Equipment Appraisal Blog | Understanding Machinery Appraisals

What Is Fair Value?

Posted by Equipment Appraisal Services on Tue, Dec 01, 2015 @ 11:00 AM

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When you're considering having a machinery and equipment appraisal performed on your business equipment, you'll hear a lot of different terms used in regards to how equipment value is calculated. One of the more common terms you'll hear used is fair value. But what is fair value, how concrete is it in term of equipment values and in what situations is it used? Let's take a look.

What Is Fair Value?

Though it seems as though the value of machinery should be the same no matter your purpose, that's not always the case. In divorce proceedings where one person is buying out the other person's interest in a business, one party wants a low appraisal and the other a high one. In donation appraisals, both parties may want a higher appraisal than is warranted, so that one party can get a higher tax write-off and the other can claim higher donations to their cause. Fair value falls in the middle of these equipment appraisals.

Fair value is determined by using a solid methodology that is unbiased and is based on rational processes of determining the value. It looks at the costs of acquisition, replacement costs, utility, market demand, the risk involved and similar properties. Fair value is not always the same as market value, depending on conditions at the time. 

Is Fair Value a Final Value?

Fair value is determined using a consensus basis. A group of auditors will typically include the services of a machinery valuator, then the team takes into account many different factors and determines the best methodology and rationale to calculate value. After that, the calculated value is reviewed and either approved or rejected based on information uncovered during the review process, including whether the scope and objectives of the appraisal were appropriate choices, whether the machine appraiser had a truly unbiased view of the appraised equipment and if the machine appraisal as a whole was done using correct methods and formulas..

Because the reviewer will want to know the methodology used and whether the methodology fit in with the applicable standards, it's typically much better to use an accredited equipment appraiser to ensure that the proper processes were followed during the equipment valuation. In its most essential form, fair value is a more subjective value than the usual objective values determined by accountants using specific processes. 

In What Situations Is Fair Value Used?

There are a wide variety where fair value is used. Many financial reporting standards require or allow the use of fair value to report their company's assets and liabilities in a standardized fashion. It is typically much closer to the actual selling price of an asset than the asking price that a company wants to receive for selling that same asset. It is commonly used in accounting situations where a current value needs to be determined instead of basing the value on outdated historical prices or other accounting methods that may present an inaccurate financial picture of the business' assets.

Though many different calculations are inaccurately labeled fair value, now that you know the difference it will be much easier to arrange to have a machine appraiser provide the exact information you need to determine fair value. If you're still trying to find the right equipment appraiser for your company, please contact us. Our Machinery & Technical Specialties appraisers are accredited through the American Society of Appraisers and provide the best possible machine appraisal of your company's machinery assets.

Tags: Equipment Appraisal, valuation, fair value

An IT Equipment Appraisal Can Support Higher Business Valuation

Posted by Equipment Appraisal Services on Mon, Oct 26, 2015 @ 09:00 AM

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In today’s digital world, IT equipment plays a crucial role in the efficient functioning of any business office or manufacturing facility. It helps people and machines to communicate, controls production demands, and manages inventory or shipping needs. When determining the value of a given business, an IT equipment appraisal can support a higher valuation.

The business may need a valuation for a number of purposes. The owners may be considering a sale, some type of incident might have resulted in an insurance claim, or the valuation may be needed to justify a request for additional capitalization. Whatever the reason, a professional equipment appraisal service can make sure that the IT equipment is properly accounted for in the valuation.

IT equipment often serves as the backbone of any type of industry today. The modern office cannot function properly without it, but manufacturing concerns also rely on technology to operate at their highest capacity. There are two types of classes involved in IT equipment - tangible and intangible. The tangible items are those things which are more visible - servers, printers, desktops, laptops, and computer-aided manufacturing assets, for example - although such things as computer software and networks may also fall under this category.

The intangible aspects of IT equipment can be more difficult to monetize. This might include a proprietary programs that have been developed to address specialized manufacturing for a particular plant, or other digital systems which contribute to the plant’s flow. An IT equipment appraisal may include the value of not only the hardware, but also the software associated with these systems. Factors an equipment appraiser might take into consideration when evaluating IT equipment include:

  • Value of the equipment itself: A machinery and equipment appraisal will include the actual value of the IT equipment itself. This takes into account the purchase price, depreciation, condition, and open market value to determine a fair equipment value.
  • Value of the software: This may be harder to place a value on. Can the operation run without the proprietary software its engineers developed to enable one piece of machinery to run in conjunction with another? Is there a specific program that gives this particular operation an advantage over its competitors? In a sales situation, this might very well be tangible topics for negotiation that are of crucial interest to a potential buyer. In an insurance situation, this could help determine how difficult it might be to replace this information.
  • Value in the business: A business that is already set up with the latest in servers, networks and mobile communication technology has more appeal to a potential buyer or lender than one without these capabilities. Companies that have not invested in technology are often looked at as being behind the times and inefficient.
  • Impact on performance: How important is this equipment and information to the smooth functioning of the operation? If the shipping department cannot operate without a full schedule of all trucking operations, then productivity and sales could decrease. Anything that lends to the ability to produce, manage, control or ship has an impact on the entity’s overall performance.

If a business can prove that there is a value to the IT equipment and underlying software, it could result in a substantially higher sales price, insurance settlement, or bank loan. That is why an IT equipment appraisal is such an important part of a business valuation.

Tags: Equipment Appraisal, valuation, IT equipment appraisal