02 Machinery & Equipment Valuation SCQ

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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 2011

PLANT MACHINERY

VALUATION

5/19/2015

Comprehensive Real Estate Appraisal Seminar and Training


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Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015

Agenda

Concepts 4-11

IVS 220 Plant and Equipment

12-17

Valuing Plant and Equipment

18-29

Information Requirements 30-

37


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Concepts


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Fixed assets, also known as "tangible assets" or

property, plant, and equipment (PP&E), is a term used in

accounting for assets and property that cannot easily be

converted into cash.

This can be compared with current assets such as cashor bank accounts, which are described as liquid assets.

In most cases, only tangible assets are referred to as

fixed.


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IAS 16 (International Accounting Standard) defines FixedAssets as assets whose future economic benefit is

probable to flow into the entity, whose cost can be

measured reliably.

These are items of value that the organization has bought

and will use for an extended period of time; fixed assetsnormally include items such as land and buildings, motor

vehicles, furniture, office equipment, computers, fixtures

and fittings, and plant and machinery. These often receive

favorable tax treatment (depreciation allowance) over short-

term assets.


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It is pertinent to note that the cost of a fixed asset is its

purchase price, including import duties and other

deductible trade discounts and rebates.

In addition, cost attributable to bringing and installing theasset in its needed location and the initial estimate of

dismantling and removing the item if they are eventually

no longer needed on the location.


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The primary objective of a business entity is to make profitand increase the wealth of its owners.

In the attainment of this objective it is required that the

management will exercise due care and diligence in

applying the basic accounting concept of Matching

Concept.

Matching concept is simply matching the expenses of a

period against the revenues of the same period.


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The use of assets in the generation of revenue is usually

more than a year, i.e. long term.

It is therefore obligatory that in order to accurately

determine the net income or profit for a period

depreciation is charged on the total value of asset thatcontributed to the revenue for the period in consideration

and charge against the same revenue of the same

period.

This is essential in the prudent reporting of the net

revenue for the entity in the period.


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Net book value of an asset is basically the differencebetween the historical cost of that asset and its associated

depreciation.

From the foregoing, it is apparent that in order to report a

true and fair position of the financial jurisprudence of an

entity it is relatable to record and report the value of fixedassets at its net book value.

Apart from the fact that it is enshrined in Standard

Accounting Statement (SAS) 3 and IAS 16 that value of

asset should be carried at the net book value, it is the best

way of consciously presenting the value of assets to theowners of the business and potential investor.


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Plant and machinery, furniture and fittings, motor vehicles,

tools and sundry equipment are usually valued at historic cost

with proper allowance for depreciation.

Cost includes purchase price, freight charges, insurance- in

transit and all installation costs.

The purpose of depreciation in accounting is to allocate the

cost of fixed assets to the several years of their useful life tothe firm.


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IVS 220 Plant andEquipment


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Scope of WorkTo comply with the requirement to identify the asset or liability

to be valued, consideration shall be given to the degree to

which the item of plant and equipment is attached or

integrated with other assets.

For example:

Assets may be permanently attached to the land and could

not be removed without substantial demolition of either the

asset or any surrounding structure or building.

An individual machine may be part of an integrated

production line where its functionality is dependent other

assets.


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Scope of WorkIn such cases it will be necessary to clearly define what is to

be included or excluded from the valuation. Any necessary

assumptions or special assumptions relating to the availability

of any complementary assets shall also be stated.


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Scope of WorkPlant and equipment connected with the supply or provision

of services to a building are often integrated within the

building and once installed are not separable from it. These

items will normally form part of the real property interest.

Examples include plant with the primary function of supplying

electricity, gas, heating, cooling or ventilation to a building and

equipment such as elevators. If the purpose of the valuation

requires these items to be valued separately, the scope of

work shall include a statement to the effect that the value of

these items would normally be included in the real property

interest and may not be separately realisable. When differentvaluation assignments are undertaken to carry out valuations

of the real property interest and plant and equipment assets

at the same location, care is necessary to avoid either

omissions or double counting.


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Scope of Work

Because of the diverse nature and transportability of many

items of plant and equipment, additional assumptions will

normally be required to describe the state and circumstances

in which the assets are valued.


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Scope of WorkExamples of assumptions that may be appropriate in different

circumstances include:

That the plant and equipment assets are valued as a

whole, in place and as part of the business, considered as

a going concern, That the plant and equipment assets are valued as a

whole, in place but on the assumption that the business is

closed,

That the plant and equipment assets are valued as

individual items for removal from their current location.

In some circumstances, it may be appropriate to report on

more than one set of assumptions, e.g. in order to illustrate

the effect of business closure or cessation of operations on

the value of plant and equipment.


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Valuing Plant andEquipment


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Appraisals can be performed for

Individual pieces of equipment,

A productionline,

A complete operating facility or multiple operating

facilities.

The client establishes the intended use of an appraisal to

enable the appraiser to identify the premise of value and the

appropriate value concepts and approaches
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The purpose of equipment appraisal

Includes -

accounting,

financing,

insurance,

leasing,

liquidation and bankruptcy,

management planning,

transfer of ownership and tax issues


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In appraising plant and machinery, technical experts are

called in to carry out a detailed examination of the assets with

a view to determining their fair market value.

Proper appraisal is necessary when the company is taking

out an insurance policy for protection of its fixed assets. It ensures that the fixed assets are neither over-insured nor

under-insured.


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The premise of value includes the fair market value in continued use,

fair market value installed;

fair market valueremoval,

orderly liquidation value in place,

orderly liquidation value,

forced liquidation or auction value,

salvage value,

scrap value,

insurance replacement cost and Insurance value depreciated


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The valuation (effective) date is important because it sets theexact date at which the value is determined and establishes the

context for the opinion of value.

The limiting conditions are also important because they state,

among others; the limits to the appraisersliability.

The next step in the valuation process is the application of the

appropriate value concepts/techniques.


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The value concepts/approaches include the cost approach, sales

comparison approach and the income approach.

The cost approach is based on the proposition that an informed

purchaser would pay no more for an asset than the cost of producing a

substitute with the same utility as the subject asset. This concept isknown as the principle of substitution.

The cost approach assumes that the maximum value of an asset to a

knowledgeable buyer is the amount currently required to purchase or

construct a new asset of equal utility. When the asset is not new, thecurrent cost is adjusted for all forms of depreciation attributable to the

asset as of the date of valuation.


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In its simplest form, the cost approach is represented as follows:

Cost New Depreciation = Value

The starting point of the cost approach is reproductioncost new, replacement cost new or a combination of both.


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The sales comparison approach considers market data in

determining the value of the subject assets.

The purpose is to determine the desirability of the subject assets

through an analysis of recent sales or offering of similar assets to

arrive at an indication of the most probable price for the subject

assets.

If the comparable from the market is superior to the subject asset

regarding specific characteristics, the comparable is adjusted

downward or upward if otherwise.

In its simplest form, the sales comparison approach can be

represented as follows:

Comparable Sale + or Adjustment = Value range.


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The income approach considers values to be represented by the

present worth of future benefits derived from ownership typically

measured by the capitalization of a specific level of income. The

basic premise of the income approach is that a purchaser expects

to receive a certain rate of return on the income stream

attributable to the subject assets.

It can be stated as follows:

Value x Rate = Income

Or

Income = Rate x Value (IRV)

Or

Income Capitalization Rate = Value.


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The income approach may possibly be used to value machineryand equipment that typically produce income such as rail cars,

airplanes and heavy construction equipment.

The final step in the valuation process is the preparation of an

appraisal report highlighting salient issues leading to thedetermination of value for the subject assets.


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Information Requirements


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The factors which are considered in determining the value of an

asset, are as follows:

Date of purchase.

Extent of use i.e. single shift, double shift, triple shift.

Type of asset. Whether the asset is a general purpose or

special purpose asset? Repairs & Maintenance policy of the enterprise.

Availability of spares in the future, mainly in the case of

imported machines.

Future demand for the product manufactured by an asset.

If the asset is part of a bigger fixed asset, the life of the latter is

crucial.


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Fixed Assets Register

The format / details to be provided in a FAR generally

depends upon the following factors:

a) Nature of assets.

i. If movable assets constitute a significant portion of total fixed

assets, details will be necessary on their movement from one

department / cost center / people to another.

ii. Cost of assets. Greater control and security is required for

costly equipment.

b) Customized reports on fixed assets required by management.

c) Disclosure norms / regulatory compliance as per statutorylaws applicable to the entity.

d) Extent of owned, and assets taken on lease / hire purchase.

e) Requirements of insurance company.

SSOC O O S S C


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f) Location of fixed assets. If fixed assets are located at

numerous locations, greater details will have to be given. In the

case of a construction company, the assets are located at

different work sites. These work sites maybe in different cities /

countries / continents.

g) Maintenance costs. Some fixed assets require regular

servicing to keep them running in an efficient and satisfactory

manner. It would be necessary to keep a tab on the

maintenance costs, dates of servicing etc. during a statedperiod.

Fixed Assets Register

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS INC


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Identification of a fixed asset

A common problem in most companies is the improper

maintenance of the FAR.

Physical verification of fixed assets becomes a futile exercise

unless the FAR is properly maintained.

It would be advisable to use a scientific numbering technique to

identify fixed assets.

The process of numbering fixed assets is called tagging.

The purpose of Tagging assets is Tracking movement of assets

from one place to another place.



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Identification of a fixed asset

An identification number (combination of alphabets, and

numbers) is written on the asset.

Engraving the identification number on the asset is advisable in

the case of plant and machinery where there is heavy wear and

tear.

A tag verifies the existence of assets and their location, aids in

maintenance, provides a common ground for communication

between the Accounts Department and the end-users and

recording the net book value of asset in case of sale / scrapping.

It is not necessary to tag all fixed assets. Land, buildings and

vehicles all have independent systems of tracking in registration

papers and survey numbers.



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Sample Information Source

Source: Langdon & Seah Construction Cost Handbook 2014 Philippines



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h i l i l i d i i ( )4/4/2015

SAMUEL C. QUINIANO President / COO Fast TAT Credit Services Inc.

Former Head Appraisal & CI - Maybank Philippines, Inc.

Treasurer - PARA Inc.

Graduates of :

Real Estate Management

De La Salle University (College of St. Benilde),Manila

Master in Business Administration San Sebastian Colleges, Manila

BS Accountancy & Economics - University of Nueva Caceres, Naga City

Holds PRC Licenses:

Appraiser PRC # 0051

Broker - PRC # 00338

Contact Nos: - 0916 2421620 / 0998 9655603 / 02-7030460

Email Address: - [email protected]/ [email protected]
mailto:[email protected]:[email protected]

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02 Machinery & Equipment Valuation SCQ