Equipment Appraisal Blog | Understanding Machinery Appraisals

When you own machinery assets for your home workshop or your company, you know that the depreciation of equipment can rapidly change the value of those assets. But what is depreciation? Exactly how is depreciation figured? How does depreciation impact your bottom line and the value of the machinery? Are there any other ways to determine value for machinery assets? Here are the answers to these questions and more.

How is depreciation of equipment figured and how does it impact value?

Depreciation is one process by which equipment values may be estimated. It's commonly used for taxes and similar business financial documentation. Generally speaking, it breaks down the estimated value of a piece of equipment over the expected period of time that machinery will function. It creates a simple way to lower equipment values over time, accounting for the change in value of the asset. It's one of the most common ways to track changes in machinery value for many businesses. But that doesn't mean it's the best possible option for your company.

A depreciation table assumes that all machinery of a particular type ages at the same rate. But what about when you have a piece of equipment that is expected to last much longer because it's well cared for and lightly used? What about when a piece of equipment is abused and worked hard beyond its expected limits? At that point, the expected lifespan of the equipment may vary widely compared to a piece of equipment that has more standardized care and maintenance. This makes a strong impact on the machinery's actual value when compared to the depreciation table, throwing your business' finances off - specifically the value of your assets.

There are a few different but very common situations where this happens. Well maintained machinery will still have value after it has been fully depreciated. Abused equipment will fail before it has been fully depreciated. In either instance, the machinery's depreciated value does not accurately reflect its actual value. When you have machinery that is initially used extensively but then takes a back burner to other processes, the rate at which it depreciates can change over time, making the value change as well. What can you do to depreciate the machinery using an accurate value and timeframe?

When you have a machinery valuation performed, you get all the information you need to set up a proper depreciation schedule. The valuation will determine the machinery's estimated value using standardized methodologies and the expected useful lifespan of that piece of machinery. By having these two pieces of information available, you can create your own depreciation table that is backed up by the valuation report and is customized to your company's situation. Because the methodologies used by certified equipment appraisers has been developed over the past several decades in legal, financial, insurance and tax agency circles, they stand up well to strong scrutiny.

By knowing how depreciation of equipment is determined, you can figure out exactly what type of value method works best for your assets. But when you're starting with equipment that isn't brand new, how do you figure out an initial value to determine your depreciation from? Many equipment owners have found that having an equipment valuation performed can make a big difference in being able to track realistic machinery values. 

When you're considering having your equipment valued, do you know what kind of appraiser you should work with? Though you could work with anyone who had a general knowledge of machinery values, that may not be your best bet. The American Society of Appraisers has spent decades developing methodologies that have been proven in a wide range of real-world situations, and that knowledge is reflected in every ASA accredited machinery & equipment appraiser they certify. Here's a look at the reasons why you should only work with an ASA certified appraiser.

Why should I work with an ASA accredited machinery & equipment appraiser?

When you need an appraisal performed on your machinery or equipment, do you know whether the appraiser you contact is certified? Though it's not the first question most clients ask of an appraiser, it's a very important one with regards to the accuracy of your final valuation report. The certification process provides an appraiser with the background education, knowledge and experience to help ensure they're accurately valuing your equipment. As an appraiser is certified, they receive a specific amount of education in both how appraisals are performed as well as which situations demand specific calculations and methodologies.

The most common accreditation program is from the American Society of Appraisers, or ASA. As one of the leading professional organizations for appraisers, the program they offer for accreditation uses the methodologies that its members have been using for decades. This means that reports generated using these methodologies stand up well to strong scrutiny. But in what situations is this really important?

Almost everybody has heard of a situation where a business is dealing with an insurance company, a lawsuit, a tax agency or a financing company where the value of an asset has been questioned. Though most people know that there's an appeals process in most of these situations, they don't bother to pursue this avenue because they don't know how else to prove the value of the asset. That's one of the best places where an ASA accredited appraiser's report can benefit your business or situation.

Because reports generated by accredited appraisers use the same standardized methodologies that have been used for decades, the report is viewed with higher regard than one developed by your local equipment dealer or similar appraisal approach. These types of appraisals have been tested in court cases and often have made a big difference in the outcome of the case. In insurance claims, it's not uncommon for adjusters to make an incorrect valuation because they don't specialize in that type of machinery. In financial and tax circles, an appraisal report can help prove a piece of equipment's value.

When you work with an appraiser, the information you receive can help prove the value of your machinery, but the information is only as strong as the methodologies that are used to calculate that value in the first place. By working with an ASA accredited machinery & equipment appraiser, you're ensured that the valuation report that you receive is accurate and will hold up well to strong scrutiny in a variety of situations. Make sure before you get started with an appraiser that they are certified to ensure you're getting your money's worth out of the valuation report you receive.

When you own equipment, do you know about how long you can expect to be able to use it? Though most owners know roughly how long their equipment will last, determining a closer estimate is a difficult process. Fortunately, it's a process that is familiar to many experienced and certified equipment appraisers. Here's a quick look at the factors they consider when determining normal useful life in a piece of equipment.

Exactly how do you determine normal useful life in your equipment?

There are a wide range of factors that contribute to the lifespan of a piece of equipment. Here are just a few that are taken into account by a certified equipment appraiser during the process of calculating useful life.

• Environmental conditions. There can be a huge difference in the lifespan of a piece of equipment based solely on the conditions where it is stored and used. Equipment kept in a dusty warehouse with extremes of temperature and a leaking roof will almost certainly have a much shorter lifespan than one kept in a clean, dry workshop with climate controlled temperatures. Why? Moisture and humidity can lead to corrosion, while being used in hot, dusty conditions will lead to early breakdown of lubricants and cause excessive wear. Better conditions lead to a longer useful lifespan.
•  Suitability to the work. If the equipment you're using is underpowered for the work, it will be used at the high end of its range for most of its lifespan. That means it will overheat more often, breaking down lubricants and causing excessive wear on the components. This in turn leads to other parts failing and a shorter overall lifespan than may be expected of a piece of machinery better suited to the work at hand.
• Abusive usage. Is the equipment being used with care to preserve its condition? If it's being used incautiously or being beaten on to work controls, this level of abuse will quickly shorten its overall useful lifespan. As an example, we've all seen heavy equipment that has been bashed, dented and torqued early on in its lifespan, which quickly leads to early failure.
• Expected longevity of that line of machinery. Some brands have a reputation for excellence and longevity that comes into play. For example, a store brand bandsaw with a reputation for poor performance and shoddy manufacturing won't hold up nearly as long as a finely-crafted one that has been well engineered, created from the best materials and delivers superior performance time and again. When the second example is used, you can expect a much longer useful lifespan than you may otherwise anticipate.
• Regular maintenance and repairs. Though it seems like a simple step, regular maintenance in line with the manufacturer's recommendations can help ensure a much longer lifespan than equipment that has been neglected over the years. In the same vein, repairs that are caught early and dealt with quickly will help prevent damage to other components in the system.

Though the process of determining normal useful life in a piece of machinery is difficult, it's one that equipment appraisers are well versed in handling. By knowing when your equipment may fail, you can better plan for replacement and ensure you are still able to receive some resale value out of it. A certified equipment appraiser can help you determine this timeline for your machinery.

When you're considering having an equipment valuation performed, one option that is available is having a USPAP compliant appraisal performed. But what exactly is USPAP and how are appraisals that are compliant to USPAP standards different than other types of appraisals? Here's a quick look at this type of appraisal and how it can benefit you.

What exactly is a USPAP compliant appraisal?

Standing for the Universal Standards of Professional Appraisal Practice, this represents a set of standards set and published by the Appraisal Standards Board, which in turn is authorized by the Appraisal Foundation. The Appraisal Foundation itself was authorized by Congress to be the source of appraiser qualifications and appraisal standards. Though USPAP appraisal practices were initially focused on real estate appraisal specifically, it has since grown to encompass virtually every possible item that can be appraised in business. 

But how can these standards benefit your equipment appraisal? Because of the high scrutiny under which USPAP has been developed and the number of different situations under which it has been applied, it has developed into a comprehensive standard that deals well with a wide range of situations. Over time, it has been tested in a wide range of legal, financial, insurance and tax agency circles. For this reason, it has become a trusted standard that provides business and equipment owners with many benefits.

When a business suffers a loss, whether due to a fire, natural disaster or theft, insurance companies must be dealt with. If the equipment has not been properly appraised, the business has no basis for claiming a value different than the one generated by the insurance company. But the insurance figure may be a generalized average across the industry, which does not recognize that the equipment has been maintained exceptionally well in a clean, dry environment. How do you fight that figure?

What about when a tax assessment is much too high on a piece of machinery that was purchased as a disposable asset, intended to be used hard for a short period of time? When a piece of equipment is purchased as a stop-gap until something different can be made to work, it often doesn't receive the best treatment. Receiving a high assessment on a machine that has a much lower value can be difficult to fight.

When you're getting ready to expand your business, do you need to secure financing using your equipment as collateral? How can you prove to the financial institution how much it is worth? A business loan can be difficult enough without having to deal with proving your equipment's value to the bank.

Fortunately, when a USPAP appraisal is performed, it provides documentation of the machinery's value, which will hold up to strong scrutiny in a wide range of situations. The standard has been tested in many situations, so it is trusted as an accurate measure of value for the machinery in question. An appraisal report prepared by a certified appraiser ensures that your interests are being protected during the process.

Though a USPAP compliant appraisal seems like a complex process, its many benefits help provide you with a wide range of benefits. Because a certified appraiser is already familiar with these standards, they're able to properly apply them to your equipment appraisal to ensure you get an accurate value. Working with a certified equipment appraiser provides you with a range of protections that may last well into the future.

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.