Equipment Appraisal Blog | Understanding Machinery Appraisals

When it comes to estimating the value of personal property and equipment, there are a number of premises, terms, and definitions thrown around in the professional appraisal realm, as well as areas such as insurance loss claims

Fair Market Value is the most frequently referenced when it comes to appraisers, however, insurance adjustors are tied to a less common term called Actual Cash Value.

Although you might think these two should be similar in their approach, they can be quite different, depending on the type of property being valued and the interpretation of their meaning.

As a direct comparison, here are the most often seen definitions:

Fair Market Value is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.

Actual Cash Value is the amount equal to the replacement cost (new) minus depreciation of a property at the time of loss. The actual value for which the property could be sold is always less than what it would cost to replace it.

Given there is generally room for interpretation with both of these definitions, there are times when appraisers and insurance adjustors can arrive at a very similar value and other times when there is a significant discrepancy between the two.

What approaches are utilized, and which data sources are relied upon will determine whether these values are comparable or far apart. How independent agencies measure useful life along with annual levels of depreciation, and whether they rely on direct market information or broader industry data can create any number of diverging estimates of value.

Before you select an appraiser or engage with an insurance company to protect your personal property and equipment, it is important to understand the company’s background and history with how they treat these approaches to value. Accredited appraisers have guidelines and quality controls in place by which they abide, while insurance companies will have their own internal methodologies based on past experience and actuarial data.

Regardless of these requirements, there will always be a subjective component to the concept of valuation with every business in both the appraisal and insurance industries. Seek to learn as much as you can about this topic so you can feel comfortable that the service being provided is the one that’s right for you.

If you're thinking about having equipment appraised, you may have heard any number of appraisal types tossed around. One type of calculation that is commonly used is actual cash value. But what is this appraisal type, how is it performed and in what situations is it the best option to consider? Here's a quick look at these questions and how they apply to your machinery assets.

How is actual cash value determined by a certified equipment appraiser?

When it comes to determining actual cash value, many people are a bit confused over how this figure is calculated. It doesn't help that over the years, the court system has defined it in several different manners. Some people think it's the same as fair market value. Others think that it's replacement cost minus depreciation. Others think it's a hybrid of the two.

But what's the difference between these two approaches? Replacement cost minus depreciation can work in some situations, but not in others. A piece of machinery is lost in a fire, and the cost to replace it is $50,000. Depreciation on the original equipment would have been $5,000, so the equipment is valued at $45,000. Using fair market value, the same equipment may be older and fully depreciated. Using replacement cost minus depreciation may only provide a value of $5,000, but if the equipment was well maintained, it may still deliver years of reliable service. At this point, the value of $5,000 may be unrealistic for replacement in a loss.

Obviously, calculating actual cash value is a difficult process, with contradictory precedents depending on the state where the equipment or company is located and where you're going through legal or insurance issues. Despite the vague definition of actual cash value, many legal, financial, tax and insurance organizations still use it, leading to potential disputes between the customer and the company. Hiring a certified equipment appraiser to provide you with an appraisal report on the actual cash value of your equipment can help your side of the debate. 

In a number of court cases, the report or testimony of a certified equipment appraiser has made all the difference between a poor value and a fair value for equipment. A certified appraiser goes through an extensive educational process that includes learning which appraisal methods are applicable to which situations. Because they are taught proven methodologies that have been tested in legal, financial, insurance and tax circles, the reports they generate hold up well to scrutiny and are considered more reliable and accurate than a number of other sources you may be tempted to use in your situation.

A certified appraiser has the knowledge, experience and ability to help you fight a poor estimate of actual cash value. They've been trained to know in what situations different rules must be applied to determine a fair value for your equipment. When you work with a certified appraiser, you'll realize significant benefits for your machine values.

When you have actual cash value calculated on your equipment, you're gaining good insight into what your machinery is worth. However, if your appraisal isn't performed by a certified equipment appraiser, you may not be getting accurate information or an appraisal report that will hold up in financial, insurance, tax and legal circles. Make sure the appraiser you use is certified to ensure that your documentation will stand up to strong scrutiny in the future.