Methods and Bases for Plant & Machinery Valuations

Whether you are on the Sunshine Coast, in Northern or Central Queensland or even around the Discovery Coast, GANTPMV can provide you with Plant and Machinery valuations based on either Fair Value, Equitable Value or Market Value. Each of these three bases has its own definition.

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market (sector) participants at the measurement date.

Equitable Value: The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.

Market Value: The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

One further ‘Basis of valuation’ is an ‘Insurance Valuation’. This reflects the replacement cost of an asset where a loss has occurred. Valuation can be for replacement with second hand comparable assets (‘indemnity’), or for reinstating assets as new (‘new for old’). However, many would say that rather than this scenario being a valuation, it is more in line with an assessment.

The purpose of Plant and Machinery valuations are determined by the basis for which it is required. As an example, if the purpose is to determine an anticipated asking / selling price in an open market, then Market Value would be the appropriate basis. However, if it is envisaged that a closed (private treaty) transaction comprising a sale to an identified buyer and you want to establish a fair price for payment, then Equitable Value would potentially be appropriate.

If the Plant and Machinery valuations are for Financial Statement purposes, for example, to establish the balance sheet value of assets, then Accounting Standards direct that the basis of valuation to be used would be Fair Value.

Fundamental conventions are then to be implemented under each basis. The most usual of these conventions is in respect to Market or Equitable Value, i.e., whether the machinery is to be valued wholly in-situ, for use in its working place (as it would be for a ‘turn key operation’) or valued based on the removal from the location at the purchasers’ expense (‘ex-situ value’).

On the other hand, the valuation method is determined by the approach that the valuer uses to reach their opinion on whatever basis they have implemented. All valuations take either a cost approach, market approach or an income approach (or a combined approach of these).

When GANTPMV receive an instruction, the first thing we determine is who is the client and what exactly is being valued (i.e., the interest and subject matter). We then need to know the purpose of valuation so we can advise correctly as to the basis of valuation. We also need to identify where the Plant and Machinery assets are situated and when the valuation is required, (i.e., date of valuation). Obtaining this information at first ensures we cover ‘who, what, why, where and when’. Once these details are established, GANTPMV will then establish the most applicable method for your Plant and Machinery valuations. These may include for example:

1) The ‘comparison method’ where historical market transactions are scrutinised. This method is a ‘market approach’;

2) The ‘Depreciated Replacement Cost (DRC)’ method. This is when the new /replacement cost of a machine is depreciated by appraising its economic life, age and residual value in order to determine the current value. This method is a ‘cost approach’.

3) Often favoured is combining the two approaches above. So effectively, a DRC bordered by referencing market evidence.

Plant and Machinery valuations largely use one of the methods above. To be noted though is that the comparison method may also include conversing with traders for circumstantial market opinions / evidence and considering the prices for similar asset types.

Income approaches may sometimes be used for machines that have an income stream that is directly attributed to the machinery, but this is quite often rare. The income approach is the most common way to value goodwill or intangible assets.

GANTPMV ensure the basis and method of Plant and Machinery valuations has reference to the best methods of sale envisioned. If we are considering a sale at auction as being the best way to maximise the achievement, then Market Value ex-situ with auction sale comparisons would be the best method. However, if the sale of machines by private agreement for removal is deemed a better option, then Market Value ex-situ assuming the sale of assets as a whole would be more appropriate and all comparative market figures would be obtained and taken into consideration when supplying your Plant and Machinery valuations.