Key Principles from International Valuation Standards for Plant & Equipment
Valuing plant and equipment assets requires a comprehensive understanding of their unique characteristics and the factors influencing their worth. The International Valuation Standards (IVS) provide valuable guidance, specifically through IVS 300 Plant and Equipment. In this blog post, we will delve into the key insights from this standard, highlighting the important considerations and approaches involved in valuing plant and equipment assets.
Understanding Plant and Equipment: Plant and equipment assets are tangible assets used in various industries, such as manufacturing, production, rental, and administrative functions. They are expected to be utilised over a period of time, serving specific purposes within an entity. Valuing these assets requires a holistic approach considering their technical specifications, remaining useful life, condition, and potential obsolescence.
Factors to Consider: Several factors must be considered to ensure an accurate assessment when valuing plant and equipment. These factors can be categorised into three main areas:
Asset-related factors: These include the asset’s technical specifications, remaining useful life, condition, any functional or physical obsolescence, and costs associated with decommissioning and removal if the asset is not valued in its current location. For assets used for rental purposes, lease renewal options and potential complementary assets should also be considered.
Environment-related factors: The location of the asset in relation to raw material sources and market demand plays a crucial role. Environmental legislation, radioactive substances or toxic waste, and licenses required for operation in specific countries are also essential considerations.
Economic-related factors: Assessing the actual or potential profitability of the asset, considering both macro- and micro-economic aspects, is crucial. Additionally, it is essential to evaluate the asset’s highest and best use and its potential for a more valuable use than its current purpose.
Valuation Approaches: IVS 300 acknowledges that different valuation approaches may be applicable depending on the nature of the plant and equipment assets and the available data. The three primary valuation approaches discussed in the IVS are:
Market Approach: This approach suits homogenous assets like motor vehicles or mobile-plant. By analysing recent sales data of similar assets, valuers can derive reliable market-based indicators of value.
Income Approach: The income approach is applicable where cash flows can be identified for the asset or a group of complementary assets. However, it is typically difficult to separate cash flows attributable to the plant and equipment without including cashflows associated with intangible assets like branding, for example.
Cost Approach: The cost approach is commonly used for individual specialised assets. It involves estimating the cost of replacing the subject asset and then making appropriate adjustments for physical, functional, technological, and economic obsolescence. Historical cost information may be utilised, but adjustments for timing, basis of value, specific costs included, and non-market components are necessary.
Bases of Value: Selecting the appropriate basis of value is crucial in plant and equipment valuations. Factors such as whether the asset is valued under an “in use” premise, orderly liquidation, or forced liquidation can significantly impact the value. Forced liquidation conditions, such as the need to remove assets quickly due to lease termination, require careful consideration.
Financing Arrangements: Financing arrangements, including leases and loans, can affect the valuation of plant and equipment assets. Assets subject to encumbrances may need separate reporting, and the stability of financing should be considered. Furthermore, the presence of operating leases should be acknowledged, as it can impact the value of owned assets.
How to Value Plant and Equipment According to IVS 300 Best Practices
Valuing plant and equipment assets involves a comprehensive assessment of their characteristics, environmental factors, and economic potential. By following the guidelines outlined in IVS 300, valuers can ensure a thorough and accurate valuation process. Considering asset-related, environment-related, and economic-related factors, along with selecting appropriate valuation approaches and bases of value, leads to well-informed and reliable valuations for plant and equipment assets across various purposes, from financial reporting to litigation.
