VALUATION OF PLANT & MACHINERY AND CASE STUDIES

BYAMISH SURYAKANT PATEL, MRICS

B.E.(Elect.), Master of Valuation (P&M)Master of Valuation (Real Estate), LL.B. (Special), Certified Valuer

Practicing Valuer, Land & Building, Plant & MachineryDirector, RBSA Valuation Advisors LLP, Ahmedabad – 380 015

Phone: +91 79 4050 6080 Mobile: +9197243 43842W: www.rbsa.in E: amish.patel@rbsa.in, amish8971@yahoo.com

PRESENTED ATInstitute of Science & Technology for Advanced Studies and Research (ISTAR)

On 14th December, 2013, Saturday

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Valuation ???!!!

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Basic Definitions

Cost Price Value

Plant Machinery Equipment

General Purpose Machinery Special Purpose Machinery Custom Built Machinery

Replacement Cost Reproduction Cost

Scrap Value Salvage Value

Physical Life Economic Life

Depreciation Obsolescence

Gross Current Replacement Cost Depreciated Replacement Cost

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Procedure for the Valuation of Plant & Machinery

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As per the International Valuation Standards published by IVSC,

Market Value is the estimated amount for which an asset or a

liability* should exchange on the date of valuation 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.

* Will be applicable from 1st January, 2014

Definition

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As per IVS, Fair Value is the estimated price for the transfer of an

asset or liability between the identified knowledgeable and willing

parties that reflects the respective interests of those parties.*

* This definition does not apply to valuations for Financial Reporting…

As per IFRS 13 Fair Value Measurement, Fair Value is the price that

would be received to sell an asset or paid to transfer a liability in an

orderly transaction between market participants at the

measurement date.

Definition

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Basis of Valuation

A basis of value is a statement of the fundamental measurement assumptions of a valuation

Basis of Valuation fall into Three principal categories:

I.Market ValueII.Investment Value and Special ValueIII.Fair Value (these three basis are well described in IVS)IV.Valuation may require the use of different Bases of Value that are defined by statute, regulation, private contract or other document like various valuation measurement bases found in IFRS.

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As per the IVS, Investment Value is the value of an asset to the

owner or a prospective owner for individual or operational

objectives.

Special Value is an amount that reflects particular attributes of an

asset that are only of value to a special purchaser.

Definition

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Checklist for the Valuation of Plant & Machinery

ABC Analysis Process Flow Diagram Machinery Layout

Data Collection

Plant VisitPreparation of Inventory

•Macro & Micro Identification

Condition of Plant & Machinery

Inspect all licenses, permits and consents of regulatory authority

Verification with Fixed Asset Register (F.A.R.)

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Valuation of P & M can be done under following Scenarios

A. Value in existing use in-situ B. Value in existing use ex-situ

C. Value in alternative use ex-situ D. Value in alternative use in-situ

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Data Analysis

Appr

oach

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Cost Approach

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Assumptions are matters that are reasonable to accept as fact in the context of valuation assignment without specific investigation or verification. They are matters that, once stated, are to be accepted in understanding the valuation.

Special Assumption is an assumption that either assumes fact that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date.

Assumptions and Special Assumptions must be reasonable and relevant having regard to the purpose for which valuation is required.

Assumption & Special Assumption

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Conclude with opinion or advice.

Opinion or advice must be clear,

definite and unambiguous.

Report Writing means the information and opinion, which the client

is seeking to be put in to words in the best possible manner.

Important decisions depend on the information & advice given in a

report. Advice should not be obscurely expressed, it should be

skillfully worded to convey the meaning as intended.

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Report Writing

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Essentials of Reports

A Methodical

Series of complete paragraphs for giving facts to

be framed. Each paragraph must be independent

and logically follows the earlier paragraphs.

B Well Set Out

One can refer any particular part without

difficulty. Appropriate title, heading and sub

headings should be given to each paragraph

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Essentials of Reports

C Continuity

It should be read as complete narrative from start to finish. No obvious break between various parts. Report is an essay on technical point written in a simple language/words for the client. Schedules and Appendices should not be the part of the main report

DConcise &

Definite

Keep the report to the length required to impart the facts and opinions needed. It should contain definite facts, opinion and advice in clear and unambiguous manner and words.

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Other important points for Report Writing

ACertain dignity of tone to be preserved, so that facts and

opinions can be expressed convincingly;

B

Choice of words: Use simple words having precise meaning

rather than ornamental words. There should be no

exaggeration. Avoid meaningless words like ‘Pretty good, Quite

fair, Needless to say, In my opinion’ etc;

C Avoid Personal pronoun.

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Other important points for Report Writing

D Avoid Technical phrases;

E Use punctuation at correct places

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Supporting documents:

Schedules, Tables, Graphs, Maps, Plans, Layout, Photographs,

Expert’s report etc. are decisive in achieving effective

communication and must attach as annexures

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General structure of the Report

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Submit along with the Covering Letter.

Submission of Report

Preservation of Data

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A Plant & Machinery valuer should follow the above mention

procedure to execute an assignment of Valuation of Plant &

Machinery, but make appropriate modification in the procedure

depending on the type of industry, type of Plant & Machinery,

availability of data, the time period within which the assignment to

be executed, purpose of valuation, any specific instruction given by

the client.

Conclusion

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Thank You