Equipment Appraisal Blog | Understanding Machinery Appraisals

Determining Depreciation and Useful Life for Machinery & Equipment

Posted by Equipment Appraisal Services on Mon, Dec 28, 2020 @ 08:00 AM

Appraisers Depreciation Useful Life

When appraisers look at variables in an equipment valuation, two of the key factors taken into account are useful life and depreciation. Though the process may seem straightforward, machinery & equipment appraisers look at different characteristics that assist in determining useful life and depreciation within the current market. This differs from the prescribed approach a certified accountant takes.

Accounting Methodology of Determining Depreciation and Useful life

When it comes to capitalized machinery & equipment on a company’s books, accountants treat depreciation and useful life according to accepted principles. One such principle is the Modified Accelerated Cost Recovery System (MACRS). This method is based around a uniform, straight line reduction in value, or depreciation, which starts with the acquisition price of the equipment and amortizes that price, or initial value, equally over a standardized term, usually five to seven years. The endpoint of the depreciation is typically zero.

An Appraiser’s Market Driven Methodology of Determining Depreciation and Useful Life

When appraisers value machinery & equipment, they research the market to find as much information as reasonably possible to estimate its current value. Depreciation and useful life are two components of this analysis, and can be determined through relevant third party sources that buy, sell and utilize the type of assets being appraised. This is a direct market derived approach to understanding these variables more in tune with the reality of how they are valued over time and how long they can reasonably be expected to operate effectively before needing major rebuilds/overhauls or retire from service entirely.

It is important to understand these factors and take them into account as part of a complete market analysis which will also include reviewing comparable sales of the equipment being appraised. Market comparable data can oftentimes be limited or inconsistent across different sources and a balanced understanding of market depreciation and useful life can complement this data and provide reasonableness checks to the comparable sales.

Developing Market Depreciation Curves for Asset Classes of Machinery & Equipment

Once an appraiser has completed a number of valuations in specific markets and industries, they can consider creating a database of values which results in the development of market driven depreciation curves that will further serve as a reasonable source of historical data to consider on future valuations. This would be similar to the concept of subscription databases that are publicly available in certain markets such as construction, automotive and over the road transportation in today’s resource networks.

In summary, when your business needs an updated true market assessment of value for their capital assets, always look to an accredited equipment appraiser to complete the assignment.

Tags: understanding fair market value, depreciation of equipment, equipment valuation, market value, useful life

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

Posted by Equipment Appraisal Services on Tue, Dec 12, 2017 @ 10:04 AM

depreciation of equipment.jpg

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. 

Tags: Equipment Appraisal, depreciation of equipment