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

economic obsolescence of equipment.jpg

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

What does economic obsolescence mean?

Posted by Equipment Appraisal Services on Thu, Oct 22, 2015 @ 08:30 AM


You may have a piece of equipment that is in good working order, yet be shocked to hear that a machine appraiser tells you the equipment is obsolete in economic terms. To understand and act upon a machinery appraisal, you must have working knowledge of the concept of economic obsolescence. Let us explain it for you. 

What is Economic Obsolescence? 

The American Society of Appraisers notesthat economic obsolescence is a difficult factor to explain. It refers to a situation where a piece of equipment loses either its usefulness or its value for factors unrelated to the object itself. 

For example, a typewriter was highly useful until computers came along. The typewriter became obsolete once computers displaced typewriters in the majority of offices.

Odds are, if you are a niche retailer, you have specialized equipment in your business that is or will become obsolete. 

A machinery valuation can help you determine whether to repair or replace outmoded equipment, help you conserve business profits, and show you where you should invest additional capital.  

An appraiser performing a machinery valuation will examine the item, determine whether economic obsolescence is occurring, and identify the factor or factors that are causing it. Finally, an appraiser will provide research materials to support their appraisal and go through the results of the valuation with you. 

You will have a good understanding of your equipment value at the end of the process. As a result, you can make informed decisions about business growth.

Factors Affecting Economic Obsolescence

An equipment appraiser will review a broad range of factors when appraising a piece of machinery. During the equipment appraisal, the appraiser may notice one or more factors that could suggest obsolescence. These include: 

  • Increased cost in materials and supplies related to usage of the equipment
  • Reduced demand for products made utilizing the machinery
  • Changing governmental or environmental regulations that affect the use of the equipment
  • Over supply of product in the marketplace 

Any these factors reduce the profitability of the product and viability of the equipment. When the equipment is no longer cost effective, or the market does not require the products made with the equipment, it can become obsolete. 

If there is a better opportunity to invest staff time or money, the conditions may be right for economic obsolescence. 

While appraisers agree on the circumstances that might suggest obsolescence, they disagree on when the condition is actually present. The concept is highly subjective, so one appraiser may see decreased demand as a blip in the market while another may perceive it as the new reality going forward.  Machine appraisers can use several methods to quantify the degrees of obsolescence, including gross margin analysis, inutility, supply and demand analysis, industry return on capital or equity, market-derived approach, and income or earnings shortfall examination. 

The subjective nature of the concept can make it difficult for business owners to accept a machinery valuation or take the appraiser's word that equipment may in fact be obsolete. 

Before winging it, take the time to talk with the appraiser and make sure they have the necessary knowledge. When you select a professional who knows your business model, you will feel more comfortable with their judgment and all equipment valuations.

Tags: Asset Depreciation, economic obsolescence, American Society of Appraisers