Equipment Appraisal Blog | Understanding Machinery Appraisals

How equipment appraisal helps you deal with economic obsolescence

Posted by Equipment Appraisal Services on Tue, Feb 13, 2018 @ 10:10 AM

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When equipment you've invested in has become obsolete, it can wreak havoc on your business' accounting, especially when it has not yet been fully depreciated. How do you deal with economic obsolescence in your company? Here's a quick look at what it is and how to best deal with it when it happens in your business.

How equipment appraisal helps you deal with economic obsolescence

I remember the first time I ran into a case of economic obsolescence in a piece of business equipment. Back in 1992, my parents invested in a 286 computer for their business, to run accounting and correspondence. Several years later, I found them a newer computer for the business, so the older desktop came home. Following a number of creative hacks to try to keep the system running for nearly 18 years, my mother finally asked, "That old computer probably isn't good for much more than a boat anchor anymore, is it?" The rejoicing at that point, albeit quietly in my head, was epic.

When equipment is no longer able to be updated to remain useful, it's said to have become obsolete. Economic obsolescence is the point at which it costs more to try to maintain older equipment than to replace it. Unfortunately, this can cause some serious problems with your company's books, especially if the machinery is not yet fully depreciated.

One industry where this regularly happens is IT. Because of the rapid progression of computer technology, it can seem as though every week a faster processor, bigger hard drive or a larger memory stick is coming out. Software from three years ago is no longer being supported by the developer, making it impossible to take care of security issues. When these assets are not yet fully depreciated, they still show value on the books even though they have become completely unusable in daily operations. 

That doesn't mean you won't get any money for it in a sale, but it would require spending time, effort and money to find the right buyer. Some computer companies build their own testing labs by purchasing older systems that may be used by their clients, but these labs are not where the company makes money as much as where they provide customer support and service to ensure the product they're developing will work well on the client's system. Though it has some value for the company, it's not in the profit sector of the company, so is often disregarded in terms of value.

For this reason, an equipment appraisal can help fix this problem. Because a certified equipment appraiser should have experience in the industry in question, they typically have a good grasp of when a technology or piece of equipment is no longer able to remain competitive in the real world. They can help provide a value for the equipment that is realistic, and their appraisal is well documented.

When you have a situation of economic obsolescence in your company, one of the best options to record the loss of machinery value is through an equipment appraisal. When you work with a certified appraiser, they have a good grasp of your industry's rate of progress and understand when certain classes of machinery become obsolete. Because they use standardized methodologies, their appraisal report will stand up well to scrutiny from outside interests, whether it's the legal system, a tax agency, an insurance company or a financial institution.

Tags: economic obsolescence, appraisal depreciation

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

Using Physical Deterioration for Equipment Depreciation

Posted by Equipment Appraisal Services on Tue, Aug 09, 2016 @ 02:00 PM

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When we think about depreciation of an asset, we typically think about it based on a percentage, such as is used in tax accounting. But companies that have looked at equipment values over the years realize that a piece of machinery that has been fully depreciated on your taxes still has significant value in your business operation and can cost a lot of money to replace. In equipment appraisals, physical deterioration is a much more commonly used form of depreciation. Here's why:

How physical Deterioration is different than percentage-based depreciation

Because machinery varies so much in terms of lifespan, durability and reliability, it became much easier for the Internal Revenue Service to simply determine a set number of years over which a piece of equipment is appraised. But in reality, equipment that is well cared for may last many years, if not decades, beyond the point that it has been fully depreciated. By having a machinery valuation performed by a qualified equipment appraiser, you have a record of the equipment's actual value instead of what the IRS thinks it's worth.

Why physical Deterioration provides a better estimate of business assets

By comparison, a physical deterioration using the age/life ratio provides you with the best possible documentation that will hold up in financial, legal, insurance and tax office circles. If you  need financing for your latest project, being able to prove the value of all your assets beyond what's listed on your tax return helps you secure it. If you're dealing with a legal headache, you can document the condition of your machinery, proving that its not, in fact, worthless as the other side may contest. If you suffer a serious loss in your business, whether due to a fire, natural disaster or vandalism, you can prove the equipment values of replacing the equipment through your insurance company without any doubt as to the accuracy of the report.

But what about the flip side of the coin? If your equipment is losing value faster than the IRS depreciation tables, a quality machine appraisal provides you with quality evidence that you need to depreciate it more quickly. This can also hold true in terms of property taxes, where you may end up having to appeal your tax assessment because of a high appraisal that was performed based on standardized depreciation rates. A proper equipment valuation provides legal documentation of the equipment's actual value, allowing you to have your taxes lowered based on the lower appraised value and lowering your overhead.

By keeping track of your actual machine values through a quality machine appraisal, it's much easier to document the replacement value when you need it most. If you haven't found a company to perform a quality machinery valuation on your equipment, you could be leaving money on the table when it comes time for insurance policy renewal, financing for a big project or expansion or a property tax appeal.

Tags: Physical Deterioration, appraisal depreciation

How Remaining Useful Life Is Determined by Appraisers

Posted by Equipment Appraisal Services on Tue, Dec 15, 2015 @ 01:30 PM

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When equipment appraisers look at equipment during a machinery valuation, one of the characteristics they take into account is the estimated remaining useful life for that piece of machinery. Though the the process may look easy, a machine appraiser looks at several different factors when determining the remaining useful life when determining equipment values.

The Accountant's Way of Determining Remaining Effective Life

When it comes to equipment value, accountants tend to look at value in terms of depreciation. Tax systems are based around a uniform reduction in value, referred to as depreciation. An accountant's way using straight-line depreciation starts with the historical price at which the equipment was purchased, then takes away a certain amount of value every year for a set number of years. But just because a piece of machinery is fully depreciated doesn't mean that it no longer has any value or that it has reached the end of its effective lifespan.

Why Equipment Appraisals Provide a More Accurate Estimate of Remaining Useful Life

An equipment appraisal look at much more than just the age of the machinery when its determining the remaining effective life. It takes into consideration the condition of the equipment and whether it appears to have been abused or It whether necessary maintenance and repairs have been made, because if they haven't, that can cause additional wear and tear on other parts of the machine. It also considers the conditions the machinery is typically operated in. A piece of metalworking equipment will last much longer if it is kept in a climate-controlled workshop than if it's on a site where it's exposed to the elements near the corrosive saltwater ocean.

How Remaining Useful Life is Determined in Equipment Appraisal

There are common methods a machinery appraiser will use to calculate the remaining useful life in equipment.  The appraiser often will use published documentation that show the normal useful life range of types of equipment.  An appraiser may also talk to the manufacturer or companies that produce similar type assets to estimate the normal useful life.  The normal useful life of the equipment minus the effective of of the equipment equals the remaining useful life.

Determining remaining effective life in equipment valuation helps you estimate an expected time frame for machinery replacement in your business. A completely new appraisal can be performed if you've buy a business and you're concerned about how long you'll have before the machinery needs to be replaced or need to document this information for your financial institution.  It is also important to have an appraisal to set the books to start the depreciation schedule.

 

Though it's not an absolute guarantee of how long each piece of equipment will last, it does help you plan financially as a business owner for major equipment replacement costs down the road. If you need to have a machine appraisal performed to help determine your equipment's estimated remaining effective life, please contact us today. Our highly-qualified, certified valuation specialists are always happy to help.

Tags: normal useful life, appraisal depreciation, remaining useful life

Understanding Functional Obsolescence in Personal Property Assets

Posted by Equipment Appraisal Services on Mon, Nov 09, 2015 @ 03:30 PM

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How can a piece of equipment be called functionally obsolete is if it something that you use every day? Learn about functional obsolescence in the machinery and equipment appraisal market to make the right decisions about your existing equipment. 

Understanding Functional Obsolescence

A machine appraiser may very well understand what this term means, but the average individual does not. Luckily, the concept is a fairly simple one to understand, even if you are not an equipment appraiser. 

The idea of functional obsolescence originally comes from real estate, although it has spread to other markets like the equipment appraisals market. An item can be said to be functionally obsolete if it is less useful or desirable than it was before. Anyone who has ever upgraded their iPhone to the latest model should understand this concept. 

An item that is obsolete usually has an outdated design feature that cannot easily be changed. In real estate, an example might be a one-bathroom house, when neighboring homes all have 2 baths. For personal property such as a car or truck, an outdated feature might be an early generation personal navigation system that is not as robust as present models of dashboard navigation. 

When there are like items on the market that have newer features and are more desirable, demand for the old item wanes as demand for the item item increases. As more people buy the new item, the value of the old one will continue to decline. 

This has a range of implications for the property owner. A store owner could get stuck with lots of old inventory if he or she invested heavily in an item that has been replaced by a newer model. A landlord could be forced to make costly repairs to an apartment if tenants did not want to rent the unit due to old, less desirable features. Or the items could be sold for reduced profit, with the decreased equipment value cutting into the business's bottom line. 

How to Determine Functional Obsolescence

While you may suspect that something is becoming obsolete, only a machine appraisal can confirm this lowered value for you in terms of real dollars. During the machinery valuation process, an appraiser will review the piece of equipment, compare it to similar inventory, note its condition, and look at other market factors that may effect the equipment or machinery valuation.

Let's say an appraiser was looking at a bottling line that was supposed to bottle 2 units per second. If the unit could not be operated at its full capacity due to external factors, or if the unit required a tune-up and could not operate efficiently, it would not be used at its full capacity and would thus take on a degree of obsolescence. A tune-up may restore the unit to peak operating condition; however, when obsolescence becomes so large, it may be more cost effective to replace the unit than repair it. 

A machine appraiser can examine the equipment and determine the presence of obsolescence. Lowered equipment values could mean a greater tax deduction for the business. Alternately, a lower value could help the company decide to sell the equipment and invest in better technology or realize that a tune-up will save money over purchasing a replacement bottling line. 

Equipment appraisers who specialize in the niche you serve are best qualified to gauge obsolescence. When it comes to valuing the equipment you use every day, trust the experts at Equipment Appraisal Services. 

Tags: appraisal depreciation, functional obsolescence

What is appraisal depreciation?

Posted by Equipment Appraisal Services on Mon, Nov 02, 2015 @ 01:30 PM

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Most people are familiar with accounting depreciation.  But what about appraisal depreciation?

When performing a machinery valuation, an appraiser will do his or her best to determine the value of all pieces of equipment and machines utilized in business. As part of determining the present value of a particular item, an appraiser will review the depreciation of a given item. When you understand what appraisal depreciation is, you will better understand the information presented to you by the appraiser. 

What is the appraisal method of depreciation?

Hopefully, you are already familiar with the concept of depreciation. This refers to the amount of value that an item loses (or depreciates) in a time period. 

Let's say you drive a new truck off the lot and plan to use it for business. You just paid $39,999 for the truck. The minute you drive the truck off the lot, it begins to depreciate. 

After two years and 60,000 miles, let's say that you want to sell the truck. Since it has depreciated for 24 months, you could not sell it for the same amount you paid. If the truck depreciated $12,000, you could assume a sales price of $28,000.  In the case of a truck, a better option might be to look at comparable sales.  But what if you had a niche piece of equipment where there are not many comps?

An equipment appraiser has access to manuals that outline depreciation formulas for specific types of equipment.  Appraisers look at a number of factors when determining depreciation which may include physical deterioration, economic obsolescence and functional obsolescence.  Appraisers will look at the normal useful life of machinery and equipment, not the accounting depreciable life, since these are often not the same.  Appraisers also adjust for the replacement cost or reproduction cost new, where accounting depreciation takes the original cost in its calculation.

Why do appraisers take depreciation?

There are many reasons that a company owner might ask for a machine appraisal. Common scenarios to get equipment appraisals performed include:

  • When selling, auctioning, or trading in an asset
  • When donating an asset to charity
  • When preparing to sell the business
  • When getting insurance estimates
  • When declaring bankruptcy
  • When taking out a loan, financing, or refinancing your business
  • For accounting or tax purposes

Savvy business owners understand that they have a flawed idea of how much their business and their assets are worth on the open market. They attach sentimental or emotional value to equipment because they take pride in what they do. To get a "reality check" on an item's value, business owners contact an appraiser who works with other companies in their niche. Appraisers specialize just like other business professionals do, and you wouldn't contact a real estate appraiser for machinery valuation, would you?

When an appraiser estimates the depreciation of an item, they have insight into its value. By comparing the depreciation with current market demand for the item, the item's historical uniqueness, and other variables, the appraiser can set a fair dollar value for the item. 

Taken together, asset depreciation, independent research, and equipment analysis can help the appraiser accurately appraise a piece of equipment and your business as a whole.

Tags: Equipment Appraisal, Physical Deterioration, appraisal depreciation