Equipment valuation is frequently necessary for the evaluation of corporate assets. The Subject Company may have significant equipment assets—manufacturing machines, cars, tools, and other assets needed in the company’s everyday operations—depending on the sort of business.
There are a variety of reasons why a firm would want an equipment valuation. A value may be needed for insurance purposes, as well as for a purchase or sale. Property tax assessments are based on current values; thus, when equipment matures, a firm may request periodic equipment appraisals; depreciation may help the company lower its tax assessment.
Steps In Equipment Valuation:
Appraisers use the following processes to assess the worth of equipment, regardless of the purpose for the appraisal:
- Identify the equipment to be valued and gather essential information for each item. Such as the purchase date, purchase price, and the equipment’s carrying value on the balance sheet, as well as incurred depreciation.
- Use the most acceptable approach or procedures for valuing your property. The sales comparison technique (similar to the market approach) and the cost approach are two approaches for evaluating equipment.
Using the sales comparison technique, the appraiser looks at dealer listings and auction prices and talks to vendors to determine the current going rate for similar equipment to determine the likely selling price of the equipment in its current condition. The apparent disadvantage of this technique is that it needs a somewhat active market to make comparisons. The market for equipment like tractor-trailer rigs is likely to be busy enough to establish value, but specialist gear may require a different strategy.
Cost Approach:
Another way of evaluating equipment is the cost approach. When utilizing the cost technique to establish the fair market value of equipment, the appraiser evaluates the current new replacement cost. Then makes modifications to account for the equipment’s physical, functional, and economic obsolescence.
Because it is impossible to assign cash flows to specific pieces of equipment, the income method is rarely employed in equipment valuation.
- To determine the value, use your judgement. The sales comparison technique will offer the most accurate value if the market for the kind of equipment being evaluated is sufficiently active. ASC 820 gives stated prices in active markets for identical assets the most weight; thus, if there is an active market for a piece of equipment, the value calculated using the sales comparison technique is the default.
The cost technique should be used if the market is not active enough to offer a clear value. The value generated from the cost technique may be compared to the limited market data available. The value can be established by averaging the values obtained from the two types of equipment appraisals. Or using some other appropriate weighting method.
Because the appraiser must consider additional expenditures that a buyer will spend in acquiring the equipment, judgement is a key component in arriving at the final value: For a potential buyer, the expenses of disassembly, transportation, and re-assembly of big pieces of stationary equipment will impact value. Pricing reflects these expenses in an active market. When the market isn’t as busy as it should be, these additional expenses must be factored into the equipment valuation.
Do you need help in determining the worth of your equipment?
Spring Galaxy has helped businesses in a variety of industries with accurate asset and business valuations. For a wide range of enterprises and situations, we have significant expertise applying all valuation techniques. Our valuation experts have worked with some of the world’s top corporations.
Don’t hesitate to get in touch with us to learn more about how we can help you in your business.