VALUATION OF PLANT MACHINERY AND CASE STUDIES BY

VALUATION OF PLANT & MACHINERY AND CASE STUDIES BY AMISH SURYAKANT PATEL, MRICS B. E. (Elect. ), Master of Valuation (P&M) Master of Valuation (Real Estate), LL. B. (Special), Certified Valuer Practicing Valuer, Land & Building, Plant & Machinery Director, RBSA Valuation Advisors LLP, Ahmedabad – 380 015 Phone: +91 79 4050 6080 Mobile: +9197243 43842 W: www. rbsa. in E: amish. patel@rbsa. in, amish 8971@yahoo. com PRESENTED AT Institute of Science & Technology for Advanced Studies and Research (ISTAR) On 14 th December, 2013, Saturday

Valuation ? ? ? !!! 2

Basic Definitions Cost Price Value Plant Machinery Equipment General Purpose Machinery Special Purpose Machinery Custom Built Machinery Replacement Cost Reproduction Cost Scrap Value Salvage Value Physical Life Economic Life Depreciation Obsolescence Gross Current Replacement Cost Depreciated Replacement Cost 3

Procedure for the Valuation of Plant & Machinery 1 • Instruction from client 2 • Scope of Work 3 • Location of Plant & Machinery 4 • Purpose for which Valuation is required 5 • Date of Valuation 6 • Offer 7 • Appointment as Valuer 8 • Site Visit, Market Survey, Data Analysis & Report Writing 4

Definition As per the International Valuation Standards published by IVSC, Market Value is the estimated amount for which an asset or a liability* should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. * Will be applicable from 1 st January, 2014 5

Definition As per IVS, Fair Value is the estimated price for the transfer of an asset or liability between the identified knowledgeable and willing parties that reflects the respective interests of those parties. * * This definition does not apply to valuations for Financial Reporting… As per IFRS 13 Fair Value Measurement, Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 6

Basis of Valuation A basis of value is a statement of the fundamental measurement assumptions of a valuation Basis of Valuation fall into Three principal categories: I. III. IV. Market Value Investment Value and Special Value Fair Value (these three basis are well described in IVS) Valuation may require the use of different Bases of Value that are defined by statute, regulation, private contract or other document like various valuation measurement bases found in IFRS. 7

Definition As per the IVS, Investment Value is the value of an asset to the owner or a prospective owner for individual or operational objectives. Special Value is an amount that reflects particular attributes of an asset that are only of value to a special purchaser. 8

Checklist for the Valuation of Plant & Machinery ABC Analysis Process Flow Diagram Machinery Layout Data Collection Plant Visit Preparation of Inventory • Macro & Micro Identification Inspect all licenses, permits and consents of regulatory authority Condition of Plant & Machinery Verification with Fixed Asset Register (F. A. R. ) 9

Valuation of P & M can be done under following Scenarios A. Value in existing use in-situ B. Value in existing use ex-situ C. Value in alternative use ex-situ D. Value in alternative use in-situ 10

Data Analysis Ap pro ach Cost Market Income 11

Cost Approach Calculate G. C. R. C. Depreciation & Obsolescence Depreciated Replacement Cost (D. R. C. ) • From Market Inquiry / By Quotation • From Personal Data Bank • By Indexation • Method of Depreciation • Technological, Functional & Economic Obsolescence • Business Enterprise Equation • GCRC – Depreciation ≈ Market Value Subject to potential profitability 12

Assumption & Special Assumptions are matters that are reasonable to accept as fact in the context of valuation assignment without specific investigation or verification. They are matters that, once stated, are to be accepted in understanding the valuation. Special Assumption is an assumption that either assumes fact that differ from the actual facts existing at the valuation date or that would not be made by a typical market participant in a transaction on the valuation date. Assumptions and Special Assumptions must be reasonable and relevant having regard to the purpose for which valuation is required. 13

Conclude with opinion or advice. Opinion or advice must be clear, definite and unambiguous. 14

Report Writing means the information and opinion, which the client is seeking to be put in to words in the best possible manner. Important decisions depend on the information & advice given in a report. Advice should not be obscurely expressed, it should be skillfully worded to convey the meaning as intended. 15

Essentials of Reports Series of complete paragraphs for giving facts to A Methodical be framed. Each paragraph must be independent and logically follows the earlier paragraphs. One can refer any particular part without B Well Set Out difficulty. Appropriate title, heading and sub headings should be given to each paragraph 16

Essentials of Reports C Continuity It should be read as complete narrative from start to finish. No obvious break between various parts. Report is an essay on technical point written in a simple language/words for the client. Schedules and Appendices should not be the part of the main report Keep the report to the length required to impart D Concise & Definite the facts and opinions needed. It should contain definite facts, opinion and advice in clear and unambiguous manner and words. 17

Other important points for Report Writing A Certain dignity of tone to be preserved, so that facts and opinions can be expressed convincingly; Choice of words: Use simple words having precise meaning B rather than ornamental words. There should be no exaggeration. Avoid meaningless words like ‘Pretty good, Quite fair, Needless to say, In my opinion’ etc; C Avoid Personal pronoun. 18

Other important points for Report Writing D Avoid Technical phrases; E Use punctuation at correct places Supporting documents: F Schedules, Tables, Graphs, Maps, Plans, Layout, Photographs, Expert’s report etc. are decisive in achieving effective communication and must attach as annexures 19

General structure of the Report PART – I • Preamble PART – II • Statement of Plant & Machinery PART – III • Annexures 20

Submission of Report Submit along with the Covering Letter. Preservation of Data 21

Conclusion A Plant & Machinery valuer should follow the above mention procedure to execute an assignment of Valuation of Plant & Machinery, but make appropriate modification in the procedure depending on the type of industry, type of Plant & Machinery, availability of data, the time period within which the assignment to be executed, purpose of valuation, any specific instruction given by the client. 22

Thank You 23