Fair Market Value: Purchase, Lease, and Asset Recovery on Disposal
Unit 2: Procurement, Contracts, and the Asset Lifecycle. Lesson 11 of 60 in CHTM Academy.
Two decisions bracket a device's life and both come to you for a number. At the front, finance asks whether to buy it or lease it. At the end, a vendor offers a trade-in credit on the replacement, and a used-equipment dealer offers cash. Somebody has to say what the old device is actually worth, and what has to happen to it before it leaves the building.
Fair market value, and what it is not
Fair market value is what a willing buyer would pay a willing seller today, with neither under pressure. It is not book value, which is an accounting position, and it is not replacement cost, which is what a new one costs. It is established from current market evidence: completed sales of the same model, dealer and broker quotes, auction results, and a professional appraisal where the value justifies one. Hospital policy should say who determines fair market value and who may accept an offer, because the manager who negotiates the replacement should not also be the sole judge of the trade-in credit.
Purchase, lease, and rental
Choice Money it uses What the hospital holds What to read in the terms
Purchase capital the asset and every nothing; the cost is yours
downstream cost for the life
Capital behaves like a the asset in substance, who maintains and insures
lease purchase, paid ending in ownership or a it, the end-of-term buyout
over a term bargain purchase
Operating operating money use of the device for a who maintains and insures
lease across the term term, then it goes back it, return condition,
escalation, and renewal
Rental operating money, use for weeks or months daily or monthly rate, who
short term services it, deliveryA capital lease is a purchase in substance, so the asset and the obligation land on the balance sheet. An operating lease spreads cost as an expense and leaves the device the lessor's property. Finance picks the structure; HTM's job is to say who services it, who insures it, what condition it must be returned in, whether the hospital may service it at all, and what happens to data on it at the end of term.
Asset recovery on disposal
Order of preference, highest value first: redistribute inside the organization or to a simulation or training center, then sell, then donate, then recycle.
- Trade-in is convenient and usually the lowest value available. Price the open market before accepting it.
- Resale through used-equipment companies and broker sites will draw bids. After the labor to list, negotiate, and load, it is often close to break-even, so count the labor.
- Donation can put a device to work abroad. Policy must say who selects the charity and who may donate instead of sell, and the device must still be serviceable where it lands.
- Recycling is the floor, and it is still a documented, compliant route rather than the loading dock.
One financial warning: disposing of an asset that is still being depreciated writes off its remaining book value, so finance agrees before the device moves.
The disposal process
- Approval under the hospital's policy, with finance notified of the book value.
- Data wiping or media destruction on anything that stored patient information. Selling or donating a device holding PHI is a HIPAA violation, and often only HTM knows the data is in there.
- Decontamination to the infection prevention standard, documented, before anyone handles it.
- Environmental handling for batteries, mercury, sealed sources, refrigerants, and electronics, which follow environmental rules rather than the dumpster.
- Documentation and inventory removal: a disposal record naming the asset, the method, the date, the wipe, and the signature, then the asset closed out of the CMMS and the ledger.
Fair Market Value: Purchase, Lease, and Asset Recovery on Disposal, explained slowly
Establishing fair market value on a real asset
A seven-year-old imaging system, original cost $400,000, ten-year useful life, no salvage.
Measure Value What it is Original cost 400,000 what the hospital paid Accumulated depreciation 280,000 7 years x $40,000 Book value 120,000 cost minus accumulated depreciation Replacement cost 520,000 what a new equivalent costs today Dealer quotes, cash 38,000 two used-equipment dealers, as-is Broker estimate, after 44,000 net of commission and de-installation sale Vendor trade-in credit 25,000 offered against the replacement Fair market value 38,000 what a willing buyer pays today, from to 44,000 current market evidence
Four numbers, and only one of them is fair market value. The trade-in credit is $13,000 to $19,000 below the market, which is the usual relationship, and it is offered because it is convenient. Price the open market before you accept one, and have the hospital's policy name who determines fair market value so the person negotiating the replacement is not also the only judge of the old asset's worth.
Now the financial consequence. Selling for $40,000 against a $120,000 book value writes off $80,000 of remaining book value, and finance must agree to that in advance. Waiting three years until the asset is fully depreciated removes the write-off entirely, which is occasionally a real argument for timing a replacement.
Purchase, lease, and rental compared
Purchase Capital lease Operating lease Rental
Money used capital capital-like operating operating
Balance sheet asset and asset and usually not on no
depreciation obligation the balance sheet
Who owns it at the the hospital usually the the lessor the lessor
end hospital
Who maintains it the hospital read the terms read the terms the lessor,
usually
Who insures it the hospital read the terms read the terms read it
Return condition n/a n/a specified, and specified
enforced
Data at end of term yours to wipe yours to wipe WIPE IT BEFORE wipe it
IT GOES BACK
Best suited to long life, a purchase the short technology weeks to
stable hospital wants cycles, trials months
technology to pay over timeThe row in capitals is the one HTM exists to catch. A leased device returned at end of term with patient data still on its drive is a breach, and the lessor is not going to raise it.
Asset recovery, ranked by what the hospital actually recovers
Route Typical recovery What it costs you
Redistribute full remaining use value internal transfer, inventory update,
internally to the organization and a service history that follows it
Sell to a dealer cash, below book value de-installation, listing, negotiation,
or broker loading; count the labor
Trade-in the lowest cash value nothing; that is what you are paying for
Donate no cash; goodwill and a shipping, a serviceable device, and a
device in service abroad policy that says who chooses the charity
Recycle little or nothing a compliant, documented route for
batteries, mercury, sealed sources,
refrigerants, and electronicsThe disposal record
Field Example entry Asset number BM-14027 Manufacturer, model, serial as recorded in the inventory Reason for disposal end of support; replaced under capital plan Approval policy reference, approver name, date Book value at disposal $120,000, write-off agreed by finance, date Data held yes: patient images on internal drive Wipe or destruction method drive removed and destroyed; certificate attached Decontamination performed, method, date, by whom Environmental handling lead shielding and batteries to the licensed route Method of disposal sold to dealer, $40,000, invoice reference Date removed from inventory with the CMMS record closed, not deleted Signature manager, and the second signature policy requires
The CMMS record is closed rather than deleted, because a recall notice or an audit may still name that serial number next year.
What to memorize
Fair market value what a willing buyer pays today; not book value, not
replacement cost
Capital lease behaves like a purchase; the asset is on the balance sheet
Operating lease an expense across the term; the device goes back
Order of preference redistribute, sell, donate, recycle
Before it leaves approval, data wipe, decontamination, environmental
handling, documentation, inventory removal
Financial check remaining book value is written off; finance agrees first