Plant and machinery valuation is defined as the method of determining the value of plant and machinery assets. Generally undertaken by professional valuers, plant and machinery valuation includes all machines or devices used in various industry sectors to produce or provide goods and services, be it construction, mining, manufacturing, food processing, hospitality, or hospitals.
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Introduction
Plant and machinery assets include everything from manufacturing equipment and service systems to vehicles, furniture, and tools. These assets often face rapid depreciation due to wear and tear, technological obsolescence, and market trends.
Modern valuations are not limited to static assessments; they incorporate dynamic elements such as global market trends, technological advancements, and sustainability. Professional valuers often rely on global valuation standards, such as the International Valuation Standards (IVS), to ensure consistency and reliability.
Scope
Plant and machinery valuation spans industries like:
- Automotive: Evaluating assembly lines and machinery.
- Healthcare: Equipment in hospitals and diagnostic centers.
- Real Estate: Industrial plant impact on property values.
- Renewable Energy: Wind turbines and solar equipment valuation.
Valuers must have expertise in the industry they are assessing, as asset utility and depreciation vary significantly across sectors. In India, compliance with Indian Valuation Standards (IVS) is mandatory for credible reporting.
Definitions
Key terminologies in plant and machinery valuation:
- Plant: Integrated systems supporting production, such as HVAC or piping systems.
- Machinery: Tools or devices that execute specific tasks within the plant.
- Equipment: Ancillary assets that enhance operational efficiency.
A thorough understanding of these terms ensures precision in inventory listing and valuation.
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4. PURPOSE
The purpose is the base of any plant and machinery valuation, and it differs according to the various purposes. Such evaluations are typically performed for the following purposes:
- Mergers & Acquisitions
- Financial Reporting
- Secured Lending/Fundraising
- New Purchase or Leasing
- Strategic Sale/Disinvestment of Distress Assets/NPAs
- Management Information & Strategic Planning
- Dispute, Arbitration & Litigation support
- Insurance – Ascertaining Sum Insured or Claim Submission
- Initial Public Offerings (IPOs)
- Expense Investigations
- Income & Wealth Tax Calculation
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5. ACCOUNTING STANDARDS
Valuations are deeply intertwined with financial reporting standards such as:
- IFRS 13: Outlines fair value measurement principles.
- IAS 16: Covers property, plant, and equipment reporting.
- Indian Accounting Standards (Ind AS): Aligns local practices with global norms.
Valuers must distinguish between fair market value and investment value to meet specific accounting needs. Misinterpretation can lead to financial misstatements or compliance risks.
6. METHODS OF VALUATION
Plant and machinery valuation requires the valuer to estimate all depreciation forms in all types of plant, machinery, and equipment. They may also use IOWA/RBI charts for depreciation calculation wherever needed. Physical, functional, economic, and environmental parameters of depreciation shall be considered types that affect the machinery life.
The valuer should only use the word “depreciation” as the difference between the new replacement cost and its value. Also, while assessing it, the valuer should consider the following:
- Age & Condition
- Utilisation Efficiency
- Future Finite Economic Life
- Techno-Functional Obsolescence
- Environmental Deterioration
- New Replacement Cost
- Price Index & Acquisition Cost
- Repair/Reconditioning/Upgradation
- Functional Capacity Impairment
- Scrap Value
- Power Consumption
- Eco-Friendliness
- Raw Material Availability
- Skilled Operator Expenses
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Inventory Essentials
A precise and detailed inventory is the cornerstone of valuation. The inventory should include:
- Asset Descriptions: Make, model, year, and condition.
- Usage Data: Operational history and efficiency metrics.
- Depreciation Factors: Both physical and functional wear.
Digital tools like company valuation calculators enhance inventory accuracy by automating data collection and analysis.
Grouping of Assets
Assets are categorized into groups for streamlined valuation:
- Fixed Assets: Machinery, fixtures, and transport.
- Consumables: Raw materials, stock-in-progress, and finished goods.
- Support Systems: HVAC, pipelines, and power backups.
Proper grouping aids in identifying high-value assets and optimizing asset utilization.
Sector-Specific Needs
Each industry presents unique valuation challenges:
- Renewable Energy: Focus on eco-efficiency and lifespan.
- Mining: Assessing heavy-duty machinery resilience.
- Textiles: Rapid obsolescence due to technological shifts.
Customized approaches ensure valuations meet both regulatory and operational benchmarks.
7. INVENTORY
The heart of any plant and machinery valuation is a sufficiently accurate and detailed inventory list upon which it is directly based. The list should contain all the significant facts within the description or the side notes that will influence the individual values. Together with the valuer’s side notes, the definition of any item should contain enough information for the valuer to explain how they produced his opinion of value.
A valuer who creates inventory thoroughly and conscientiously will never find himself in any confusion. Besides being readily understandable, it will also remind the valuer of all the salient features throughout the site to accurately evaluate. In addition, a well-laid-out and concise inventory, leading the reader through the inspection of assets, will also impress the client.
The valuer must inspect physically and list all the items he is concerned about in the plant and machinery valuation within all the areas with the necessary identifying descriptions. Location and asset descriptions must be brief, sufficiently accurate, and straightforward to even a layperson. The asset description sequence must be logical and follow a sensible pattern assisted by internal area headings for open areas.
The valuer should ensure that all relevant items have been included in his inventory before leaving the site. Since assets lie above or below the line of sight and are hidden in congested areas, it is always good to recheck places and the entire premises at the end of the schedule, preferably in the reverse direction of the inventory order.
8. GROUPING OF ASSETS
All movable assets that concern a plant and machinery valuation shall fall under the following groups:
- Plant & Machinery
- Service Systems
- Loose Tools & Equipment
- Fixtures & Fittings
- Office Furniture & Appliances
- Factory Vehicles
- External Transport
- Raw Material Stock
- Work In Progress
- Finished Stock
- Consumable Stock
Although all evaluators are expected to schedule and value all items under these eleven groups, most inventory work will be concerned with the first seven. The standard practice expected in very small or global plant and machinery valuation is to sequentially schedule the assets group-wise to estimate the proportion of each group’s value in the final summary.
Unaided plant and machinery valuation inventory are best scheduled separately for each group during separate tours of the premises.
9. TYPES OF PLANTS & MACHINERY
Plants established solely for manufacturing items usually consist of the following:
- Machinery Types
- Ancillary Plants
- Service Systems
- Controlling Unit
- Raw Material Storage
- Finished Goods Storage
As per plant and machinery valuation standards, all assets concerning industrial machinery shall fall under the following groups:
- Plant & Machinery
- Service Systems
- Loose Tools & Equipment
- Fixtures & Fittings
- Office & Other Furniture
- Office Equipment
- Transport Vehicles
- Raw Material Stock
- Finished Stock
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10. REPORTING VALUATION
Before coming up with the final report, any valuer should observe some critical details before reporting the plant and machinery valuation. These details include intended use, intended user, location, method of valuation, manufacturing process, make/model, year of manufacture, capacity, fixture types, power requirements, and other technical discussions.
The principal valuer also performs a physical asset inspection accompanied by the owner when the factory runs for a detailed examination of each piece of equipment with its technical specifications and trial expenses noted.
Detailed tax verification of available records like CA certificates, asset registers, bills, vouchers, invoices, duties paid, purchase deals, mechanical repairs, renovation, or modifications is also undertaken with relevant data collection.
During a meeting with the owner, the flow process diagram, hazardous chemical reactions, balance sheet, annual report, compliance of statutory requirements, and records of production capacities/production achieved/utilization need to be rigorously discussed by the valuer.
Imported plant and machinery valuation requires determining old/new machines, equipment origin, paid duty, manufacture year, technology type, foreign collaboration agreement, and exchange rates with a detailed inspection of support facilities and utility equipment.
The valuer is also tasked with separately recording the mismatches, negative values, recent technological changes/upgrades, and repairs if found available. The factory’s general information collection is also needed to know the factory’s reputation in the market.
FAQs
1. What is the importance of plant and machinery valuation?
Valuation ensures fair pricing for transactions, compliance with regulations, and informed decision-making for asset management.
2. Which valuation method is best for machinery?
The choice depends on the asset’s purpose. For financial reporting, the cost approach is common, while the market approach suits insurance claims.
3. How is depreciation calculated?
Depreciation is assessed based on factors like age, wear, obsolescence, and operational efficiency.
4. What is Berkus Method Valuation?
This method evaluates intangible contributions like technology or intellectual property, commonly used in innovative sectors.
5. How often should valuations be updated?
Regular updates every 2-3 years are recommended, or sooner if significant changes in asset condition or market trends occur.
6. Are imported machines valued differently?
Yes, factors like customs duty, exchange rates, and compliance with local standards are considered.
7. Can I use a company valuation calculator for plant assets?
Yes, advanced calculators can provide a rough estimate, but professional valuation ensures accuracy.
Conclusion
Plant and machinery valuation is crucial for businesses across industries to maximize their asset value, ensure compliance, and make strategic decisions. Whether you’re planning an acquisition, financing, or strategic sale, professional valuation ensures transparency and accuracy.
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