02 Machinery & Equipment Valuation SCQ

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
PLANT MACHINERY
VALUATION
Comprehensive Real Estate Appraisal Seminar and Training
5/19/2015
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 2011
Agenda
Concepts 4-11
IVS 220 Plant and Equipment
12-17
Valuing Plant and Equipment

18-29
Information Requirements 3037
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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 cash

or 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 Fixed

Assets 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 assets
normally 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 shortterm 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 the

asset in its needed location and the initial estimate of
dismantling and removing the item if they are eventually
no longer needed on the location.
The primary objective of a business entity is to make profit

and 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 that
contributed 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.
Net book value of an asset is basically the difference

between 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 fixed
assets 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 the
owners 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 to
the firm.
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IVS 220 Plant and

Equipment
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Scope of Work
To 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 Work
In 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 Work
Plant 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 different
valuation 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 Work
Examples 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 and

Equipment
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Appraisals can be performed for

Individual pieces of equipment,
A production line,
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 value removal,
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 the

exact 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 appraisers liability.
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 is
known 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, the
current 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 reproduction
cost 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 machinery

and 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 the
determination 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 statutory
laws applicable to the entity.
d) Extent of owned, and assets taken on lease / hire purchase.
e) Requirements of insurance company.

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Fixed Assets Register

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 stated
period.
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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

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:
- samrealink@yahoo.com / fasttat@ymail.com
4/4/2015

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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Valuing Plant and Equipment

Information Requirements 3037

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Fixed assets, also known as "tangible assets" or

This can be compared with current assets such as cash

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

IAS 16 (International Accounting Standard) defines Fixed

These are items of value that the organization has bought

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

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

In addition, cost attributable to bringing and installing the

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The primary objective of a business entity is to make profit

In the attainment of this objective it is required that the

Matching concept is simply matching the expenses of a

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The use of assets in the generation of revenue is usually

It is therefore obligatory that in order to accurately

This is essential in the prudent reporting of the net

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Net book value of an asset is basically the difference

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

Apart from the fact that it is enshrined in Standard

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Plant and machinery, furniture and fittings, motor vehicles,

Cost includes purchase price, freight charges, insurance- in

The purpose of depreciation in accounting is to allocate the

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

IVS 220 Plant and

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

An individual machine may be part of an integrated

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Valuing Plant and

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

Appraisals can be performed for

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The purpose of equipment appraisal

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

In appraising plant and machinery, technical experts are

Proper appraisal is necessary when the company is taking

It ensures that the fixed assets are neither over-insured nor

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The premise of value includes

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The valuation (effective) date is important because it sets the

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

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The value concepts/approaches include the cost approach, sales

The cost approach is based on the proposition that an informed

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

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

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

The income approach may possibly be used to value machinery

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.

02 Machinery & Equipment Valuation SCQ

02 Machinery & Equipment Valuation SCQ