Equipment Appraisal Blog | Understanding Machinery Appraisals

Used up and worn out: Dealing with functional obsolescence in equipment

Posted by Equipment Appraisal Services on Tue, Jan 30, 2018 @ 04:03 PM

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We've all heard of problems businesses may have due to obsolete equipment. But what many companies don't realize is that there is a big difference between a piece of equipment being economically obsolescent and reaching functional obsolescence. But what's the overall difference between these two major types of obsolescence and what do you do when you have equipment that breaks down or wears out and becomes functionally obsolete? Here's a quick look at how it works out in equipment appraisal.

Used up and worn out: Dealing with functional obsolescence in equipment

Functional obsolescence is defined as the loss of value and usefulness of a piece of equipment which is caused by the machinery's lack of efficiency, inadequacies or high cost of maintenance and repair. In general, it's typically reached when a piece of equipment becomes more expensive to repair or maintain it than to replace it. But how does that work?

As a quick example, consider a vehicle. It's purchased with the understanding that at some point it will need to be replaced. As the years roll by, more repairs are required to keep the vehicle operating reliably. Eventually, the cost of these repairs will exceed the cost of purchasing a newer vehicle.  Another example could entail the need for a more fuel-efficient vehicle. If the current vehicle only gets five miles per gallon and a newer model would get 20 miles per gallon, the cost of operation is the key factor in terms of when to replace the equipment for a more efficient model. 

But what causes machinery to become functionally obsolete? Newer, more efficient technology may gain ground and come down in price, making the cost of acquisition much lower than in the past. This makes it possible to replace the equipment because of the reduced cost of waste. If it's caused by machinery breaking down, that can be caused by operating it in a state of over capacity, which wears the machinery at a faster pace than normal. In general, this is caused by purchasing machinery that is not suited to the task at hand or having to make increased demands on it after the initial investment. If innovations in the market provide new features that become necessary for modern operation practices, this can also make the machinery functionally obsolete.

Unfortunately, when you have a piece of equipment that has become functionally obsolete, it can create problems with your business' accounting and overall financial standing. If the machinery has not yet been fully depreciated, it may be showing a higher value than what it's actually worth at this point. If you have to deal with legal issues, the other side of the case may look at these values and claim that your company has a higher value than is reasonable. Having an equipment appraisal helps you document the machinery's actual value.

Though having equipment reaching functional obsolescence isn't a goal any business tends to make, it's one that many companies end up facing at some point or another. By taking the time to learn how to deal with the issue when it arises, you can make better decisions for your company and your remaining assets. Being able to document the final value of functionally obsolescent machinery can make a huge difference on your accounting and helps provide a more accurate overall picture of your business' financial health.

Tags: appraisal depreciation, functional obsolescence

Dealing with a Business Loss: Retrospective Appraisals

Posted by Equipment Appraisal Services on Tue, Jan 23, 2018 @ 02:34 PM

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Your workshop catches fire and burns the equipment that was stored or used within. A hurricane floods your office and destroys both the maintenance records and the vehicles that were kept on site. A vandal breaks in and causes irreparable damage to your machinery over a late night or long weekend. Whatever situation you find yourself in, one of the thoughts that may raise your stress levels is how to prove the value to your insurance company. Here's a look at how retrospective appraisals can help in these difficult circumstances.

Dealing with a Business Loss: Retrospective Appraisals

How can an appraiser determine the value of equipment that has been significantly damaged? Though some of the process may involve some level of educated estimation, most of it is grounded solidly in appraisal practices and methods. Some information will be easily obtained, while other information will require careful study of what's left and any paperwork that is left after a disaster.

Let's take the example of a cargo van that has been burned in a warehouse fire and had significant damage due to the heat involved. Most business owners and equipment operators, even many mechanics, would only see the burned shell of the van. Fortunately, equipment appraisers take a different view of the machinery they're appraising.

To start, the appraiser will work with any paperwork and information that is available.  The original purchase paperwork, maintenance logs, receipts from repairs: all these papers paint a picture of what kind of van it was, the care it was given over the years and possibly a record of how many miles it had on it at the time of the loss. This information allows the appraiser to calculate the cargo van's value in general terms, based on the market conditions and demand for that type of vehicle.

But what if the van had been poorly used over the years? What if there was unrepaired body damage or significant problems with its mechanical systems due to being neglected or abused? On the other hand, what if it had much lower miles than most vehicles of that age and was maintained in impeccable condition? What if the business had added machinery or options to the vehicle that would increase its overall value? These are all aspects the equipment appraiser must take into account when calculating the value of a piece of equipment after a loss.

Another area to consider is when the damage took place. If the van was stored at a remote site and the damage was discovered months after the fact, how do you determine value? What if the bottom has fallen out of the van market in the intervening weeks and months? Should the van be appraised at the value it held when the damage was discovered or at the estimated time of the the loss? An equipment appraiser can retroactively value the machinery to the loss date using verified, tested appraisal methods.

Having to deal with a business loss is stressful, but having the option of getting retrospective appraisals performed on damaged equipment helps reduce the load. Whether you're claiming a loss on tax returns or pursuing compensation from your insurance company for the damage, a retrospective appraisal can help your business get back on its feet faster. Make sure you work with certified equipment appraisers, as the methodologies they use will hold up well against scrutiny in court, insurance and tax agency circles.

Tags: Equipment Appraisal, retrospective appraisals

What is effective age and why does it matter for your business?

Posted by Equipment Appraisal Services on Tue, Jan 16, 2018 @ 10:56 AM

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Effective age is defined as the difference between the overall economic life and the remaining economic life of a piece of equipment, a structure or similar asset. Though that provides you with a basic overview of the concept, it can often seem much more complicated than that. How is it determined? How will it impact your company's bottom line? Do you really need to know this detail for your machinery? Here's a quick look at those questions and more.

What is effective age and why does it matter for your business?

Though the above definition of effective age seems rather dry, it does cover the basics. Imagine that you've purchased a cargo van for your company. Purchased new, the expected lifespan is about five years with your expected annual mileage. But what if you found a great deal on another vehicle after a couple years of ownership? By spreading the work between the two vehicles, you may then expect the cargo van to last longer, but exactly how long? That's where effective age comes into play.

If machinery is abused or used in a harsh environment, it may age at a rate faster than would otherwise be considered normal. Salt water, moisture, humidity, sand, grit, dirt, acids: all of these factors can make a piece of machinery age at a much faster rate than would normally be expected, often because they cause excessive wear and tear on the machine's components. If you were considering using machinery like this as collateral in a bank loan, you may find it isn't considered to be worth as much as you might expect.

In both of these cases, the machine itself can be expected to last a longer or shorter time period than may have been originally expected based on the appraiser's prior knowledge of the equipment. Because a machine appraiser spends all day looking at equipment, they have a good eye for when a machine is in exceptional condition and will last significantly longer than expected. For example, a well-maintained piece of equipment that is kept in an ideal environment and worked well below its top specifications can be expected to last much longer than a piece of machinery that is poorly maintained in a bad environment and regularly worked at the very top of its expected performance will. 

When you have a machinery appraisal performed on your equipment, you're able to discover about how much longer it can be expected to perform economically for your company. Having this information available makes it much easier to determine when you'll need to purchase replacement equipment. You'll have more time to shop around, learn about the best new features and decide exactly what type of machinery you need and what budget you can afford to spend on the right equipment. That's always a much better option than being forced to quickly replace failing equipment with machinery that won't meet your needs.

By knowing your machinery's effective age, you can better plan for your company's financial needs in the future. This allows you to spread any equipment purchases out over time without having to worry about your equipment failing before it's paid off. By knowing this figure, you can ensure that your company has the means in line to replace the equipment when the time comes without exposing the business to excessive risk.

Tags: Asset Depreciation, effective age

Online Equipment Appraisal: The Benefits of the Process

Posted by Equipment Appraisal Services on Tue, Jan 02, 2018 @ 09:26 AM

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When you need an equipment appraisal, the timing can often be inconvenient or problematic to your schedule. But when it's needed, you know the task must be handled. Fortunately, there's another option for you to consider that can give you the appraisal you need without having to sacrifice your schedule in the process. Here's a quick look at online equipment appraisal and how it can benefit your business.

Online Equipment Appraisal: The Benefits of the Process

But what is an online equipment appraisal? When an appraiser does not go on site to view your equipment first hand and instead relies on the specifications and pictures that are provided by the owner, this is known as an online equipment appraisal or desktop appraisal. It has a number of benefits for your business.

Since the appraiser's travel time and expense are eliminated, this type of appraisal can provide you with what is usually a more economical option. For many use cases, it provides sufficient documentation of the equipment's value. When you're trying to get an idea of what a piece of machinery's value is, it can give you a solid ballpark figure to help get you started. 

If your equipment is fairly standard, an online machinery valuation is an easy way to find out what it's worth. When you have a large number of the same machinery, such as a fleet of semi trucks that were all purchased around the same time and have similar mileage on the odometer, getting an online equipment valuation is a good way to get an idea of the overall value. You'll still need to provide some information when having a group of the same model machinery appraised, including ID numbers and mileage or hours.

In general, when an appraisal needs to be produced fairly quickly, the equipment in question is fairly standard in your industry or the equipment is located far from an appraisal company, a desktop appraisal can be a great choice. You will still need to provide some information and time to the appraisal company in this situation. It will require a well-detailed description or list of the asset or assets in question to help the appraiser get started in researching that machinery. Excellent photos to show key areas of the machinery will be needed to verify the machinery's overall condition. What's more, you'll also need to make available a person who is familiar with the equipment and who is authorized to speak on your behalf to the appraiser about the machinery being appraised.

However, it's important to know whether a desktop appraisal would be appropriate for your situation. If the value of the machinery is in question because of a contested case in court, such as a divorce, lawsuit or issues with your insurance company, this type of appraisal may not be sufficient for your purposes. In these situations, an in-person appraisal will almost certainly be needed, with the report prepared by a certified equipment appraiser that will hold up well to strong scrutiny in these situations.

The equipment valuation process is a vital part of your company's asset protection and risk reduction plan, but that doesn't mean it has to be a big problem. Online equipment appraisal can provide you with a more economical format that doesn't take as much of your time and often provides solid results for most purposes. 

Tags: online equipment appraisal