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:
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:
- are held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and
- 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:
- The Sales Comparison Approach
- The cost Approach
- 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:
- That the plant and equipment are valued as a whole, in-situ (In place) and as part of the business as a going concern,
- That the plant & equipment are valued in-situ but on the assumption that the business is closed, or
- 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)