Defining Asset Value

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Defining Asset Value

The Organization for Economic Co-Operation and Development (OECD), states that a physical asset has no intrinsic value. Instead, its value results from the benefits it yields, be they to the asset owner, a set of transportation system users, society as a whole, or some combination thereof. As an asset ages, it depreciates, or loses value as its benefits are consumed. The OECD defines three different perspectives to consider asset value: Cost Perspective, Market Perspective, and Economic Perspective. The following provides a brief synopsis of these three perspectives.

  • Cost Perspective–The cost perspective focuses on capital costs incurred by the asset owner. When establishing value from this perspective the question is “How much does it cost us to acquire this asset and operate it over time?” The basic issue with the cost perspective is that it leaves no daylight between cost and value; these are one and the same. If one asks what value will be derived from spending $1 million to reconstruct a road, from the cost perspective the answer is “$1 million, of course.” Consequently, the cost perspective can help answer questions about how best to manage assets, but it is ill-suited for addressing questions concerning the underlying value of transportation assets to society. To answer that question requires an economic perspective.
  • Market Perspective–The market perspective focuses on the price of an asset on the open market. When establishing value from this perspective the question becomes "How much would this asset sell for on the open market?” For example, the value an automobile might be the resale value should the car be sold through an auction or to a reseller. The virtue of this perspective is that it leverages the behavior of free markets to determine how much value an asset is expected to yield in the future. If the market for an asset is competitive, then the asset’s market value should theoretically account for the future benefits provided to the buyer. The competitive nature of the market should ensure that no asset is sold at less than this value. This perspective is extremely valuable where a well-defined market exists for an asset. The market value of an asset is viewed as the best representation of asset value based on international accounting guidance.
  • Economic Perspective–The economic perspective focuses on the benefits generated by an asset. When establishing value from this perspective the question is “What are the benefits of the asset to travelers and society?” In general guidance for asset value, this perspective is also called the “income perspective,” as it involves calculating the income generated by not just an asset, but by its existence. An economic measure of asset value stems from a more comprehensive value, based on the use of a facility. Economic asset valuation is an analytical exercise that establishes a rationale on whether and when a facility ought to be constructed or improved.

The cost, market, and economic perspectives on asset value differ in subtle and important ways. For example, a cost perspective generally starts from an implicit assumption that a facility is worth maintaining at the level of service for which it was originally planned and constructed. The actual use of the facility does not factor into the assessment except when it is used to indirectly estimate the rate of deterioration and maintenance schedule. In comparison, the market approach directly considers the value of the facility to users in addition to the cost to maintain it. The market approach can be considered from the perspective of a concessionaire who could evaluate the facility based on the opportunity to recover the costs to date and earn a profit, perhaps through revenue collection or the value of the land.

Each asset value perspective emphasizes a specific aspect of how transportation assets are constructed and utilized. All three perspectives are valid and can provide insights that help communicate information about assets and support decision-making. While each of the perspectives supports some of the applications described in Section 5.5.1, many public agencies rely on the cost perspective for their calculation of asset value. The cost perspective helps an agency directly relate its expenditures on assets to changes in their value, and it supports a large number of TAM-related applications. Also, where a market exists, the cost of replacing the asset, depreciated based on its age or use, tends to correlate closely to its price. Where no market exists, the depreciated replacement cost serves as a proxy for its market price.