By their very nature, companies are established to generate wealth, and in order to quantify the income they gain, they must account for the expenses they pay in the course of doing their business. Hence, it is very important that they keep detailed records of all their assets, especially those that cost a lot of money to buy.
Undoubtedly, fixed assets, such as manufacturing facilities and heavy machinery, account for the company’s highest expenditure, therefore the need to determine their price and value regularly through plant and equipment valuation is necessary for any business.
A plant and equipment valuation is a comprehensive assessment of the fair market value of facilities and machinery intended for the production and distribution of products and services. Such detailed evaluation can only be conducted by certified valuers since various factors must be considered for the assessment. Hence, it is important for businesses, especially those with high capital costs, to work with these experts.
Various reasons for plant and equipment valuation include:
Asset Verification
The valuation of plant and machinery ascertains the fair value of the assets and allows the business to compare their value to that of the market. This enables the company to intelligently and definitively decide if they should purchase the assets. In addition, this evaluation helps the company figure out if these investments will be useful and profitable in the long run if they decide to purchase them. Plant and equipment verification is important for a company’s long-term success, but it is especially crucial for those with high capital costs.
Estimation of an asset’s remaining useful lifespan
For any business, the purchase of a manufacturing facility and its associated equipment necessitates a sizeable capital from the company. As a result, the company must ensure that the assets that it buys will produce a greater return on its initial investment. A plant and equipment valuation can help with this by estimating how long the asset will be useful. Moreover, such an appraisal can also aid in the optimization of the plant’s operational performance by providing insight on when machine maintenance should be performed and when equipment replacement is necessary. So, the company can set up regular maintenance for its equipment and allocate funds to buy new equipment in the future.
Risk Management
Arguably, one of the most important benefits of performing plant and equipment valuation is the ascertainment of logical and financial risks that could come from the assets. Knowing the causes and effects of these threats greatly assists businesses in preparing for their possible occurrence and mitigating their consequences. More importantly, it also ensures the plant’s operational efficiency and personnel safety.
Buying and Selling Equipment
The purchase and sale of equipment can be for a number of different reasons. Perhaps a company wants to purchase new machinery because the one that they have has reached the end of its useful life or it is now inferior in quality to the newer one. Maybe the company is in the business of buying and selling different kinds of equipment. For companies facing financial woes, they may choose to liquidate fixed assets in order to supplement their cash flows. Regardless of the reason, a company that wants to buy or sell machinery must use the services of a certified equipment appraiser to get an accurate estimate of the assets’ fair market value with respect to the current state of the market, the condition of the assets, and the present supply and demand for the equipment. Doing so ensures that the business receives the best offer at the best time.
Financial Reporting
From a financial standpoint, an accurate appraisal of manufacturing facilities and operating equipment is absolutely beneficial for both the companies and stakeholders. This is because the result of the assessment offers vital information about the worth of the company’s most important assets and provides a sufficient understanding of the company’s overall value. In particular, plant and equipment valuations assist in the assessment of the asset’s carrying value, which aids in the determination of losses from depreciation and impairment. The disclosure of this information in the financial report aids stakeholders in estimating the fair value of tangible assets, which ultimately allows them to make clear and informed decisions about their investments in the business. In addition, it gives potential investors a glimpse of a factor that affects a company’s financial performance. Furthermore, legal and regulatory organizations can evaluate the company’s compliance with their standards.
Growth and Expansion of Operation
A company generally constructs new production facilities and acquires new equipment to increase their manufacturing capacity, improve their efficiency, optimize their process, and elevate their overall performance. To achieve these objectives, careful financial planning is required, and in order to do so, the company needs an accurate assessment of the fixed assets that they will need to acquire. In this situation, plant and equipment valuation is essential because it provides insight into the costs of the assets and the amount of funds that must be raised.
Written By Kevin Kyle B. Santos
Aviso Valuation and Advisory Corp. is a real estate consultancy firm that provides Plant & Equipment Valuation services for Manufacturing companies and others. We comply with international standards such as the International Valuation Standards (IVS) and International Financial Reporting Standards (IFRS). For inquiries and appraisal requirements, you may send us an email at info@askaviso.com, or call us at (02) 8570 65 35 to 36.
