When you're considering having a machinery and equipment appraisal performed on your business equipment, you'll hear a lot of different terms used in regards to how equipment value is calculated. One of the more common terms you'll hear used is fair value. But what is fair value, how concrete is it in term of equipment values and in what situations is it used? Let's take a look.
What Is Fair Value?
Though it seems as though the value of machinery should be the same no matter your purpose, that's not always the case. In divorce proceedings where one person is buying out the other person's interest in a business, one party wants a low appraisal and the other a high one. In donation appraisals, both parties may want a higher appraisal than is warranted, so that one party can get a higher tax write-off and the other can claim higher donations to their cause. Fair value falls in the middle of these equipment appraisals.
Fair value is determined by using a solid methodology that is unbiased and is based on rational processes of determining the value. It looks at the costs of acquisition, replacement costs, utility, market demand, the risk involved and similar properties. Fair value is not always the same as market value, depending on conditions at the time.
Is Fair Value a Final Value?
Fair value is determined using a consensus basis. A group of auditors will typically include the services of a machinery valuator, then the team takes into account many different factors and determines the best methodology and rationale to calculate value. After that, the calculated value is reviewed and either approved or rejected based on information uncovered during the review process, including whether the scope and objectives of the appraisal were appropriate choices, whether the machine appraiser had a truly unbiased view of the appraised equipment and if the machine appraisal as a whole was done using correct methods and formulas..
Because the reviewer will want to know the methodology used and whether the methodology fit in with the applicable standards, it's typically much better to use an accredited equipment appraiser to ensure that the proper processes were followed during the equipment valuation. In its most essential form, fair value is a more subjective value than the usual objective values determined by accountants using specific processes.
In What Situations Is Fair Value Used?
There are a wide variety where fair value is used. Many financial reporting standards require or allow the use of fair value to report their company's assets and liabilities in a standardized fashion. It is typically much closer to the actual selling price of an asset than the asking price that a company wants to receive for selling that same asset. It is commonly used in accounting situations where a current value needs to be determined instead of basing the value on outdated historical prices or other accounting methods that may present an inaccurate financial picture of the business' assets.
Though many different calculations are inaccurately labeled fair value, now that you know the difference it will be much easier to arrange to have a machine appraiser provide the exact information you need to determine fair value. If you're still trying to find the right equipment appraiser for your company, please contact us. Our Machinery & Technical Specialties appraisers are accredited through the American Society of Appraisers and provide the best possible machine appraisal of your company's machinery assets.