Download - 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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
Concepts
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
IVS 220 Plant andEquipment
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
Valuing Plant andEquipment
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
Information Requirements
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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
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Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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.
PHILIPPINE ASSOCIATION OF REALTY APPRAISERS INC
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
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.
PHILIPPINE ASSOCIATION OF REALTY APPRAISERS INC
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
Comprehensive Real Estate Property Appraisal Seminar and Training (CREASAT) 20114/4/2015
Sample Information Source
Source: Langdon & Seah Construction Cost Handbook 2014 Philippines
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PHILIPPINE ASSOCIATION OF REALTY APPRAISERS, INC.
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]