Equipment Appraisal Blog | Understanding Machinery Appraisals

Accredited and certified appraisers are responsible for certain hours of continuing education to maintain their credentials. As part of this perpetual training and learning experience, there are numerous requirements we adhere to that pertain to each valuation assignment and scope of work effort. Two of these important prerequisites dictate that every report must have a specific use or uses, as well as defined intended users. If the client uses the report for another reason or discloses it to parties unnamed, this is a violation of the engagement terms.

Here is a great example of why this is important to an appraisal assignment.

Potential Future Business Disputes and Litigation Unrelated to the Prior Valuation

Let me preface this by saying there are many instances where an experienced appraiser will be engaged to value businesses, machinery & equipment, personal or real property, as an independent expert, in support of an existing dispute or ongoing litigation. This is one of the primary reasons to engage with an appraiser, to facilitate a settlement, or in support of a trial or arbitration.

There are times when, months or even years later, the client who originally engaged the appraiser for a completely different purpose, such as a sale, purchase, or refinancing, is involved with a future dispute that leads to litigation. Somehow, the old appraisal gets drawn into the case, likely, because the value of certain assets has become a factor in the dispute. Lo and behold, the report is now being thrown around the courts between opposing sides of the case. The appraiser is ultimately dragged into the conflict, unwittingly, and is being asked to present confidential data, and potentially be subpoenaed or testify at a later date.

As long as there are clear statements in the engagement agreement and report regarding the intended purpose and users for the valuation, in addition to a clause addressing client confidentiality, the appraiser is protected from involuntarily being dragged into the proceedings.

The prior client and appraiser need time to directly discuss the case and the reason why the original valuation report might be used. During this discussion, it should be determined who may be involved in engaging the appraiser for what is now considered a new consulting and updated valuation assignment. I’m highlighting this phrase so it is clearly understood, there needs to be a professional discussion between the prior client, attorneys and courts involved, so the appraiser can be comfortable that:

1. There are no potential disclosure issues involved.
2. They are the ones allowing (or disallowing) the prior report to become part of the case.
3. They are entering into a new engagement with the appropriate parties to present any data related to the prior work, begin a new consulting assignment, and/or update the report.

This is the appraiser’s work product, and there are obligations and privileges which need to be recognized by any and all parties now involved with the litigation dispute. Any future work requested should be compensated by the new clients, based on the current rates of the appraiser.

In summary, documentation requirements required by the governing appraisal bodies, such as intended users and report purposes, are important for the appraiser and their clients to understand so any future developments are handled professionally and sensibly.

An accredited, reliable, and defensible equipment appraisal should include at least three components: a USPAP (Uniform Standards of Professional Appraisal Practice) and ASA (American Society of Appraisers) compliant narrative summary report discussing the valuation methodologies and conclusions; an appendix that itemizes the assets that include associated details; and photographs of the equipment.

The narrative report is structured fairly consistently throughout every valuation, with the appraiser focusing on the processes, methodologies, scope of work, assignment summary, definitions used, research, market and industry sources utilized, and the value conclusions.

The photographs are self-explanatory, and ideally include a couple of images of each item along with the machine ID tags, which verify the specifications of the equipment. There are exceptions when photographs cannot be obtained in certain cases, and the appraiser can usually make allowances for this without compromising the integrity of the valuation.

The most important component, in my opinion, is the itemized asset detail, typically listed as an appendix to the report. This document is the backbone of the appraisal and includes the data necessary to document the transaction for which the appraisal is to be used. Regardless of the number of assets involved, this detail is useful for the business owner’s internal accounting and tax records, as well as providing documentation for third parties, such as investors, banks, financial institutions, and tax authorities, when they secure or review their collateral interests.

This detailed appendix should include the following information for each line item asset being appraised:

Description/Equipment Type: (Ex: Hydraulic Excavator or Vertical Machining Center)

Make/Manufacturer (Ex: Caterpillar, Mitsubishi)

Model #

Serial #

Year Manufactured or Effective Age, if Unknown or Refurbished (Common for Older Assets to Extend Their Useful Life)

Additional Specifications and Comments Section (Ex: Condition if other than normal or good; Capacity, Hours/Mileage, Attachments)

Estimated Individual Values and Summary Totals

The report narrative summary will generally only reference the total value for all the assets appraised and refer to this appendix for the itemized detail.

It is not uncommon for clients to request this detail in a separate workable file, so they can better utilize the data as well as transfer it to their internal documents. This is generally acceptable to the appraiser, with the firm understanding that the data itself will not be altered. As long as the appraiser retains the original files, any potential disputes on this issue can be easily remedied.

In summary, when you are considering engaging an equipment appraiser, ensure that these component documents will be part of the overall valuation report and that you are working with an experienced accredited, ASA machinery appraiser.

When you have invested significantly into your machinery, you want to make sure that your investment is protected. Though many businesses will insure their equipment, proving the value of your machinery after a loss is important to making a successful claim. But what if you're not sure what the value of your machinery should be or are having problems proving that value? in these areas, a commercial appraisal is vital to help ensure your equipment remains an asset to your business. Here's a quick look at the benefits of such an appraisal on your machinery.

Why should you get a commercial appraisal on your equipment?

What is the equipment in your business actually worth? It's a common question, whether you're dealing with a tax assessment, securing a business loan or making an insurance claim. Unfortunately, the answer to that question can be difficult to prove. Whether you have purchased new machinery, purchased used machinery or need to document the value of machinery that has been in use for some period of time, documenting the machinery value is important for a wide range of situations. But how do you go about documenting that value to outside interests?

When you first acquire a piece of equipment, whether it's new or used, you'll need to enter that value into your books so that you can deal with accounting issues such as depreciation. But does that mean if you got a good deal on it that the machinery is tied to that specific value? Not necessarily. If it was and you suffered a loss, you may not be able to claim the machinery's full value to your insurance company. A valuation protects the machinery's actual value to your business rather than the cost to acquire it.

It also helps to document the value of the machinery for any number of reasons. A certified appraisal is completed using methodologies that have been tested in a wide range of circumstances over the decades, so such an appraisal can stand up well to strong scrutiny. It will allow you to use that value in financial, insurance, legal and tax agency circles to prove the machinery value.

If you have equipment that has been in use for years, it may have been completely depreciated and have a book value that is virtually nothing. However, the machinery may continue to provide strong service for years to come. How do you document that loss of production value when the equipment had no value on the books? Having a piece of older machinery appraised allows you to benefit when it has been lost instead of losing the production value of the machinery because you have no documentation of its value.

By taking the time to have a commercial appraisal performed on your equipment, you're able to better protect your investment. But not all appraisals are the same. Though it can be tempting to try to value your machinery based on market sales or the word of a sales rep, this type of valuation won't hold up well to the strong scrutiny that will come about in a wide range of circumstances. Fortunately, even if you've already suffered the loss of your equipment, a professional certified appraiser can still perform an appraisal to determine the value prior to the loss, making it easier for you to document your equipment's value.