Acknowledgement : The information shared in the article comes from a MySeat case study where data have been gathered for a significant period of time (1 year). Findings are specific to one client in one location : CTI Working Environments and should not be considered as a benchmark data for any item listed below.
Abstract : This post further exposes how CFOs use workplace asset tracking and analysis to optimize their accounting by amortizing the furniture’s CAPEX while taking into account actual usage time and wear of the immobilized asset.
Legacy : Traditionally, office furniture and equipment are amortized using linear models. There are many ways to depreciate an asset’s initial value from your Balance Sheets and put that as a charge that will calibrate your Profits and Loss. The question is knowing if those methods are effectively representative of the way assets contribute to your company’s results and productivity. Is there a more relevant method ?
Case : Considering that an item purchased at 1250$* can be amortized at a maximum annual rate (for example 20% in some countries) of the acquisition cost. That is the suggested rate for many accounting charts sometime and sometimes it is the maximum allowed threshold by the fiscal regulation . Following that model, the entire 1250$ will be discounted from the balance sheet after 5 consecutive years (if amortization rate is of 20%, and no residual value after 5 years).
Depending on your CFO’s goals, they may wish to amortize your furniture Capex on a shorter OR a longer period of time. The truth is picking 5 years randomly would be miss-landing and does not represent the real contribution of the asset amortization to the company’s results and productivity.
For instance : most companies operate vehicles to deliver goods and services, and will amortize these cars’ value while taking into consideration the millage. Lets take the example of two cars acquired at the same price the same day. After the first year one has 30K Kms at the odometer and the second one has 60K Kms. Do you depreciate those at the same value in your accounts? the amortized amount should be, OF COURSE proportional to the car wear, and should be ideally twice as high for one car, as compared to the other …
So the same is for furniture !
CTI Working Environments have been operating 10 units of Human Scale Diffrient World Chair, for 1 calendar year (270 working days). These 10 units have recorded a total of 6253 distinct utilizations each, within that year corresponding to 6692 hours of utilization in total
Question 2/7 : How many times, has your 1225,00$ task chair been utilized, and does the CAPEX amortization reflect the effective use ?
Every time one of these 1225$ chairs is used for 1 hour, that’s an amortization of ONLY 38 CENTS per hour of use.
The linear amortization model suggests that all of the 10 seats will have an equal time of use and THAT time of use will remain the same across the 5 years …. which is of course not true.
Extrapolating to a 5 years scheduled End of Life (EOF), we can say that a random World Task Chair is used 669 hour per year , therefore the product life cycle would be of 3345 hours of utilization across 5 years.
This blind method also suggests that every single unit of those Human Scale Diffrient World Chair will be worth 0$ (or almost, for other methods) after the 5 year EOF (more or less), regardless of how often they are used across their life cycle.
The standard deviation of the statistical set of data below, is of 431 hours of utilization with a maximum and minimum of respectively 88 hours and 1376 hours of use. so why would you only consider the average (669 hours of use) and amortize these assets equally?
for any company : 1 workstation CAPEX is much more higher than just the price of a Task chair. Servicing the space around that Task chair requires OPEX that one can also master using workplace asset tracking and analytics.
Imagine now if you can balance that 37 CENT chair amortization cost on your OPEX instead, and capitalize on other durable assets such as Real Estate. Furniture As a Service (FaaS) appears to be a compelling solution when trying to achieve a “0 furniture CAPEX” model.
As a CFO, workplace data analytics will allow you to refine your amortization model. You will have the possibility to amortize your assets while taking into consideration real usage and wear of assets but also their real contribution to your company’s results and productivity.
* Public Retail Prices are in CAD, displayed by one specific vendor (see hyperlink), you may obtain up to 50% discount on such items when buying from CTI Working Environnements. You can request a quote from [email protected]