Trade-In Assets – Recognizing the Accounting and Physical

Inventory Impact

Bob Mahaney, CPPS

Manager Program Accounting and Finance

MD Anderson Cancer Center

smahaney@mdanderson.org

Who’s In The Room?

• New member this year?

• First NES?

• Type of business• University• Contract Property/Federal• State/Local Government• Private

Trade-In Assets

The disposal of property through trade-in is a simple process on the surface.

“Used property is offered to the vendor from whom similar equipment (in most cases) is being purchased.”

Have you heard this one?

“I save the institution money because I trade-in old equipment when I buy new equipment.”

“That oscilloscope can’t be on my inventory. I traded it in on a new one last year.”

“The vendor picked up the trade-in equipment already. Did they sign what?”

Financial Considerations

• Trade-in assets can have a dramatic impact on the margin.

• Profit or non-profit, we all have a margin.

• Assets that are not fully depreciated have loss potential.

What actually causes the loss?

• Trading in assets with remaining useful life.• Asset has a net book value (NBV).• NBV = Cost minus Accumulated Depreciation.

• Vendors Trade-in Credit less than NBV.

• Additional cost paid by institution to remove trade-in asset.

Calculating the Financial Impact

Asset Cost $ 8,400,000

Useful Life 84 Months

Remaining Life 24 Months

Accumulated Depreciation $ 6,400,000

NBV $ 2,000,000

Trade-in Credit from Vendor $ 1,000,000

Trade-in Loss $ 1,000,000

Calculating the Impact

Asset Cost $ 8,400,000

Useful Life 84 Months

Remaining Life 24 Months

Accumulated Depreciation $ 6,400,000

NBV $ 2,000,000

Trade-in Credit from Vendor $ 1,000,000

Estimated Sales Proceeds $ 2,200,000

Gain on Sale $ 200,000

Mitigating Financial Impact

• Effective Trade-in policy.

• Incorporates the gain/loss calculation into the buying decision.

• Identifies whether cash sale off trade-in asset is an option.

• Evaluate cash sale price verse vendor’s trade-in credit.

Mitigating Financial Impact(contd.)

• Effective Trade-in policy (contd.).

• If asset has 50% of useful life remaining, require the department to justify giving up an asset with that much life remaining.

• Require sign-off by department head or Property Administrator for the department.

Physical Asset Considerations

Physical Transfer of the Trade-in Asset

• Trade-in asset may remain in-service until close to delivery date of new asset.

• Larger assets can require a professional to uninstall and prepare for shipping.

• Transfer must be documented.

Physical Asset Considerations(contd.)

Groups that may need to be involved.

• Environmental Health & Safety.• Remove radioactive devices.• Prepare specialized documentation for transport of

hazardous chemicals/material

Physical Asset Considerations(contd.)

• Facilities.• Ensure building integrity is maintained for large

asset removal.• Provide best pathway for asset removal

• Campus or City Police• Manage traffic or security issues

Ownership Transfer

Critical part of the trade-in process.

• Ownership transferred to vendor at pick up.

• Clear documentation is required.

• Audit considerations.

Ownership Transfer(contd.)

Documentation Requirements.

• Bill of lading signed by vendor’s representative.

• Documents trade-in assets under control of vendor.

• Signed and dated by carrier and Property Custodian

Ownership Transfer(contd.)

• Institutions Trade-in Asset Form (hardcopy).

• Signed and dated by vendor or carrier.

• Signed and dated Property Custodian

Ownership Transfer(contd.)

• Sufficient to met institutions audit needs.

• Original ownership transfer documents sent to Finance Department for final processing.

• Remove trade-in asset from inventory.

• Add trade-in credit value to replacement asset.

Trade-in Policy

• Supports an accurate and correctly valued asset inventory.

• Supports good financial decisions.

• Provides controls to assure financial analysis of assets acquired through trade-in.

• Addresses the physical removal and ownership transfer of the trade-in asset.

Questions