Updated July 19, 2023
Definition of Wasting Asset
A wasting asset is a type of asset that has a limited life span and its value keeps on decreasing. It can be vehicles, natural resources like crude oil, coal mines, machinery, etc. The value of wasting assets declines over a period of time and the asset will not be put to use also the scrap value of the asset becomes very low.
Explanation
It has a declining value but the life span of the asset is fixed. The value of the asset decreases in such a manner that the value after the sale is even less than its parts. But on the contrary, we have also witnessed some exceptional cases of wasting assets. The wasting asset sometimes gains its value maybe because it is very well maintained or maybe because of the extraordinary demand which is not in parity with the supply and thus the wasting asset gains its value instead of declining value. The wasting asset can be very helpful for the company at the stage of the initial investment.
Financial analysts have also considered an investment in wasting assets as one of the smart ways to manage the assets of the company. Since it has a limited life span the company is aware of the fact that for how many years this asset can be used. Thus the company’s accountant can plan for its finances beforehand.
Features of Wasting Asset
Some of the features are:
- It has a limited useful life
- The value of wasting assets declines over a period of time
- The assets depreciate in such a way that the residual value becomes very less
- There are some financial instruments that are considered as wasting assets so in the capital market the securities also have some deadline for purchases and sales and thus in case that exceeds the time is up for that security. In general terms, it is known as time decay
- The wasting asset is also known as a consumed asset.
Examples
The wasting assets are assets like Vehicles, machinery, financial instruments like options and contracts, and natural resources like crude oil, and coal mines but also there are sometimes a few exceptions that occur. The asset which we considered in our financials as a wasting asset did not turn out to be the wasting asset. The asset has a value more than its price and this is considered to be an exceptional situation otherwise the value is declining over the period of time.
Wasting Asset vs Fictitious Assets
- The wasting assets are assets in real. Whereas the fictitious assets are not real.
- It has a particular lifespan while there is no such life span set for fictitious assets.
- The fictitious assets are considered as a medium for the company owners to derive benefit whereas the wasting assets are meant to get used completely.
- It is also known as consumed assets whereas fictitious assets cannot be consumed.
- Examples of wasting assets include natural resources like coal, and oil, and others like machinery, vehicles, etc. Whereas examples of fictitious assets are prepaid expenses, promotional costs, etc.
Advantages
Following are the advantages are:
- The wasting asset is like any other asset. The advantage of acquiring the wasting asset is that it can be consumed by the company when it is required.
- It is also a great source of income for the company if it is used very effectively.
- It is considered by many financial analysts as one of the smartest ways to invest because, at the time of initial investment, the arbitrary gain can be derived from the asset.
- The exact useful life of the wasted asset plays a vital role in the company’s management to plan its finances at the very beginning of the year. The wasting assets are used completely.
- It also helps in the tax benefit for the company because every year the asset gets depreciated and thus it helps to reduce the tax liability of the company.
- If the investors will understand the concept then they can easily manage their securities because many securities are also wasting assets that have a particular time decay. The benefits can only be derived from the options and contracts if the dealing is done at the given time. Therefore a smart investor can easily make decisions and can be in a low-risk situation.
Disadvantages
The following are the disadvantages:
- The wasting asset will not give any residual value to the company.
- It is also present in the case of the capital market where the investors cannot put their money for a longer period and have to either sell or purchase the asset at a given time.
- It can be very risky for the company or investor in case they do not understand the concept of wasting an asset and investing a large amount into it.
- The wasting asset value keeps on decreasing or depreciating over a period of time and thus no value is left after that.
- It may not give the required amount of benefits to the company as other assets are supposed to give.
- It may disappear with no salvage or residual value thus it can badly affect the finances of the company.
- Sometimes it is also seen that the residual value of the wasting asset is even less than the small part of the asset.
Conclusion
We all are consuming wasting assets like oil, coal, etc. The value is also depreciating but we all have to understand that these are natural resources and cannot be recycled or regained again thus we have to maintain certain protocols to not misuse the same because it will not only hamper the profit of the company but also will ruin the natural resources.
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