valuation of plant & machinery - iv page 1 of 62 · valuation of plant & machinery - iv:...

Valuation of Plant & Machinery - IV : of 62

Contents of Course

Contents

1. Overview of Indian Accounting Standard (Ind AS 16 – PPE)

2. Study of guidance notes and accounting practice for revaluation of fixed assets

3. Valuation of specialized machinery or property

4. Elementary study of docks and harbors

5. Salient features of Land Acquisition Act, 1894

6. Study of International Valuation Standards published by International Valuation

Standards Committee

7. Manual of Valuation/Guidance notes in relation to valuation of plant and

machinery published by Royal Institution of Chartered Surveyors

8. Study of Case laws - affecting valuation of plant and machinery

9. Valuer’s role, functions and responsibilities & Code of ethics for valuer


Overview of Indian Accounting Standard (Ind AS 16 – PPE)

Ind AS

16 - PPE

Objective:

1. The objective of this standard is to prescribe the accounting treatment

for Property, Plant and Equipment (PPE), so that users of the financial

statements can differentiate information about an entity’s investment

in its property, plant and equipment and the changes in such investment.

2. The principal issues in accounting for property, plant and equipment are

the recognition of the assets,

3. The determination of their carrying amounts and the depreciation

charges and impairment losses to be recognized in relation to them.



Ind AS

16 - PPE

This Standard does not apply to:

1. PPE classified as held for sale in accordance with Ind AS 105, Non-current

Assets Held for Sale and Discontinued Operations,

2. Biological assets related to agricultural activity other than bearer plants. This

Standard applies to bearer plants but it does not apply to the produce on bearer

plants (Ind AS 41),

3. The recognition and measurement of exploration and evaluation assets (Ind

AS 104),

4. Mineral rights and mineral reserves such as oil, natural gas and similar non-

regenerative resources.



Definition

Property, Plant and Equipment are class of tangible items that:

a) Held for use in the production or supply of goods or services,

for rental to others, or for administrative purposes; and

b) Expected to be used during more than one period.

Carrying Amount is the amount at which an asset is recognized after

deducting any accumulated depreciation and accumulated impairment

losses.

Cost is the amount of cash or cash equivalents paid or the fair value of

the other consideration given to acquire an asset at the time of its

acquisition or construction.



Definition

Depreciation is the systematic allocation of the depreciable amount of an

asset over its useful life.

Depreciable Amount is the cost of an asset, or other amount substituted for

cost, less its residual value.

Carrying Amount is the amount at which an asset is recognized after

deducting any accumulated depreciation and accumulated impairment losses.

Entity - Specific Value is the present value of the cash flows an entity

expects to arise from the continuing use of an asset and from its disposal at

the end of its useful life or expects to incur when settling a liability.



Definition

Fair Value is the price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market

participants at the measurement date.

Impairment Loss is the amount by which the carrying amount of an

asset exceeds its recoverable amount.

Recoverable Amount is the higher of an asset’s fair value less costs to

sell and its value in use.



Definition

Residual Value of an asset is the estimated amount that an entity

would currently obtain from disposal of the asset, after deducting the

estimated costs of disposal, if the asset were already of the age and in

the condition expected at the end of its useful life.

Useful life is:

a) The period over which an asset is expected to be available for

use by an entity; or

b) The number of production or similar units expected to be obtained from the asset by an entity.



Accounting

Treatment



Recognition


Overview of Indian Accounting Standard (Ind AS 16 – PPE) : Elements of Cost

Measurement

at

Recognition



Measurement

at

Recognition



Measurement

at

Recognition

1. The cost of an item of PPE is the cash price equivalent at the

recognition date.

2. The difference between the cash price equivalent and the total

payment is recognized as interest over the period of credit unless

such interest is capitalized in accordance with Ind AS 23

3. The cost of exchanged non-monetary assets of PPE is measured at

Fair Value.

4. The cost of an item of PPE held by a lessee under a finance lease is

determined in accordance with Ind AS 17.



Measurement

after

Recognition



Depreciation

Each part of an item of property, plant and equipment with a cost that

is significant in relation to the total cost of the item shall be

depreciated separately, means of Componentization Approach.

For example, it may be appropriate to depreciate separately the

airframe and engines of an aircraft.

The depreciation charge for each period shall be recognized in profit

or loss unless it is included in the carrying amount of another asset.



Basis of

Componenti-

zation



Depreciable

Amount &

Depreciation

Period

Depreciable Amount of an asset shall be allocated on a systematic

basis over its useful life,

Residual Value and the useful life of an asset shall be reviewed at least

at each financial year-end,

Depreciation is recognized even if the fair value of the asset exceeds its

carrying amount, as long as the asset’s residual value does not exceed

its carrying amount,

Depreciable Amount of an asset is determined after deducting its

residual value,



Depreciable

Amount &

Depreciation

Period

The residual value of an asset may increase to an amount equal to or

greater than the asset’s carrying amount,

Depreciation of an asset begins when it is available for use,

Close down when held for sale under Ind AS 105 or de-recognition, not

while idle

Land & Building are accounted separately



Useful Life



Residual

Value



Depreciation

Method

1. Depreciation method used shall reflect the pattern in which the asset’s

future economic benefits are expected to be consumed by the entity,

2. Depreciation method applied to an asset shall be reviewed at least at each

financial year-end,

3. Depreciation methods include the straight-line method, the diminishing

balance method and the units of production method,

4. A depreciation method that is based on revenue that is generated by an

activity that includes the use of an asset is not appropriate.



Example of Componentization - Depreciation without componentization



Estimation of Depreciation with componentization



De -

recognization

1. on disposal; or

2. when no future economic benefits are expected from its use or

disposal.


Elementary Study of Harbors & Docks

Harbors &

Docks

Harbor: The sheltered (protected) area of the sea in which vessels could be

launched, built or repaired, or could seek refuge during storm time and provide

loading and unloading facilities of cargo and passengers.

Dock: The enclosed area provided for berthing ships to keep them afloat at a

uniform level to facilitate loading and unloading.


Elementary Study of Docks & Harbors

Harbor &

Docks

Classification of Harbor:

Natural Harbor, Semi Natural Harbor, Artificial Harbor, Harbor of Refuge,

Commercial Harbor, Fishery Harbor, Military Harbor or Naval Base Harbor

Classification of Dock:

1. Wet Docks: used for berthing of ships or vessels to facilitate the

loading and unloading of passengers and cargo

2. Dry Docks: used for built & repairs of ships or vessels



Dry

Docks



Wet

Docks



Horbor



Terms

Berth: The space where cargo is unloaded or loaded into a vessel

Apron: The open space left immediately in front of a berth of a ship

Approach Channel: The dredged clear channel through which ships

proceed from the open sea to the harbor basin

Breakwaters: The protective barriers constructed to enclose harbors and keep the harbor waters undisturbed by the effect of heavy and strong seas

Basin: The water area formed in a port on the sea coast protected by an out laying breakwater

Jetty: A piled solid or open type structure built out from the shore to deep

water to berth vessels along side



Terms

Navigational Aids: the devices such as lights, signals used to guide and

warn safe, efficient, economic and comfortable travel of ships in rivers,

oceans and harbors

Piers: The structures constructed perpendicular or oblique to the shore of

the sea or river to provide bathing facilities

Quays: The platforms constructed parallel to the shore to allow ships to

berth along sides these platforms for loading and unloading purposes

Wharves: The landing platforms or places in the form of walls built near

the shore for vessels to berth


Valuation of Specialized Machinery or Property

Jigs &

Fixtures

Jigs & Fixtures are production tools used to accurately manufacture

duplicate and interchangeable parts. Jigs and fixtures are specially

designed so that large numbers of components can be machined or

assembled identically, and to ensure interchangeability of components.

Jigs: It is a work holding device that holds, supports and locates the work

piece and guides the cutting tool for a specific operation.

Fixtures: It is a work holding device that holds, supports and locates the

work piece for a specific operation but does not guide the cutting tool.



Press

Tools,

Mould & Die

Press Tools are commonly used in hydraulic, pneumatic, and mechanical

presses to produce components at high volumes & are categorized such

as blanking, piercing, bending, forming, forging, trimming etc.

Mould or Mold is a hollowed-out block that is filled with a liquid like plastic, glass, metal, or ceramic raw materials. The liquid hardens or sets

inside the mold & adopting its shape.

Die is a specialized tool used in manufacturing industries to cut, shape

and form a wide variety of products and components.

Pattern is made of wood or metal, is a replica of the final product and is

used for preparing mould cavity.



Cost of

Production

of

Specialized

Machinery

(SM)

Cost of production shall consist of Material Consumed, Direct Wages and

Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research

and Development Cost, Packing cost, Administrative Overheads relating to

production.

To arrive at cost of production of goods dispatched for captive consumption,

adjustment for Stock of work-in-Process, finished goods, recoveries for

sales of scrap, wastage etc. shall be made.



Cost of Material Consumed shall consist of cost of material, duties and taxes, freight

inwards, insurance, and other expenditure directly attributable to procurement. Trade

discount, rebates and other similar items will be deducted for determining the cost of

materials. Cenvat credit, credit for countervailing customs duty, Sales Tax set off, VAT,

duty draw back and other similar duties subsequently recovered/recoverable by the

enterprise shall also be deducted.

Direct Wages and Salaries shall include overtime, leave encashment and incentive

payments made to employees directly engaged in the manufacturing activities.



Direct Expenses are cost of utilities such as fuel, power, water, steam & other,

technical assistance/knowhow fees, job charges, charges for a particular product

designing etc.

Works Overheads Expenses are consumable stores and spares, repair and

maintenance of plant and machinery, drawing and designing department cost, service

department cost such as tool room, engineering & maintenance, etc.

Quality Control Cost is the expenses incurred relating to quality control activities for

adhering to quality standard.



Research and Development Cost incurred for development and improvement of the

process or the existing product shall be included in the cost of production.

Administrative Overheads need to be analyzed in relation to production activities and

other activities. Administrative overheads in relation to production activities shall be

included in the cost of production.

Refer: Cost Accounting Standard on Cost of Production for Captive Consumption (CAS – 4)



Valuation

of

Specialized

Machinery

(SM)


RICS Valuation – Professional Standards

Plant & Equipment usually Included in Valuations of the Property Interest

This will include;

1. items associated with the provision of services (gas, electricity, water,

drainage, fire protection and security) to the property

2. equipment for space heating, hot water and air conditioning not integral to any

process and

3. structures and fixtures that are not an integral part of process equipment, for

instance, chimneys, plant housings and railway tracks



Plant & Equipment Separately Valued

Plant and equipment valued separately from the property interest can be divided into broad

categories of Fixed Asset.

Examples of ‘fixed assets’ include;

process and production plant and machinery

fixtures and fittings

office equipment, including computers

office furniture

vehicles and transport infrastructure and

mobile plant




Borderline items that may not always be regarded as ‘fixed assets’ include:

product-dedicated items (e.g. moulds, jigs and dies)

spare parts

operating software, licences and consents

stocks (inventory)

materials-in-trade

stores and

work in progress.




Examples of intangible assets include;

commercial and administration records, drawings, designs and technical data

licences and consents

software

licences, operating systems, goodwill, know how, patents, trademarks, brand names and

other intellectual property.

Although intangible assets fall outside the definition of plant and equipment, the two asset classes often

operate in concert, which may have an impact on their discrete and or composite values. In such cases the valuer should establish appropriate assumptions in this regard (preferably at the engagement stage) and prior to reporting a valuation. Valuers should also be aware of the fact that the definition of intangible

assets may vary relative to statute, local practices and accounting convention.



Encumbered Assets

It is common for plant and equipment to be subject to lease or financing arrangements. Such

asset backed or based arrangements vary from a simple hire/lease purchase agreement through

to complex, cross-border financing agreements.

Valuers will need to establish the reporting basis and any special assumptions at the time of

engagement, or agree and document the assumptions as the engagement progresses.

National and International Financial Reporting Standards and lending regulators’ rules regarding

the treatment of leased/financed assets are subject to regular review and change.

Valuers should clearly set out the basis and extent of their proposed work relative to such rules and

standards, to ensure that the resulting valuation advice is appropriate to the particular reporting

circumstances.



Material Considerations

When valuing plant and equipment on the basis of market value, it requires an indication of whether the valuation

assumes that the assets will remain in their working place, or are valued for removal (as a whole or as individual items). Further assumptions may also be required, depending on the purpose of the valuation.

Examples include:

how the property is to be offered for sale (e.g. as a whole or as individual items)

the assumed method of sale

environmental issues

any restriction on sale method (e.g. lease conditions prevent sale by auction)

whether the purchaser or vendor is to bear the costs of decommissioning or removal an

whether allowance is made for any cost of reinstatement following removal and, if so,

who will bear the cost.



Material Considerations

The valuer first needs to establish matters such as the type, specification, capacity and

purpose of the items, then consider matters such as age, efficiency, condition, functional

and economic obsolescence, and estimated total and remaining useful economic working

life.

The extent of the investigations, and any assumptions reflected in the valuation, will

have to be agreed with the client at the time of engagement and included in the later

report.



Regulatory Measures

The valuer must investigate the nature of the plant and activity, as well as the purpose of

the valuation and its extent, in determining how far the regulatory measure can, or

might, affect the valuation.

Where there is doubt about compliance with any regulations affecting the value of plant

and equipment, the valuer should discuss the matter with the client and any related

advisers and refer to the outcome in the report.

This should be done either by agreeing to make assumptions in the report, or to

compliance undertakings as advised by the client and any related advisers.


IVS 300: Plant and Equipment

Overview

Items of plant and equipment (sometimes referred to as personal property) are

tangible assets that 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 that

are expected to be used over a period of time.

Intangible assets fall outside the classification of plant and equipment assets.

However, an intangible asset may have an impact on the value of plant and

equipment assets. For example, the value of patterns and dies is often

inextricably linked to associated intellectual property rights.



Overview

Operating software, technical data, production records and patents are further

examples of intangible assets that can have an impact on the value of plant and

equipment assets.

Valuations of plant and equipment are often required for different purposes

including secured lending, sales of real property, taxation, litigation, insolvency

proceedings and financial reporting.

Consideration of a range of factors;

1. Asset related

2. Environment related

3. Economic related



Overview

Assumptions that may be appropriate in different circumstances include;

1. that the plant and equipment assets are valued as a whole, in place and as part of

the business, considered as a going concern,

2. that the plant and equipment assets are valued as a whole, in place but on the

assumption that the business is closed, and

3. that the plant and equipment assets are valued as individual items for removal

from their current location.



Basis of Value

Using the appropriate basis of value and associated premise of value is

particularly critical in the valuation of plant and equipment because differences

in value can be pronounced depending on whether an item of plant and equipment

is valued under an ‘in use’ premise, orderly liquidation, or forced liquidation.

The value of highly specialized equipment is particularly sensitive to different

premises of value.



Valuation Approaches

Market Approach

Income Approach

Cost Approach



Financing Arrangements

The value of an asset is independent of how it is financed. However, in some

circumstances the way items of plant and equipment are financed and the stability

of that financing may need to be considered in valuation.

An item of plant and equipment may be subject to a financing arrangement.

Accordingly, the asset cannot be sold without the lender or lessor being paid any

balance outstanding under the financing arrangement


Code of Ethical Principles for Professional Valuers

Integrity:

The principle of integrity imposes an obligation on all professional valuers to be straightforward

and honest in all professional and business relationships. Integrity also implies fair dealing and

truthfulness.

contains statements or information that are materially false or misleading or that are

made recklessly; or

omits or obscures information required to be included where such omission or obscurity

would be misleading



Objectivity:

The principle of objectivity imposes a responsibility on the professional valuer not to

compromise their professional or business judgment because of bias, conflict of interest or the

undue influence of others.



Competence:

1. to act in accordance with applicable technical and professional standards when

providing professional services;

2. to maintain professional knowledge and skill at the level required to ensure that clients

or employers receive competent professional service

The maintenance of professional competence requires a continuing awareness and an

understanding of relevant technical, professional and business developments. Continuing

professional development enables a professional valuer to develop and maintain the capabilities

to perform competently within the professional environment



Confidentiality:

1. disclosing outside the firm or employing organization confidential information acquired

as result of professional and business relationships without proper and specific

authority or unless there is a legal or professional right or duty to disclose; and

2. using confidential information acquired as a result of professional and business

relationships to their personal advantage or the advantage of third parties.



Professional Behavior:

The principle of professional behavior imposes a responsibility on all professional

valuers to act carefully in the service of their clients and to ensure that the service

provided is in accordance with all legal, technical and professional standards that

are applicable to either the subject of the valuation, the purpose of the valuation or

both.

Professional behavior includes acceptance of a responsibility to act in the public

interest

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