How to Value IT assets?

Many of our clients, come across this problem - usually in the course of normal business like producing financial statements, applying for loans and financing, insurance claims, companies or divisions getting bought out etc. Valuing the assets involves assessing their worth based on various factors such as their contribution to business operations, the asset's technological capabilities, its market value for resale, and the potential for generating future returns. Here are the two main approaches to evaluating IT assets -

Cost Approach

This method involves looking at their historical cost. It considers the initial purchase price we add the installation costs, and any subsequent costs related to upgrading and maintaining the asset. However, this approach may not reflect the current market value of the asset but it gives figures to the management in terms of replacement costs for the system. Accounting uses these numbers to write off expenses or in same cases record it as a capital expenditure and amortize it across the useful life of the system.

IT assets such as hardware and software licenses, are subject to depreciation and amortization over their useful lives. Depreciation is a loss that is allowed by IRS due to the assets reducing economic utility - normally due to wear and tear. Depreciation methods such as straight-line depreciation or accelerated depreciation allocate the asset's cost over its expected useful life, reflecting the gradual loss in value over time. Amortization applies a similar concept to intangible assets such as software licenses or patents.

We can also value IT assets by comparing them to the cost of purchase of similar systems in the marketplace. This gives us replacement costs. This involves lot ofmarket reseacrh and a through understanding of the systems and their fuctionalities as we need to make sure we are comparing apples to apples and not apples to oranges. This helps us determine the fair market value of these assets.

Income Approach

The income approach values assets based on their ability to generate income for the organization. It considers factors such as the asset's revenue-generating potential and future cash flows. For example, software applications or digital platforms that generate revenue streams -Saas and Paas software usually falls in to this category .

DCF analysis is a common method used to value income-generating IT assets. It involves estimating the future cash flows generated by the asset and discounting them back to their present value using a discount rate that reflects the asset's risk and opportunity cost.

Ultimately, valuing IT assets requires a comprehensive understanding of the asset's economic potential and its ability contribute to business objectives. By applying appropriate valuation methods and considering both quantitative and qualitative factors, organizations can make informed decisions about IT asset management, investment, and disposal strategies. As we can see, engaging the right IT professionals who have a good understanding of the system is essential provide valuable insights into the value drivers and market considerations affecting IT asset valuation.