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“REDUNDANT ASSET”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

Saturday Brain Storming Thought (134) 09/10/2021

COMPILED BY ER. AVINASH KULKARNI

REDUNDANT ASSET

Redundant assets are defined as assets that are not necessary to the ongoing operations of the business enterprise

These can be tangible or physical assets the business owns that would not impact the business operating cycle if extracted

The identification of these assets can often appear to be straightforward

Examples of Redundant Assets

1) tangible assets not used directly in the business operations

2) real estate

3) marketable securities

4) excess non-cash working capital

5) investment in a related or non-related entity

6) personal automobiles and other capital assets

7) bank loans and other liabilities for personal use

Redundant assets are not specifically required by a company to generate earnings and cash flow from operations

The buyer assumes that the redundant assets will stay with the seller

Valuation of redundant asset

Redundant assets should not be valued using the capitalization or discounting method

Redundant assets should be valued at their net realizable value after deducting distribution and disposition costs

The value obtained is added to the operational value of the company to get the enterprise value

When disposing of the business, sellers usually remove the redundant assets from the company’s valuation

Working of redundant assets

Redundant assets usually generates some type of revenue or return for the owing company, but does not play a part in the company’s operations

Redundant assets are omitted from most analyses of growth and revenue projections, because they are unrelated to a company’s production capabilities

Income taxes on redundant assets

1) taxable capital gains (losses)

2) taxable business income (loss)

3) taxable depreciation recapture (terminal loss)

While analyzing the profits & losses of a business, it is important to account for redundant income and expenses

Business Valuation of redundant asset

The value of a redundant asset = Net realizable value

= (fair price or fair value of asset) less (disposition cost) less estimated income taxes on the asset sale

Non infrastructure material – redundant assets

Except track, that trains runs on, many other assets that come to the end of their useful life which are offer for sale

Signal boxes
Cable drums
Sleepers
Metals
Agregates

Redundant assets management policy

Purpose

1) Assets are safely managed to avoid accidents, trespass and dispersion to the day to day running business

2) transactions should have business jurisdiction

3) assets are protected against damage, less misuse and from fraud

4) storing safely and securely

5) asset record to be maintained

Scope

1) management of applicable redundant and reusable assets

2) accountabilities and responsibilities

3) fraud and theft prevention

Land – redundant asset

Vacent land is redundant asset

These assets must be valued seperatly and added to the value of the business otherwise determined

Key takeaways of redundant assets

1) assets that are not considered to be part of core operations

2) non-operating assets may be unused land, spare equipment, investment securities and so on

3) income from non-operating assets contributes to the non-operating income of a company

3) these assets and any income from them are usually omitted from the financial analysis of a company’s core business
4) non-operating assets can function as a way to diversify risk and revenues

Disadvantages of excessive redundant assets

1) ideal funds – earns no profit

2) leads to unnecessary purchase

3) implies excessive debtors and defective credit policy

4) leads to overall inefficiency of the firm

5) bad relationship with bank and financial institutions

Divestiture

It is the action of selling off subsidiary business interests or investments

Reasons of divestiture

1) to sell off redundant business units

2) to generate funds

3) to increase resale value

4) to ensure business survival or stability

5) to comply with regulators

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

 

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