What Is a Legacy Asset?
A legacy asset is an asset that has remained on a company's balance sheet for a long period of time and has since become obsolete or has lost nearly all of its initial value. In fact, legacy assets run the risk of becoming a liability for the company holding them, as they may incur storage, repair, or maintenance costs.
- A legacy asset is an obsolete asset that has been kept on a firm's books for an extended period of time and runs the risk of becoming a liability.
- Financial companies may have legacy assets in the form of investments that have lost most or all of their value, or loans that will never be collected.
- Legacy assets often have little to no economic value to the company and will often have been written down for a loss.
Understanding Legacy Asset
The term "legacy" literally means something that has existed for a long period of time. The term "legacy asset" has been coined to refer to an asset that is outdated or obsolete. A legacy asset is an asset that has been on the company's books for a long period of time and has generally decreased in value, likely due to obsolescence, to the point where it is now a loss for the company. It is a loss both in the sense that there is no value in selling the asset, but also it may require some expenditures for storage or maintenance as it can take up shelf space, better occupied by current inventory, or it may require annual tune-ups despite being in disuse.
Financial companies may have legacy assets in the form of investments that have lost their value or loans that will not be collected and have thus been characterized as bad debt. Legacy assets often have no value to the company and will have been written down for a loss. However, at times it is possible that they may have new value in a different time or economy. Items that are old can become collector's items and be assigned value for their nostalgic qualities or because they are rare.
Legacy Asset Example
For example, suppose that XYZ Music Corp. has been in business since the 1920s and has always kept extra recording and music playing equipment in its warehouse. Old gramophones, turntables, and 8-track players haven't quite held onto their value throughout the ages, but since they are still held on XYZ's balance sheet they are booked as legacy assets.
Occasionally, XYZ Music will donate an old piece of equipment to a museum or local theater company for a production. When vinyl came back into fashion around 2010, they saw an uptick in the demand for vintage turntables and were able to sell a number of their legacy assets due to the shift in consumer tastes, turning potential money drains into profits.