Recent News - Dangers of Bend and Trend Techniques

How well do you value your fixed assets? 

Many companies over the years have simply applied an index year on year to their historical book value as a means of arriving at an estimated replacement cost of the assets for insurance purposes. More alarmingly it has been known for the index to be applied to the depreciated net book value. As most insurance policies are on a replacement with new basis, the following points need to be considered.

This indexing method (sometimes known as bending and trending) has its merits in some cases, but the potential pitfalls can outweigh them. Before you adopt this approach perhaps consider the following questions and answers.

Q1 Do we apply the same index to property and plant assets?

A Indices for property and plant are very different. Property can be largely regionalized in terms of build costs. Plant indices can differ considerably depending on the industry sector.

Q2 Are all the costs of the assets on the fixed asset register actual costs or have any upgrades and refurbishment been added?

A It can be feasible that both the original cost and subsequent upgrade costs have indices applied resulting in a higher replacement value than necessary.

Q3 Does the index consider where the assets have been sourced from and the current exchange rates with the country of origin?

A Probably not. It is well documented how much impact the present Euro rate has had with the UK in terms of equipment prices, but Rushton International assignments are often further afield. Current issues are the cost of sourcing assets from Japan due to the strong Yen against other countries.

Q4 Does the manufacturer of my key assets still exist or do I need to source an alternative supplier in the event of a loss?

A This can be only answered on an individual basis, but it may be that a particular asset is no longer available and an alternative with some modification costs is required.

Q5 Was the original historical cost heavily discounted for commercial reasons?

A This may only be ascertained by analyzing original invoices or quotations. The discounts received originally may not be available in the event of a loss today.