Top 10 Facts You Should Know About Plant & Machinery Valuation

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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Here is a list of things that nobody tells you about plant and machinery valuation.

1. INTRODUCTION

Plant and machinery collectively constitute a general class of tangible property assets which are broadly divided into two categories:

1. 1. • Assets forming part of the factory or commercial building services installation are typically included in plant and machinery valuation.
      • Other categories include manufacturing equipment installed with the occupier’s industrial or commercial processes, together with furniture, furnishings, fixtures, fittings, vehicles, moulds, and loose tools.

Since the plant and equipment are typically capable of being moved or relocated, their value often depreciates significantly faster than real property. The plant and machinery valuation also differs depending on whether being valued with other assets or as an individual item for exchange.

2. SCOPE

Plant and machinery valuation is a vast field concerned with many different industries like engineering, chemical, textile, automobile, metal, glass & ceramic, food & beverages, sugar, distillery, film, etc. Hence, the valuer should always comply with the competence clause mentioned in the Indian Valuation Standards and may even require special licensing or registration in some jurisdictions.

3. DEFINITIONS

Terminologies you should know related to plant & machinery valuation.

• PLANT is defined as a combination and interlinking of various machinery and equipment in a specialized building.
• MACHINERY is an apparatus used for a specific process in the operation of the entity.
• EQUIPMENT are assets that are used to assist the operations of the enterprise or entity.

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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

Under International Financial Reporting Standards, plant and machinery valuation should be included on an entity’s balance sheet at either cost or fair value after removing depreciation and impairment. They may also be subject to other IFRSs, including IAS 2 and GN 3 from the International Valuation Standards.

The valuation approach and assumptions applicable to a plant and machinery valuation may differ from those appropriate for another purpose for inclusion in a financial statement. Hence, a clear distinction should be made if values for different purposes are reported in the same document.

Different valuation assumptions may be reasonable under different IFRS. Therefore, the valuer needs to be familiar with the relevant standards and discuss their assumptions with the client before proceeding.

6. METHODS OF VALUATION

Plant and machinery valuation require 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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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 which 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 to 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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Recommended, Plant and Machinery Valuation: Know Its Worth in the Changing Times!

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 certificate, asset register, 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, records of production capacities/production achieved/utilisation 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.

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