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Valuation of Plant & Equipment under IVS

 
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amibrahim



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PostPosted: Wed Aug 03, 2011 9:46 am    Post subject: Valuation of Plant & Equipment under IVS Reply with quote

A. M Ibrahim. FIE (I), FIV

Kadayanallur – Tamil Nadu

 

Valuation of Plant & Equipment under IVS

 

(1) Definition of Plant & Equipment under International Valuation Standards (IVS) & International Financial Reporting Standards (IFRS):

 

IVS: Plant & Equipment. Tangible assets other than realty, that:

a): are held by an entity for use in the production or supply of goods or services, for rental by others, or for administrative purposes, and

b): are expected to be used over a period of time.

 

Categories of Plant & Equipment:

 

Plant

Machinery

Equipment

Assets that are in extricable

Combined with others and that may include special buildings, machinery & equipment.

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.

Other assets that are used to assist the operation of the enterprise or entity.

 

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 arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

 

IFRS: Property, Plant & Equipment (PPE). Tangible items that:

  1. are held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and
  2. are expected to be used during more than one (Accounting) period (IAS 16, para, 6)

Fair Value: The amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction. (IAS 16, para, 6)

Finance Lease: A lease that transfers substantially all the rights and rewards incidental to ownership of an asset. Title may or may not be eventually transferred (IAS 17, para, 4)

Operating Lease: A lease other than a finance lease (IAS 17, para, 4)

Valuation of Plant & Equipment can be carried out using any of the following approach:

  1. The Sales Comparison Approach
  2. The cost Approach
  3. The Income Capitalisation Approach.

For many purposes, including compliance with IFRSs, the most appropriate basis of value is Market Value. When undertaking a valuation of Plant & 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 valuation. These assumptions may include the state of the business in which the plant and equipment are currently utilised, or the extent to which individual items are aggregated with other assets. Examples of assumptions that may appropriate in different circumstances, or for different valuation purposes include:

  1. That the plant and equipment are valued as a whole, in-situ (In place) and as part of the business as a going concern,
  2. That the plant & equipment are valued in-situ but on the assumption that the business is closed, or
  3. That the plant & equipment are valued as individual items for removal from their current location.

For assets in the public sectors, the assumption  equivalent to a business continuing as a going concern is that the public sector assets will continue to be used  for the provision of the relevant public good or service.(1) (International Guidance Note 3). Valuation of Plant & Equipment (Revised 2005). This (GN 3) applies to the valuation of P & E assets of both Private & Public sectors entities.

The International Guidance Note 3, referred above focuses on the application of the approaches, principles and bases described in the standards to the valuation of plant & Equipment (P & E).

The following International Guidance Notes (GN) may also be relevant to the valuation of Plant & Equipment:

GN. 4. Valuation of Intangible assets.

GN. 5. Valuation of Personal Properties

GN. 6. Business Valuation

GN. 7. Consideration of Hazardous and Toxic Substances in Valuation.

GN. 8. The Cost Approach for Financial Reporting (DRC).

DRC VALUATION (Depreciated Replacement Cost Approach)

IAS 16, PPE (Property, Plant & Equipment), Paragraph 33, provide that in the absence of market based  evidence, an entity may need to estimate the fair value of a specialized asset using an income approach or a DRC Approach.

DRC is the current cost of reproduction or replacement of an asset less deduction for physical deterioration and all relevant forms of obsolescence and optimization. In determining DRC, optimization is applied for obsolescence and relevant surplus capacity.

 

(2) The DRC calculation while non-market will be based on criteria that envisages a transition between rational informed parties. (2) (Source: IVS GN No. 8 = Guidance Note 6th, Edition)

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amibrahim



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Posts: 360

PostPosted: Wed Aug 03, 2011 9:50 am    Post subject: Cost Inflation - Elect & Non Elect Equipment - India Reply with quote

(3 India) There are two methods to arrive at the Present Day Replacement Cost (PDRC) by applying escalation factor on the investment cost, using yearly indices of escalation for such equipment as published by Reserve Bank of India / Ministry of Commerce & Industry; O/o the Economic Advisor or by obtaining a quotation of a new machinery of similar type . The WPI, Index Number of whole sale Prices for Non-electrical machinery & Parts & Electrical machinery issued by the Office of the Economic Advisor is given below: (Base Year 1970 – 71 = 100)

 

Financial Year

Non electrical Machinery & parts

Electrical Machinery

Base Year

1971-72

105.2

103.4

1970-71 = 100

1972-73

113.3

106.4

 

1973-74

125.8

116.7

 

1974-75

155.2

158.1

 

1975-76

175.4

116.7

 

1976-77

176.0

158.1

 

1977-78

177.9

164.8

 

1978-79

189.2

172.9

 

1979-80

218.8

199.8

 

1980-81

246.0

208.8

 

1981-82

275.0

221.1

1981-82 = 100

1982-83

105.0

100.4

 

1983-84

109.3

103.9

 

1984-85

115.2

108.9

 

1985-86

124.8

117.6

 

1986-87

131.2

123.0

 

1987-88

134.9

129.4

 

1988-89

154.4

146.9

 

1989-90

173.0

158.8

 

1990-91

190.0

169.4

 

19991-92

220.0

195.5

 

1992-93

243.6

214.5

 

1993-94

246.8

228.2

1993-94 = 100

1994-95

107.6

113.8

 

1995-96

116.0

108.9

 

1996-97

126.4

108.5

 

1997-98

130.4

105

 

1998-99

134.2

103,6

 

1999-2000

136.5

102.2

 

2000-01

142.3

109.9

 

 

 

 




Last edited by amibrahim on Thu Aug 11, 2011 8:59 am; edited 1 time in total
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amibrahim



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PostPosted: Wed Aug 03, 2011 9:57 am    Post subject: Cost Inflation - continuation Reply with quote

 

Financial Year

Non electrical Machinery & parts

Electrical Machinery

Base Year

2001 - 02

152.1

113.4

 

2002 - 03

156.9

112.2

 

2003 - 04

162.6

112.4

 

2004 - 05

175.5

116.3

2004 – 05 = 100

2005 - 06

104.6

103.07

 

2006 - 07

107.81

111.18

 

2007 - 08

109.13

118.62

 

2008 - 09

111.42

123.63

 

2009 - 10

115.11

122.07

 

2010 -11

118.38

123.86

 

 

(3) The above data upto financial year 2004 – 05 is from Indian Valuer / April 2010 PP 414 (Author A. M. Ibrahim) & 2005 – 06 to 2010 – 11 from the O/o Economic Advisor, Ministry of Industry & Commerce  website. Please note that non-elect m/c weight : 1.02563 (2004 – 05), whereas 0.98909 in 1993 – 94 & weightage for Electrical  m/c: 2.34277 in 2004 -05 and for the financial year 1993 – 94 weight are not available. 

Disclaimer: AM Ibrahim shall not have any liability, duty or obligation for or relating to the content or information (Data) contained herein. In no event shall AM Ibrahim be liable for any special, incidental or consequential damages, arising out of the use of the data.

 



Last edited by amibrahim on Tue Jun 12, 2018 1:06 pm; edited 3 times in total
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amibrahim



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PostPosted: Wed Aug 03, 2011 10:03 am    Post subject: Valuation of PPE - as per GN 8 Addendum example Reply with quote

DRC VALUATION as per GN No. 8

 

DRC VALUATION for PPE.

 

 (4) In the case of Plant & Machinery, the DRC method of calculation is the same but excludes the land element (4 GN 8 Para 5.5.1.8)  I

 

 (Opinion of A. M. Ibrahim based on GN No. 8 ADDENDUM Example, )

 

Illustration of a) the methodology to determine a DRC valuation based on the Market value for Existing Use of the land (Column “A”) and the apportionment of the DRC conclusion for reporting purposes on the market value of the land – HABU (Column “B”)

 

  • Improvement: 10,000 sqm of Industrial Building

 

  • Extent of land: 10 Acres; Existing Land Use: Industrial & Market value of land per acre: Rupee 3, 00,000/=. Therefore, Market Value Rupee 30,00,000/=

 

 

  • The Land Use conversion to Residential is permissible with special permission from the Local Municipal Authority, which is legally & physically possible, financially feasible & maximally productive for the site (Highest and Best Use = HABU)

 

  • Market value of land can be assessed @ Rupee 4, 50, 00 per acre after conversion. Therefore, HABU Market value Rupee 45,00,000/=

 

 

 

Description

Column A

(Rupee)

Column B

 (Rupee)

Replacement Cost

50,00,000

50,00,000

Physical deterioration

12,50,000

12,50,000

Functional obsolescence

(Knowledge of business requirements to estimate functional/technical obsolescence)

10,00,000

10,00,000

Economic obsolescence

(Knowledge of future industrial requirements to estimate economic / external obsolescence)

5,00,000

20,00,000

extent of additional economic obsolescence

Depreciation plus all relevant form of  obsolescence & optimization

27,50,000

 

DRC of Improvements

22,50,000

7,50,000

 

Market Value for existing use of land

30,00,000

 

Market Value of land under HABU

 

45,00,000

D R C

52,50,000

52,50,000

Conclusion

D R C:                                                            52,50,000

Apportionment between

Buildings / Improvement Elements:                 7,50,000

Land Element                                                45,00,000

 

Note: Sufficient knowledge is required from valuer to determine the impact of economic / external obsolescence on the value of improvement under HABU is materially higher than the land value at its current use.

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amibrahim



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PostPosted: Wed Aug 03, 2011 10:10 am    Post subject: Valuation of PPE - as per GN 8 Addendum example (Continuatio Reply with quote

DRC VALUATION as per GN No. 8

DRC VALUATION II (Opinion of A. M. Ibrahim based on GN No. 8 Addendum Example)

 

Illustration of (a) the methodology to determine a DRC valuation based on the Market value for Existing Use of the land (Column “A”) and (b) the adopted Market Value based on the Market Value of Land – HABU (Column “B”)

 

  • Improvement: 10,000 sqm of Industrial Building
  • Extent of land: 10 Acres; Existing Land Use: Industrial & Market value of existing land per acre: Rupee 3, 00,000/=. Therefore, Market Value in its existing use Rupee 30,00,000/=

 

  • The Land Use conversion to Residential is permissible with special permission from the Local Municipal Authority, which is legally & physically possible, financially feasible & maximally productive for the site (Highest and Best Use = HABU)
  • Market value of land can be assessed @ Rupee 6,00,000 per acre after conversion. Therefore, HABU Market value Rupee 60,00,000/=

 

Description

Column A

 (Rupee)

Column B

 (Rupee)

Replacement Cost

50,00,000

50,00,000

Physical deterioration

12,50,000

12,50,000

Functional obsolescence

(Knowledge of business requirements to estimate functional/technical obsolescence)

10,00,000

10,00,000

Economic obsolescence

(Knowledge of future industrial requirements to estimate economic / external  obsolescence)

5,00,000

27,50,000

 

extent  of additional economic obsolescence

Depreciation plus all relevant form of  obsolescence & optimization

27,50,000

 

DRC of Improvements

22,50,000

0

Market Value for existing use of land

30,00,000

 

Market Value of land under HABU

 

60,00,000

D R C

52,50,000

 

Conclusion

Market Value:                                                                                            60,00,000

Apportionment between

Buildings / Improvement Elements:                                                                            0

Land Elements                                                60,00,000

 

GN 8 can be read in conjunction with IVS 2 – Valuation Bases other than Market Value and International Valuation Application (IVA – 1) Valuation for Financial Reporting. IVA – 1 sets out the valuation and valuation reporting requirements under the various IFRSs. A clear distinction should be made if values for different purposes are reported in the same document. Different valuation assumptions may be appropriate under different IFRSs and therefore it is important for the valuer to be familiar with basic requirements of the relevant standards and discuss the appropriate assumptions with the client before proceeding.

A. M. Ibrahim

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amibrahim



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PostPosted: Sat Jun 09, 2018 6:24 pm    Post subject: Plant & Machinery Valuation Reply with quote

Reinstatement Value (Say “RV”):

Historical Cost + Foundation x Incremental Ratio. (From RBI wholesale price index).

Computed Market Value:       RV - Depreciation

This shall be read in conjunction with page 2 & 3 Supra and the Disclaimer in Page 3. i.e AM Ibrahim shall not have any liability, duty or obligation for or relating to the content or information (Data) contained herein. In no event shall AM Ibrahim be liable for any special, incidental or consequential damages, arising out of the use of the data.

 

 




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PostPosted: Sat Jun 09, 2018 6:34 pm    Post subject: Marshall & Swift Index Reply with quote

 

Source: Chemical Engineering www.che.com September 2009

 

Provided by A.M. Ibrahim




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PostPosted: Wed Jun 13, 2018 11:12 am    Post subject: RBI INDEX and US Machinery Indexes Reply with quote

 

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