Equipment Appraisal Blog | Understanding Machinery Appraisals

One of the most common documents an equipment appraiser will receive from their clients during the early stage of the valuation process is an asset depreciation report, which tracks all the capitalized machinery, FF&E, real property, and improvements that a company has invested in and acquired over time. This document can be useful in the valuation process; however, it is generally not reliable on its own.

The capitalized depreciation record will usually be categorized and itemized by type of asset and includes the date of acquisition, dollar amount, and a brief description of the item. There will also be columns for accounting information so the company can internally track depreciation while providing a helpful tool for property tax and balance sheet purposes.

From an appraisal perspective, the original acquisition dates and associated investment amounts are the most beneficial pieces of information, however, with the descriptions typically abbreviated, it will be difficult to rely on the document to create an accurate itemized listing for the purposes of researching values. These documents can also be incomplete or include equipment that has long been disposed of. This is because companies will expense a portion of their equipment purchases while not having a consistent process in place for updating the report for accuracy.

It is important the appraiser and client review this listing together with the goal of expanding the descriptions while adding items that are not on the list and excluding those that should be removed.

For example, old computer equipment might have been sold or scrapped years ago for newer models but remain on the list, or there may be $10,000 worth of hand tools that were expensed over the years and never capitalized and depreciated.

The goal in any M&E appraisal is to create a refined list that is reasonably accurate and complete so the valuation process will be supportable. The primary focus can be on the larger, more valuable equipment while potentially grouping smaller asset types like office equipment and support tools so the process doesn’t get too bogged down and time-consuming.

In summary, when you provide an asset depreciation schedule as part of the data requested by the appraiser, anticipate the need to get more involved to afford them a better understanding of the detail behind it so they can develop a more accurate listing that represents your company’s machinery and equipment.

Simply put, the better the data provided, the better the result will be with the valuation. Discuss this topic with your appraiser proactively to ensure a timely and effective process.

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.

As tax season is in full swing, there are two ways to handle depreciation of equipment: the easy, risky way or the harder, smart way. Though it's easy to use the government's standard depreciation tables and schedules to depreciate your equipment values over the years, you may actually be creating a situation where you're opening your business up to risk or leaving money on the table when looking at potential opportunities. Depreciation is legal documentation of your business assets and should be accorded the same regard as your deed to your location or your business licenses. Here's why using machine appraisal to get a proper figure for depreciation of equipment can make a huge difference to your company:

How miscalculating depreciation of equipment affects your company's potential

Situations where value remains higher than the standard depreciated value

In some situations, an equipment appraiser may assign a higher value than a standardized depreciation table. If you use a depreciation table in these circumstances, you're stating a lower value than the machine may actually be worth. This is a problem in a few areas. A tax agency may claim that you are intentionally claiming a lower value to avoid taxes, especially if you use the equipment for an extended period of time after it has been fully depreciated per the standardized table. You can't leverage your assets fully to take advantage of opportunities that may come your way because your financial institution doesn't know you have more value in your machinery than stated. Not having an accurate machinery valuation may cause problems with getting cash from your insurance company to purchase comparable equipment in a loss because the tax record and depreciation is the only proof of value you have.

• Is your equipment seeing easy use? If it isn't getting normal wear and tear, it might have a higher value than an average piece of equipment of that type and quality because it will be expected to last longer.
• Did you invest in quality equipment that is still expected to be in service and retain value beyond the end date of the standard depreciation table for that type of equipment? If so, it might lose value at a slower rate and will still have value long after it has been completely depreciated.

Situations where value may be lower than the standard depreciated value

But there are also situations where your value may be below the standardized depreciation tables. In these instances, you may be overstating the value of the equipment, leaving your business open to risk and higher taxes. Paying taxes on assets that are shown as having a higher value creates a false high value, raising your business taxes. At the same time, using these figures to secure financing may open your business to additional risk when an opportunity doesn't pan out and the machinery won't sell for its depreciated rate.

• Does your equipment tend to see heavy or abusive use? If it does, it might have a lower value than an average piece of equipment of that type and quality due to a shorter expected lifespan.
• Is it of average or bargain quality? It may not last the full length of the depreciation table, forcing you to pay higher taxes on it until it fails.
• Have there been issues with irregular maintenance or uncompleted repairs? These can lead to a shorter lifespan, causing it to be removed from service before it's completely depreciated.

If you need to have equipment appraisals performed to get a corrected depreciation value, Equipment Appraisal Services can help. Our certified, highly-trained equipment appraisers are ready to find the right value for your machinery.

What are your company's equipment values? Though you could guess, a machinery and equipment appraisal can give you a better idea of the value of your company's machinery. But beyond making a quick guess based on what you've seen sell lately or where it is compared to new models of older machinery, the only way to make sure by having a quality machine appraisal performed, during which time the effective age of the machinery will come strongly into play. Let's take a look at what equipment appraisers concentrate on when determining equipment value.

Effective Age of an Asset in Machinery Valuation

Though you can try to determine the value of a piece of machinery, there are a few techniques that don't really work well. Using standardized depreciation formats instead of considering the long-term viability of the equipment means you may have completely depreciated the assets you are still using on a regular basis, which provides an inaccurate view of your business' financial outlook. At the same time, basing the value on local sale prices or dealership offerings may also wreak havoc on your financial outlook, as other machines being offered for sale may be of higher or lower quality and maintenance than the machinery you own and need to appraise.

When an equipment appraiser looks at your business' equipment, he or she is not just looking at the age, manufacturer and model. Because machinery can be kept in a wide range of conditions and levels of maintenance and repair, a much closer approach must be undertaken to determine what the effective age of a machine is as well as the expected remaining useful life from that machinery. But what kind of details are considered during equipment appraisals? Let's continue on for a look.

How Machinery Valuation Specialists Determine Effective Life

So how do machinery appraisers determine the effective useful life of your equipment? They take a good look at the machinery, to see whether it has had excessive wear and tear or other signs of abuse, such as dents, welded repairs or similar concerns. Other areas they'll consider is the working environment and how well the machine has been protected from the elements. They'll take a look at your maintenance and repair logs to ensure that the equipment has received proper care or whether there are outstanding issues that could lead to further problems down the road. They'll consider the hours meter and whether the degree of wear matches up to what they'd expect from machinery with that amount of use. Beyond the machines you own and hare having appraised, they'll also take into consideration similar machines they've appraised in the area and how long they tend to last, basing your machine's potential effective life on all these factors.

By knowing your company's equipment appraisals are accurate and based on solid methodology, you're able to make better decisions in the future that will benefit your company, such as determining when to plan for expected machinery changes as older assets reach end of life. By having a quality, certified machine appraiser take a good look at your machinery and determining its effective age and potential future lifespan, you have legal documentation of the condition of your machinery for financial or insurance purposes if needed. If you have any further questions on how effective life is determined or want to schedule an equipment appraisal, please contact us today. Our highly-trained, certified staff are always happy to help with your equipment appraisal needs.