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PM - G - 1 - Valuation of Plant & Machinery
PM - G - 1 - Valuation of Plant & Machinery
Valuation / Appraisal Value is used to describe worth. In the appraisal profession, the word value is never
The act or process of developing an opinion of value or the amount representing an opinion of used alone; it always appears with a modifier as in market value, fair value, insurable
value or estimation of value. value, and so on.
Basis of Value Value is defined as “…an economic concept referring to the monetary relationship
between goods and services available for purchase and those who buy and sell them.”
A statement of the fundamental measurement assumptions of a valuation or the specific basis
(bases) upon which a valuation assignment has been completed.
It is an estimation;
It is critical that the basis (or bases) of value be appropriate to the terms and purpose of the
May be higher, lower, or equal to the cost or price;
valuation assignment, as a basis of value may influence or dictate a valuer’s selection of
methods, inputs and assumptions, and the ultimate opinion of value. IVS defined bases of value The modifiers provide a specific definition of value
as Market Value, Fair Value, Equitable Value, Investment Value, Synergistic Value, Liquidation Market Value & Fair Value
Value, etc.
A. Market Value
Purpose of Valuation The estimated amount for which an asset or liability should exchange on the valuation
Valuation is required for a variety of purposes, including; 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
Allocation of purchase price; without compulsion.
Financing & bankruptcy; B. Fair Value
Dissolutions of Marriage, Partnerships, and corporations; Fair Value is the price that would be received to sell an asset or paid to transfer a
Insurance & leasing;
liability in an orderly transaction between market participants at the measurement
date.
Management considerations;
Approaches to Value
Mergers and acquisitions; 1. Income Approach
Partnership formation and dissolution & Transfer of ownership; A valuation approach that provides an indication of value by converting future cash flows
For various types of taxation and tax planning; and utility rate making. to a single current capital value.
I. Cost A valuation approach which provides an indication of value by comparing the subject
asset with identical or similar assets for which price information is available.
Actual expenditure to create/manufacture or Amount required to reproducing, building,
Approaches to Value
or assembling an improvement.
3. Cost Approach
In relation to production, not exchange; A valuation approach based on the economic principle that a buyer will pay no more for
Either an accomplished fact or a current estimate; an asset than the cost to obtain an asset of equal utility, whether by purchase or by
construction.
May be higher, lower, or equal to the asset’s value
II. Price Valuation Method
The amount a particular purchaser agrees to pay and a particular seller agrees to accept A specific technique or model used to estimate value. All valuation methods fall within a
under the circumstances surrounding their transaction. valuation approach.
Type of Market: Buyers Market, Sellers Market or Stable Market If offered price is higher than highest price determined by the buyer or it is lower than lowest
price determined by seller, the transaction or sale of product does not take place. But in all
Demand and Supply Curve other cases transaction takes place after bargaining for the price.
1. Demand Buyers curve A-B-C shows number of buyers at different price levels. ‘A’ price is offered by
minimum number of buyers in the market. Transaction does not take place if the said price is an
Law of Demand:
unviable price. At ‘B’ price, there are maximum numbers of buyers who are willing to buy.
The functional relationship between the price of commodity and its quantity demanded; Transaction may take place or may not take place. At ‘C’ price again there are minimum
numbers of buyers because said price is considered very high by buyers
It states that the demand for a commodity tends to vary inversely with its price;
Remaining unchanged: Income of the people, Taste, preference and habits of consumers, Prices of Sellers curve d-e-f indicates a number of sellers at different price levels. At ‘D’ price there are
related goods, no expectation of future change in price of the commodity, commodity in question is hardly any sellers able to sale their product because buyers will consider said price too high. At
not consumed for its prestige value. ‘E’ price there are maximum numbers of sellers. Transaction may or may not take place at this
2. Supply price. Again at ‘F’ price there are minimum sellers because said price is considered too low by
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Aim for Education that Fits Every Facet of Your Career G – Valuation of Plant & Machinery – Marks: 6
sellers. Individual, or a collection or a fleet of machines that may be employed, installed or
Thus most of the transactions take place in the market in the price range of ‘F’ and ‘C’. Price ‘G’ remotely operated in connection with a user’s industrial or commercial processes, trade
can be said to be ideal price as it is average price of highest price that would be offered by a or business sector. Equipment
willing buyer and lowest price that would be acceptable to any willing seller. It is said that in Ancillary assets that are used to assists the function of the enterprise / entity.
perfect competition market, transaction takes place at ideal price ‘G’.
As per VPGA 5: Valuation of Plant & Equipment
In real estate market, there is no such common market place as we have for commodity market.
However, these concepts do operate in real estate market. There is a range of prices for any An all encompassing term for other assets such as sundry machinery, tooling, fixtures,
specific property depending upon individual buyer’s needs, their paying capacity and furniture and furnishings, trade fixtures and fittings, vehicles and loose tools that are
estimation of cost of said property by each individual buyer. Demand and supply factor and
used to assist the operation of the enterprise or entity.
factor for availability of substitute property in the market operate in this market with equal
force. 4. Value-in-Use
In order to arrive at fair price of a commodity in the market, buyer as well as seller considers As per IVS 2017
various characteristics of the product viz. it use, its physical benefit, service life, etc. Similarly for
real estate viz. land or land with building/s; buyer and seller consider various characteristics of The present value of the future cash flows expected to be derived from an asset or cash-
properties viz. its usage, its service life (for building) its resale value, benefit of infrastructure generating unit.
amenity and civic amenities etc.
Value-in-use is the worth of a plant and machinery to a specific user or set of users. As
value-in-use is related to specific user’s need, it is often referred to as subjective value
Definition or non-market based.
1. Plant & Machinery
Value-in-use in the realm of PME may arise as a replacement concept under situation of
It is an installations and support facilities for manufacturing in an industry designed to specialty e.g., a company hopes to revive its position by switching over to a technique
perform a specific pre-determined function, whether used singly or in combination with that requires a purchase of typical equipment which is generally not available in the
other items to enhance the productivity or operating facility; and includes all devices in investor’s market. In such situation the company may bargain to offer much above the
fixed or movable form, other than real estate, deployed in manufacturing, processing or market price to improve its situation. Such subjective price shall measure the value-in-
assembling of products from the stage of raw materials to finished goods. use of the particular equipment. The additional price paid may be considered
intangible.
As per IVSC:
5. Value-in-Exchange
A class of tangible asset that is:
Value-in-exchange is the price that would tend to prevail in a free, open and competitive
A Held by an entity for use in the production or supply of goods or services, for rental
market on the basis of an equilibrium set by the forces of supply and demand. This may
by others or for administrative purposes &
be true for an item to be moved from one place to another or an entire plant in place.
B Expected to be used over a period of time.
This is sometimes referred to as objective value because it is based on observable
2. Plant
economic forces. A common form of value-in-exchange is market value and it is
The assemblages of assets that may be include specialized non-permanent buildings, market based.
machinery, and equipment.
6. Value to Buyer
As per VPGA 5: Valuation of Plant & Equipment
It is a capitalized value of additional income generated due to acquisition of any
Assets that are combined with others and that may include items that form part of additional industrial plant.
industrial infrastructure, utilities, building services installations, specialized buildings,
7. Value to Seller
and machinery and equipment forming a dedicated assemblage.
It is a deprival value i.e. capitalized value of income foregone.
3. Machinery
8. Value to Occupier
A machine is an apparatus using or applying mechanical power, having several parts
each with a definite function, and together performing certain kinds of work. It is a capitalized value of income generated by the asset which held under right to use.
As per VPGA 5: Valuation of Plant & Equipment 9. Value in Existing Use In-Situ
The price that could be obtained in these circumstances will depend upon the nature Utility Degree of render a services
of the pressure on the seller and the reasons why proper marketing cannot be
Marketability Potential of being or fit to be sale / Degree of demand of identical
undertaken.
or similar asset
16. Highest and Best Use
Transferability Prospect of changes of Ownership / Rights / Possession, etc.
The use of an asset that maximizes its potential and that is physically possible, legally
permissible and financially feasible. Scarcity Demand & supply and alternate uses to which the goods or service