Plant and Machinery

Very little thought is ever given to the fair value of Plant & Machinery beyond some arbitrary depreciation policy.

There are many ways to “skin the cat” and our experience in the valuation of this critical fixed asset class is substantial.

Plant & Machinery has a relatively long useful life, and ranges from small items of computer equipment to large manufacturing plants.

Although we can easily work out the value of Plant & Machinery on the day it’s acquired, this value quickly becomes stale or outdated with usage and the passage of time. Accountants (through the application of “IFRS 16: Property, Plant and Equipment”) try to use some form of depreciation methodology to mimic this reduction in value, but this rarely reflects economic reality.

IFRS 13: Fair Value” provides guidance on how to determine the current fair valuation of Plant & Machinery. A Market Approach, Income Approach, Cost Approach, or combination of the three approaches is recommended. In the context of your item of Plant & Machinery, however, what does this mean?

1. Market Approach
Assuming you are able to find a Similar Item of Plant & Machinery, what is its value?

At first glance, this appears to be an easy exercise – phone up some supplier who is selling the Similar Item and find out its Retail Price. Sadly, there are challenges with this approach. Firstly, this Retail Price reflects the value of a Brand New item, which ignores the age and condition of the item you are trying to value. Secondly, there may well have been technological advancements since you bought your asset several years ago – for example, laptops evolve rapidly. So, yes, finding a Retail Price may be relatively easy, but it may be completely irrelevant for your item of Plant & Machinery.

2. Income Approach
What is the cash-generating ability of your item of Plant & Machinery?

Again, this sounds quite easy to do – construct a fancy discounted cash flow (“DCF”) valuation and let Excel do the rest. The major problem with this approach is that items of Plant & Machinery rarely work in isolation. People (unless your business is fully automated) are needed to run the Plant & Machinery. Working capital (cash, debtors, inventories, payables) is needed to manage the output of the Plant & Machinery. And then there are a mountain of administrative expenses which are difficult to allocate specifically to your item of Plant & Machinery. So, yes, you may well be able to value “something” but this “something” probably includes a lot more than just the item of Plant & Machinery.

3. Cost Approach
How much would it cost to acquire, or even reconstruct, your item of Plant & Machinery?

Although cost approaches are typically relegated to the bottom of the pile when it comes to valuation methodologies, this is probably the best approach for valuing Plant & Machinery. This approach is highly technical and involves either finding a Brand New Asset (like with the “Market Approach” above) or making an inflationary adjustment to your Existing Asset. Further adjustments are then made for usage, technological changes and cash-generating ability of the asset.

Above is a diagram that summarises the process, and includes a whole host of fancy terminology.

Please Contact us for more information on how we can assist you with any Plant & Machinery queries that you may have.