Check List for Valuation of Plant and Machinery, documents to be studied prior to Plant Visit/Inspection, ABC analysis.
Process of Valuation
The valuers expected to decide the information to be collected from the client based on the purpose of valuation, scope of valuation, types of industry, types of plant and machinery and any specific instruction from the client.
The general check list containing the information to be collected from the client to be submitted to the client well in advance by the valuer prior to his plant visit, so client can get the information ready at the time of valuer’s visit to the plant.
Checklist for the valuation of plant & machinery.
a) Name of the ownership of assets.
b) History of the company.
c) Purpose for which assets are utilized.
d) Particulars of each machine-like specifications of machines, name and address of manufacturers/ suppliers, purchase price with break up, ex-work’s price, packing and forwarding, excise duty, sales tax, handling, transit insurance, foundation cost etc., new or second-hand purchase details of purchase order etc.
e) Daily shifts working hours, number of days of working in a year.
f) Year wise amount spent on repairs & maintenance to plant & machinery.
g) Maintenance schedule for plant & machinery.
h) Electrical layout giving details of HT/LT distribution and sub distribution.
i) Along with the type of cable, size of cable and length of cable.
j) Sanctioned load, connected load in KW/HP.
k) Installed capacity of plant and actual production in last 5 years in quantity as well as in rupees.
l) Fixed Asset Register, details of last physical verification, discrepancy noticed of any.
m) Copies of annual reports last five years.
n) Details of plant and machinery sent for repair outside the factory premises.
o) List of imported machinery with year of purchase, purchase price in foreign currency of the country of origin.
p) Valuer must ask client to furnish the list of Plant and Machinery to be valued along with original cost with breakup and the year of purchase and the manufacturing process flow diagram prior to his plant visit.
q) Valuer has to carry out ABC Analysis of Plant & Machinery to be valued and identify the important Plant & Machinery (value-wise), so he can concentrate more on those Plant & Machinery and try to his level best to get all the relevant information from the plant itself as well as from the market of those machinery. The experience says that about 20% to 30% of the total numbers of Plant and Machinery will cover almost 70% to 80% of total value of Plant & Machinery in the unit.
The items to be treated as Plant and Machinery
• Air-conditioning plant with ducting
• Electrical installation for PME
• Water and sewage installation
• Chimney to boiler
• Brick or concrete structures, foundation and tanks associated with plant
• Effluent treatment plant
• Alarm installation
The items to be treated as Land and Buildings
• Wells, tube wells, underground tanks, overhead tanks, roads etc.
Physical Verification (Survey and Inspection)
Note down the condition of individual machine as under and give the rating of physical and working conditions of Plant and Machinery base on Valuer experience, by getting the information from the operator, technical supervisor and maintenance in-charge of the factory:
a) N- Brand New
b) E- Excellent/ just like new
c) V-Very good
d) G-Good
e) F-Fair
f) P-Poor
•Inspect all the licenses, permits and consents required to run the factory and its possibility of renewal for further period.
Inspect the report issued by the authorities like factory inspector, electrical inspector, excise inspector and any other statutory requirement to run the factory.
• After collecting the inventory of Plant & Machinery, it should be verified with the Fixed Asset Register of the company, Valuer may find the following discrepancies:
a) Plant and Machinery physically existing on site, but account record not available; for example, a Welding machine of the contractor is lying in the factory premises and
b) Plant & Machinery existing in account record, but physically not available; for example, a single speed shaft grinder is sent for repairing outside the factory premises.
c) Plant & Machinery used for production activity, not in use condition, scrapped and surplus. Treat team appropriately.
The valuer needs to settle such discrepancies arise out of verification of FAR with the help of personnel from Technical and Account/Purchase department and finalize the list of Plant and Machinery to be valued. Once the required data from the factory are collected, then it needs to be analyzed by valuer at his/her place.
While doing exercise care should be taken by
a) Identification of non-productive/surplus assets Comparison of assets held by the company and the assets required for installed capacity will be lead to identification of non-productive / surplus assets.
b) Identification of off-balance sheet assets Off-balance sheet assets mean the assets which are not appearing in the balance sheet, these include:
•Premises occupied as tenants under Rent Control Acts;
•Entire cost of equipment is debited under the ‘revenue expenses’ account in good times instead of capitalizing and hence do not appear in fixed asset register.
However, such machinery is installed in the plant but not reflected in the balance sheet should also be included in valuation as it falls under the category of ‘off-balance sheet’ assets Equipment fabricated by an enterprise consuming its own material and labor, at times are not logged in the fixed asset records maintained by the company.
Data Collection and Valuation Analysis under- Cost, Market and Income Approaches.
1) COST APPROACH
Steps to be followed to estimate final value are as under:
- Ascertaining replacement cost new (a)
- Calculating depreciation and obsolescence (b)
- Difference of (a) and (b) indicates depreciated replacement cost.
The method is not as simple as it appears because of non-availability of proper data for estimating replacement cost new, economic life and depreciation.
Replacement cost new can be ascertained by anyone of the following two methods:
- By floating inquiry
- By applying price index to historical /original cost
Replacement cost new calculated by floating inquiry and getting the quotation from the supplier is very accurate. For this, it is necessary to provide proper technical specifications to the supplier. This can only be achieved by obtaining the following vital data from the clients-
- Technical specification mentioned in the purchase order.
- Technical specification from the maintenance/engineering department
2) MARKET APPROACH
Information on the following items are necessary for plant and machinery under consideration:
- Description with complete technical specifications
- Date of purchase
- Date of installation
- Purchase price
- Sale price
- Date of sale condition (physical) of machine at the time of sale
- Terms and conditions of sale
- Any renovation/remodeling/upgradation carried out after installation so as to increase output etc.
It is likely that there may be machines which have dissimilarity with regard to manufacturers. By using specifications of comparative models as manufactured by various manufacturers a guideline for comparison may be worked out.
It is also advisable to get information from reliable dealers of second-hand machines, or from privately created data bases.
Now-a-days information on price of second-hand machines are available on internet.
These data have to be used judiciously.
3) INCOMEAPPROACH
The following factors need to be considered while applying income approach.
• The income and expenses history of the subject plant & machinery;
• The income and expenses history of comparative plant & machinery;
• Recently signed rental agreements, proposed rental agreements, and asking rents for the subject plant & machinery and for comparative plant and machinery;
• Actual rental levels for the subject plant and machinery and for comparative plant and machinery;
• Maintenance expenses for the subject plant and machinery and comparative plant and machinery;
• Published operating data;
• Market expectation; and
• Projected replacement allowance for components that wear out and must be replaced.
The following points need to be considered while examining the various rental and lease agreements: • Terms and conditions with regard to insurance • Stipulations for repairs and maintenance • Rent payable • Type of penalty clause, if any
• Purchase clause with consideration
• Premium paid, if any
• Return provision
For each item of plant and machinery, the following data need be confirmed:
• Rental history
• History of maintenance with expenses incurred
• General and administrative expenses incurred
• Marketing and advertising expenses
• Taste and preferences of consumers for products manufactured by the plant and machinery
• Projected cost of repairs and maintenance under consideration While deciding the rate of capitalization, the following points need to be considered:
• Prevailing risk-free rate
• Amount of additional risk, if any
• Probable effect of inflation
Value of plant and machinery under consideration is derived in the following manner:
• Net income multiplied by Y.P.
• Total of discounted income over remaining economic balance life equals to value by the discounted cash flow method
For more details or enquiry pls. contact/mail at info@vrays.in.
