How environmental and digital transitions impact business value
How are digital transformation and environmental regulations reshaping asset valuation and depreciation for businesses and national accounts?
The convergence of digital transformation and environmental imperatives has created new challenges for organisations and nations to value their assets and account for depreciation, particularly as businesses navigate climate-related regulations and accelerating technological change.
There are several critical areas for national and business accounts according to Paul Schreyer, former OECD Chief Statistician, who shared insights on how environmental and digital transformations affect asset valuation and depreciation at a joint conference held by the UNSW Centre for Applied Economic Research and the Economic Statistics Centre of Excellence (ESCoE) on 25-26 November 2024. Held at UNSW Sydney, Schreyer emphasised that traditional approaches to measuring sustainability and asset depreciation need reconsideration.
The UNSW-ESCoE Conference on Economic Measurement 2024
Understanding sustainability in the digital age
Sustainability, whether for entire countries or individual businesses, is about preserving and expanding the asset base for future operations and consumption. Depreciation is a key element here to gauge investment needs in business and national assets. Schreyer, who is an expert in national accounts and the measurement of capital and productivity, said the move towards intangible assets has shifted focus from physical wear and tear to obsolescence as the primary factor in asset depreciation.
This shift reflects fundamental changes in how businesses create and maintain value, with digital assets often becoming outdated due to technological advancement rather than physical deterioration. The rise of cloud computing, software platforms, and data assets has introduced new complexities in how organisations must approach depreciation and asset valuation.
“The digital transition has as one of its features the obsolescence of products rather than physical wear and tear. This whole move towards intangibles is more about obsolescence for many reasons, rather than depreciation in a traditional sense of wear and tear, physically wear and tear, of assets,” Schreyer explained.
The impact of this transition extends beyond accounting practices to affect how businesses make investment decisions and value their operations. Companies must now consider both the physical lifespan of assets and their technological relevance, leading to more complex calculations of asset value and depreciation schedules. Schreyer told the conference audience that this shift is particularly relevant for technology-intensive industries where the pace of innovation can rapidly diminish the value of digital investments.
Environmental transition and asset valuation
Schreyer also said the environmental transition is creating new challenges for businesses in terms of how they value and depreciate assets. The implementation of climate policies is likely to result in stranded assets – those that become economically unviable or need to be retired because of regulations before the end of their physical life. The same principles apply to natural capital – when regulations restrict resource extraction, previously valuable assets may drop in value, even if physically unchanged.
These transformations are forcing organisations to reassess their approach to asset valuation and risk management. As such, Schreyer said companies must now factor in potential regulatory changes and environmental policies when determining asset lifecycles and depreciation schedules, adding new layers of complexity to financial planning and reporting.
Electric vehicles and consumer asset depreciation
The transition to electric vehicles provides a practical example of how environmental changes affect asset depreciation and business accounting. Electric vehicles currently depreciate at a higher rate than traditional combustion engine vehicles, which impacts both consumer costs and business accounting practices. This shift in depreciation rates can affect fleet operators, leasing companies, and organisations managing vehicle assets. The higher depreciation rates also affect residual values, insurance costs, and total cost of ownership calculations, creating new considerations for business planning and investment decisions.
“The rate of depreciation for electric cars is currently certainly higher than the rate of depreciation for combustion engine cars. So, it would affect how those who buy electric cars are shown in terms of the expenditure patterns in the accounts,” Schreyer noted.
He explained that consumer purchases of durables, including electric cars, should enter national accounts and consumer price indexes with their user costs rather than as a one-off entry of acquisition costs. Using data from France, Schreyer demonstrated that differences could be large with user costs exceeding acquisition costs by as much as 30%, possibly affecting measured consumer inflation and household asset values.
At the same time, digital transformation has given rise to business models where service offers replace the purchase of consumer durables, leasing of cars or subscription to software services being cases in point.
While this automatically leads to registering user costs (rental payments) for consumers in our national accounts, it makes accounting for depreciation and asset management of the businesses offering these services ever more important. Schreyer said the implications extend beyond direct costs to impact lease structures, maintenance planning, and long-term investment strategies in transportation assets.
Business implications and future considerations
In summary, Schreyer’s presentation highlighted several key considerations for business professionals. The pace of technological change means traditional depreciation schedules may no longer accurately reflect the true economic life of digital assets, requiring more dynamic and responsive valuation methods.
Environmental regulations impact asset values, particularly for carbon-intensive industries. Organisations should prepare for potential stranded assets by implementing depreciation models that account for regulatory risk. This includes developing scenarios for different regulatory outcomes and their potential impact on asset values, ensuring businesses can adapt quickly to changing environmental policies.
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Current business accounting practices depend on accounting and fiscal rules and these may need adjusting to reflect new realities. There is thus also an agenda for policymakers to create the possibilities for businesses to apply new models of depreciation and asset valuation and to set the right incentives.
When it comes to employing user cost valuations for consumer durables, Schreyer indicated that bringing in the user costs rather than the acquisition costs would create better symmetry between the corporate sector and the household sector in the national accounts.
“More generally, there should be much more of an interface between business and national accounting to make things compatible. It would also help in terms of the data. I mean, if businesses think about these things differently or have parameters that resemble those that we’d like to use in the national accounts, well, we’d get a better empirical handle on things as well,” he concluded.