Valuation of Plant & Machinery/Immovable Property
For doing annual financial reporting, it is important that all assets are valued in a proper manner. The accountant has to make a comparison between the historical cost of an assets and market value of assets in order to make proper reporting. Accordingly, the valuation of plant and machinery is very important for any enterprise. They form part of fixed assets and normally qualified registered values are employed to conduct the correct valuation of immovable property.
Plant and machinery valuation is required by every industry in order to have a clear picture regarding their turnover, securing loan options, insurance, tender etc.
Generally, the valuation of plant and machinery is required for the following purposes:
- For the purpose of Mergers & Acquisitions – both before the merger and after a merger
- Doing financial reporting as per applicable accounting standards
- Securing loans from banks and financial institutions as bankers take immovable property as collateral security, therefore, valuation of immovable property is required.
- Making an analysis of whether assets have been impaired or not
- Determining at which price assets shall be allocated at the time of business restructuring
- For sell-off of non-performing assets
- Determining distress assets
- For helping top management to make proper planning
- At the time of taking Insurance
- Initial Public Offerings
One of the problems faced by registered valuer is that data for plant and machinery are limited as compared to data for land and building. Further, there is no standard database for plant and machinery valuation as compared to land and building valuation.
There are 3 internationally accepted approaches to value assets i.e market, income, and cost approach.
In this approach, direct sale comparison is made with an existing asset of the same utility. In this approach, the underlying principle is that an informed buyer would not pay more for any assets when a similar asset is available at fewer prices. This method is useful when there is an active market available for such assets.
In this method, the valuer tries to identify what is the present value of future benefits which may arise from the use of such assets or similar assets with similar risk. This is because and the informed purchaser will not pay more for an asset then an amount equal to the present worth of anticipated future benefit ( income) from similar assets. However, one drawback of this method is that it is not easy to bifurcate the potential future benefits which have aroused form use of the plant, machinery, equipment or other assets and benefits which have arisen from entire business.
In this approach, the replacement cost of assets is determined. This approach is based on a principle that value of any asset decreases due to depreciation, wear and tear, aging etc and any informed purchaser would not pay more for an asset than the cost of substitute assets with same utility or functions. The main difficulty arises under this method when there is non-availability of similar products in the market.
Valuation of plant and machinery involves 2 major steps:
Data collection– Here physical inspection of assets are done by valuer and proper identification of assets are done in terms of an item, model, year of manufacturing, a location of assets, size, capacities, function etc.
Research or desktop process– It consists of making an analysis of comparable sales of the subject assets and if required, contacting the manufacturers of plant and machinery or other equipment.