Notes on Appraisal of Machinery & Equipment

By: RJC, RN, REA, REB

A.5 Immovable Property: (Civil Code):

A. Definition of Terms
A.1 Appraisal/Valuation:
- Process or act of making an estimate of the
value of any assets or property in accordance with the
GENERALLY ACCEPTED VALUATION STANDARDS on a
given or specified date for a specific or particular
purpose.
- In Real Estate Practice, it is the estimate or
opinion of value of real property/real estate made by a
duly licensed REA based on define standards.
A.2 Real Estate:
- Refers to LAND
IMPROVEMENTS thereon

and

all

- The distinguishing factor between personal

property and real estate is that personal property is
movable or can be transferred from one place to another.

PERMANENT

A.3 Real Property:

- Refers to the Rights, Interest and Benefits
related to the ownership of a real estate.
A.4. Personal Property
- Personal property is a type of property which, in
its most general definition, can include any asset other
than real estate.

(5) Machinery, receptacles, instruments or implements

intended by the owner of the tenement for an industry
or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the needs
of the said industry or works.
Requisite:
1. The Placing must be made by the owner of the
tenement, his agent, or duly authorized representative.
2. The industry or work must be carried on in the
building or on the land.
3. The machine must tend directly to meet the needs of
said industry or works.
4. The machines must be essential and principal
elements in the industry and not merely incidental.
A.6 Market Value:
- The estimated amount for which a property
should exchange on the date of valuation between a
willing buyer and a willing seller in an arms length
transaction after proper marketing wherein the parties

had each acted knowledgeably, prudently and without

compulsion.
A.6.1 Fair Value.
- The amount for which an asset could be
exchanged between knowledgeable willing parties in an
arms-length transaction

A.7. Depreciation:
- Refers to loss in value of any property or
improvements up to appraisal date due to functional
obsolescence, economic obsolescence, and physical
deterioration or wear and tear.
A.8. Scrap Value:
- The value of a depreciated building, or the
materials recovered from it.
A.9 Salvage Value:
- Value of the amount that may be recovered
minus cost of disposal, when the assets will be retired or
disposed of at a future time.

B.1 What is a PLANT?

Assets that are inextricably combined with others
and that may include specialized buildings, machinery
and equipment.
Note: Notwithstanding that the term Plant is not
in general use, it is accepted practice to include
specialized buildings and structures which cover
machinery in the Machinery and Equipment category. In
such circumstances the valuation report must clearly
state this.

B.2 What is A Machinery?

Refers to individual machines or a collection of
machines. A machine is an apparatus used for a specific
process in connection with the operation of the entity.
B.3 What is An Equipment?
It includes other assets that are used to assist the
operation of the enterprise or entity.
B.4 Characteristic of PME as a Real Estate:
- Collectively constitute a general class of tangible
property assets.

B. Appraisal Concept

- Normally capable of being moved or relocated

and often will depreciate at a significantly faster rate
than other real property.

- Frequently the value will differ notably

depending on whether an item of plant, machinery or
equipment is valued in combination with other assets
within an operational unit or whether it is valued as an
individual item for exchange or whether it may be
considered as either in situ or for removal.
B.5 Categories of Machinery:
1. Industrial Machinery Machinery used to
transform/process material from one state to another,
whether it is movable, permanent or semi-permanent.
2. Material Handling Equipment used in
handling or transporting raw materials or finished goods
within the plant vicinity. (Conveyor, Crane and industrial
Truck).
3. Agricultural Machinery Machinery used for
agricultural purposes such as tractors and irrigation
pumps.
4. Transportation Equipment Motor Vehicles,
aircraft and watercraft.
B.6 Value Characteristics of Machinery
1. Investment Value
2. Market and Owner Value
B.7 Description of M&E Condition

Condition affects value. If your level of assurance

is high, require the appraiser to conduct a personal
inspection of the equipment
1. Very Good (VG) - This term describes an item
of equipment in excellent condition capable of being
used to its fully specified utilization for its designated
purpose, without being modified and not requiring any
repairs or abnormal maintenance at the time of
inspection or within the foreseeable future.
2. Good Condition (GC)- This term describes
those items of equipment which have been modified or
repaired and are being used at or near their fully
specified utilization, but the effects of age and/or
utilization indicate that some minor repairs may have to
be made or that the item may have to be used to some
slightly lesser degree than its fully specified utilization
in the foreseeable future.
3. Fair Condition (FC) - This term describes those
items of equipment which are being used at some point
below their fully specified utilization because of the
effects of age and/or application and which require
general repairs and some replacement of minor elements
in the foreseeable future to raise their level of utilization
to or near their original specifications.
4. Poor Condition (PC) This term is used to
describe those items of equipment, which can only be
used at some point well below their fully specified

utilization, and it is not possible to realize full capability

in their current condition without extensive repairs
and/or replacement of major elements in the very near
future.
5. Scrap Condition (X) This term is used to
describe those items of equipment which are no longer
serviceable and which cannot be utilized to any practical
degree regardless of the extent of the repairs or
modifications to which they may be subjected. This
condition applies to items of equipment which have been
used for 100% of their useful life or which are 100%
technologically or functionally obsolescent.
C. Valuation of Machinery and Equipment:

C.1 Assumptions:
The most appropriate basis of value is Market
Value. However, Market Value simply stipulates that an
exchange is assumed to take place on an arms length
basis between knowledgeable and willing parties; it is
silent as to how the particular asset is to be presented
for sale or any of the other specific circumstances that
could have a fundamental effect on the valuation
When undertaking a valuation of plant,
machinery and equipment, the Valuer must therefore,
establish and state the additional assumptions that are

appropriate, having regard to the nature of the asset and

the purpose of the valuation.
1. That the plant, machinery and equipment are valued
as a whole, insitu (in place) and as part of the business
as a going concern. (Value for Continued Use)
2. That the plant, machinery and equipment are valued
in-situ but on the assumption that the business is
closed.
3. That the plant, machinery and equipment are valued
as individual items for removal from their current
location.
C.2 Other Factors that Can Affect the Market Value
of Plant, Machinery and Equipment.
1. The costs of installation and commissioning where
plant, machinery and equipment are valued in situ.
2. Where they are valued for removal, any allowance
made for the costs of decommissioning, removal, and
possible reinstatement following removal, and which
party is to bear those costs.
3. Factors such as finite sources or raw materials, the
limited life of the buildings or limited tenure of the land
and buildings housing the plant, and statutory
restrictions or environmental legislation can also have a
significant impact on the value of plant and equipment.
C.3 Approaches to Valuation:

Valuations of plant, machinery and equipment

can be carried out using any of the following
approaches:
1. Sales Comparison Approach.
- Due to the lack of direct sales evidence the use
of the sales comparison approach is often limited to
individual freestanding machines such as generators,
and motor vehicles.
2. Cost Approach
- Machinery and Equipment valuations are
usually carried out using the Depreciated Replacement
Cost approach to reach a valuation conclusion.
- International Guidance Note No.8 provides
guidance in the use of the Cost Approach for Financial
Reporting. It states that depreciated replacement cost is
an application of the cost approach used in assessing
the value of specialized assets for financial reporting
purposes, where direct market evidence is limited. In the
absence of direct market evidence depreciated
replacement cost is regarded as an acceptable method of
determining value and since the publication of the IVS
seventh edition (2005) depreciated replacement cost is
recognized as a market-based methodology.

3. Insurance Valuations
- It is recognized that where the cost approach is
adopted for valuations for insurance purposes, the
approach and assumptions used will be different to
those adopted when undertaking valuations for financial
reporting. The valuation conclusion using the cost
approach for insurance valuations will therefore not
equate to Market Value.
4. Income capitalization approach.
- In practice, this approach in the valuation of
machinery and equipment is not adopted. It is
recognized that it is rarely possible to identify an income
stream and allocate it to individual assets. As a result, it
is generally very difficult, if not impossible, to determine
values for individual assets by reference to the income
approach.