scrapped at the end of its useful life. The minimum value at which this machine should be sold without loss is called its book or disposal value.
Disposal of an Asset
Suppose a company has bought a machine for $5000. After serving the company for some year, the machine becomes obsolete and needs replacement. The machine’s book value or disposal value can be calculated by subtracting from original cost, its depreciated cost. For instance, the depreciation value of machine at time of sale is $4000, means its book value is $1000. The company will try to sell the machine at least at its book value. If the machine is sold at a higher value than book value or disposal value it is booked as gain on the sale of machine on the income statement account.
How to Calculate Disposal Value
For calculation of the disposal value of an asset, it is necessary to get its original cost and depreciated value. To calculate disposal value, one typically estimates the expected useful life of the asset and then estimates the value of the asset at the end of that period. This can be done by considering factors such as market conditions, technological obsolescence, and replacement costs. There could be different ways to calculate depreciation, two most commonly used methods are straight line method and units of production method.
- Straight Line Method
It is the easiest and simplest way to calculate the depreciated value of an asset. Simply subtract salvage value of the original cost and dividing the result by the estimated useful life will give you depreciated value. Salvage value is the market or scrap value of that particular asset at the time of disposal. Disposal or book value can be easily calculated by simple subtracting this depreciated value from the original cost.
- Units of Production Method
The units of production method consist of two steps. It differs from the straight line method in a ways that instead of using an estimated number of useful life in years, this method uses estimated useful life in the units.
Usage of Disposal Value
Disposal value is used in accounting according to International Financial Reporting Standards (IFRS) when an entity is accounting for the depreciation of an asset. IFRS requires that an entity depreciate an asset over its useful life, and the useful life is defined as the period over which an asset is expected to be used by the entity. The disposal value is used in accounting as the residual value of an asset, which is the estimated value of the asset at the end of its useful life.
When an entity is accounting for the depreciation of an asset, the disposal value is subtracted from the cost of the asset to determine the total amount that will be depreciated over the useful life. For example, if an asset has a cost of $100,000, a useful life of 10 years and a disposal value of $10,000, the total amount to be depreciated over the life of the asset would be $90,000 ($100,000 - $10,000). This means that the entity will account for a depreciation expense of $9,000 ($90,000 / 10 years) per year over the life of the asset.
It's important to note that the disposal value can be estimated and can change over time, as the market conditions and the company's plans might change. The entity should review and update the disposal value regularly to ensure the accuracy of the depreciation expense calculation.
In addition to disposal value, there are several other values that are commonly used in accounting and financial analysis. These include:
Fair market value: The value of an asset or liability as determined by the current market conditions, taking into consideration supply and demand, and other factors that might affect the price of the asset or liability.
Book value: The value of an asset as reported on a company's balance sheet, which is typically equal to the original cost of the asset minus any accumulated depreciation.
Liquidation value: The value that an asset would fetch if it were sold in an immediate sale, typically in the case of the liquidation of a company.
Intrinsic value: The value that an asset or security is deemed to be worth based on an analysis of its underlying fundamentals, such as earnings, dividends, or other financial metrics.
Market capitalization: The value of a company's outstanding shares of stock, calculated by multiplying the number of shares by the current market price per share.
Enterprise value: The total value of a company, including its debt, equity, and cash.
Each value serves a different purpose and is used in different financial analysis, depending on the context, and the goal of the analysis.