Equipment Appraisal Blog | Understanding Machinery Appraisals

Discover your equipment's real value beyond physical depreciation

Posted by Equipment Appraisal Services on Tue, Dec 26, 2017 @ 04:13 PM

physical depreciation.jpg

Your equipment is a big part of your business assets. But do you know what that machinery is really worth? Many companies rely too strongly on physical depreciation tables that take the age of the equipment into account, but not the market conditions or the condition of the equipment itself. Is that old table saw really not worth anything, or does it have value that can help you with negotiations down the road? Here's a quick look at what physical depreciation is and how to determine your equipment's real value.


Discover your equipment's real value beyond physical depreciation

Let's imagine a situation. A partnership is breaking up, and it's becoming rather messy. One partner is staying with the business and wants all the fully depreciated equipment to stay with the company. In his mind, it has no value on paper, so it shouldn't be an issue to hang onto it. The other partner who is leaving is demanding that his interest in the equipment be paid off, because the equipment is still used on a daily basis to produce income for the business. Therefore, the equipment does have value.

The next person involved in the dispute is the bookkeeper or accountant, who shows that the machinery has been fully depreciated and no longer has value as an asset to the company. But by definition, this means that the equipment should no longer be functioning effectively. Who is right and who is wrong in determining value?

When a physical depreciation is used, most commonly with income taxes, there is a strong expectation that the equipment will last a set period of time. It could be two years, five years or a decade. On average, that equipment will need to be replaced at the end of the depreciation period, therefore the equipment's value drops following a table as time passes.

But if the equipment is being maintained well, not abused or pushed to the end of its rated capacity, it can last much longer. Almost every business has a piece of equipment bumping around that is absolutely ancient, but it still performs very well. If the books show that this equipment has no value, how can you make a claim when it's destroyed in a fire or stolen? Two words: equipment appraisal.

An equipment appraisal looks at so much more than a simple depreciation table for taxes. The appraiser will take a solid look at the machinery, noting its condition, brand, model and any packages, kits or after-market add-ons that may boost its value. They will also look at how well the mechanical systems work, whether it consistently produces high-quality results and if it is in need of repairs or maintenance. Any abuse or damage will be noted, as well as wear that may shorten the equipments estimated remaining useful life. Finally, they'll look at the market conditions and determine whether demand will raise the value of the equipment.

When you take the time to have an equipment appraisal performed, you have proof of your equipment's value for insurance, tax, financial and legal purposes. However, to have that proof hold up in those circles, you'll want to make sure the appraisal is performed by a certified equipment appraiser. The certification process provides the appraiser with the appropriate methodologies to calculate equipment value that have been tested in a wide range of circumstances and hold up well for these purposes.

Tags: Physical Deterioration, physical depreciation

Using Physical Deterioration for Equipment Depreciation

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


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

What is appraisal depreciation?

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


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

How to Determine Physical Deterioration for Asset Depreciation

Posted by Equipment Appraisal Services on Fri, Apr 24, 2015 @ 01:14 PM

physical asset deterioration depreciation

Building on the framework of understanding an asset’s effective age, one can then begin to look at that asset’s physical deterioration.  Physical deterioration is simply an effect of depreciation on an asset caused by physical means, not including economic or functional obsolescence.  In order to find the physical deterioration, take the asset’s anticipated physical life (how long it is supposed to last) and divide it by the effective age.

For an example of this concept, assume an asset has a physical life of 10 years and an effective age of 5 years. With these assumptions, 50% would be the apparent physical deterioration.  This, in the appraisal world, is what is known as the age/life ratio. 

There is the possibility, however, that the asset mentioned may outlive its physical life.  This is where effective age becomes an important factor of the equation. Sometimes, an asset can be taken care of to the point that its effective age outlasts the physical age, which requires the physical deterioration to be altered.  In this case, instead of using merely the physical life in the denominator of the equation, the sum of the effective age and remaining physical life of the asset would be used.  If the physical life were to be used when the effective age is greater than it, it would indicate more than 100% physical deterioration, giving the impression that the asset does not function.

Expanding from the first example, supposed that this same asset still has the physical life of 10 years but has now progressed to have an effective age of 12 years.  This may have been due to a rebuild or overhaul on the equipment. In the process, it has been determined that the asset physically has a remaining physical life of 3 more years.  As a result, the physical deterioration would be 12/12+3, indicating an 80% physical deterioration.

Putting this concept to use, an owner of an asset can use information to determine how much functionality has been used up from an asset, which may assist in its valuation.

Tags: Equipment Appraisal, Physical Deterioration, Asset Depreciation