FIXED ASSET VALUATION METHODOLOGY
Our engagement and key scope of work
We, as a valuation firm consulting a real estate appraiser specialist), conducting comprehensive valuation on current assets of various clients such as land, building, plant / machinery and vehicle etc.
We are to perform agreed-upon procedures as laid out later in this text with the purpose of:
- As a Sadruddin Associates (Pvt.) Ltd., our engagement is mainly about valuation of fixed assets only.
- Assessing the consistent implementation of fair market value, measurement and assessment of current assets.
- Updating the valuations of specific classes of current assets, as list provided by the valued client.
The valuation involved the project is independent to assess fair and reasonable market value of any appointing client (Land / Building, Plant / Machinery and vehicle etc.).
REFERENCE OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
Capitalization, measurement at recognition and measurement after recognition
The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:
- It is probable that future economic benefits or service potential associated with the item will flow to the entity; and
- The cost or fair value of the item can be measured reliably.
The criteria to capitalize the tangible assets as Property Plant and Equipment depend upon the nature of items and capitalization policies of an entity.
Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition as an asset, shall be measured at its cost.
Measurement after recognition can be made either at Cost Model or Revaluation Model as per IAS 16.After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.
If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.
The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Some items of property, plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every three or five years.
The classes of current assets within the scope of this assignment for above are:
- Building (Construction)
- Plant / Machinery.
- Motor Vehicle.
Appraisers’ qualification and understanding of the specific industry and asset classes
The appraiser ought to be a professional with relevant subject-matter expertise (industry, asset classes), possibly evidenced through professional certification, and substantial practical experience. Besides, the appraiser should be sufficiently independent and objective with regard to the entities and assets to be assessed.
Real estate (land, buildings)
For land we will require all information related to the parcel of land including the title deed, affection plan, development details, and any information in relation to subleases. The format will be to check against comparable transactions and compare this with the residual approach to ensure complete accuracy in the valuation.
For buildings we will apply financial modelling techniques including an examination of the legal hereditament, an analysis of the current lease structures and their effect on value. Each property will be compared to transactions in the market as well as a financial assessment of the income generated by the property which will then be capitalised at an appropriate rate having allowed for vacancy, maintenance and obsolescence. This dual approach will confirm the real current value of the assets.
Approach and Methodology of evaluate Land.
While preparing evaluation report different methodology being adopted to evaluate the property particularly land.
The following are the basis methodology adopted for land.
Regarding evaluation of land in case of Plot recent sale-purchase price, we enquired from the various property dealers/Plot Brokers in the locality and after entire satisfaction and discussion held with the area property dealers, we ascertain the present market value considering its location, size and measurement of land, frontage, depth, approach, passage to the land etc. and consider its market potential and possession of land.
For the scrutiny we obtain copies of various documents pertaining to the land such as Sale Agreement, Lease Documents, Lease Agreement Deed, Sale Deed, Allotment of Land, Confirmation Possession Letter, we also check illegal possessed if any, No Objection Certificate, Copies of all paid Challans / Dues, Copy of Form-II, Form-VII, Sketch/Map and Search Certificates. The most important we do physical inspection and enquired from chowkidar, security guard and check the boundary wall, gate, etc.
Approach and Methodology of evaluate Building.
While preparing evaluation report different methodology being adopted to evaluate the property particularly building.
The following are the basis methodology adopted for building.
- To obtain latest drawing with land sketch, showing with any amendment addition, new construction etc.
- To calculate total covered area with each class of construction compare with year of construction.
- To get present value with each class of construction, we apply and calculate covered area with present cost of construction to bring the present cost for the re-instatement value, then after apply 3% per annum depreciation on the amount calculated with the rule of diminishing method and after application of depreciation the present market value calculated. Some time we apply more depreciation, depending and considering the wear & tear and maintenance of the project / building.
- We also obtain account audited balance sheet for the last three years for comparing the value taken by the concerned authority for audit point of view, depreciation taken year-wise etc.
Methodology adopted for evaluation of Plant / Machinery
To evaluate plant and machinery we physically inspect the entire plant / machinery with section-wise installation. The age, make, origin, condition etc. has been taken into account, to arrive at the present market value comparing with the invoices, custom bill of entries, packing lists, date of installation, working capacity and maintenance record etc.
While conducting evaluation the present value been computed, after application of suitable appreciation / depreciation factors. Rate of inflation and devaluation has been considered for optimum and closest approximate value of plant/machinery. For obtaining the nearest value we also take 05% to 10% installation charges and add other levies to start and complete the plant/machinery.
Methodology adopted for inspection of Motor Vehicle
Regarding valuation of vehicles we do initial inspection of the vehicle, checking present physical condition of the vehicle. Also examine the following and verify from the supporting documents:-
- Copy of Registration Book of vehicle from registration plate.
- Engine and Chassis Number with manufacturing plate.
- Year of Manufacturing
- Horse Power (No of C.C)
- Millage Done (Meter reading)
- Physical Condition
- Accessories (Factory fitted / additional)
After entire satisfaction and verification of the documents we compare the value of motor vehicle under reference with the replacement value of new considering present market value of similar make and model of the motor vehicle, usage / millage done. After detailed discussion and enquiries from the different car dealers / brokers as well considering its condition, we assess the value accordingly.
Using these inputs, we perform a top-down valuation of any client as a whole using the following approaches:
- Depreciated replacement cost: The approach involves estimating the current replacement cost of the asset and then allowing for depreciation to arrive at the current depreciated replacement cost
- Fair market value: Establishing the marketability criterionand gathering market and transaction comparables from reference markets.
Substantive procedures at asset level detail
Existence and occurrence
Existence of assets, combined with their valuation, is certainly a key assertion for a valuation assignment. We test existence by inquiry of management, followed by physical inspection of tangible assets.
Rights and obligations
Beyond existence, rights and obligations linked to an asset are essential when determining fair values, for tangible assets. We test this assertion by inquiries of management, inspection of documentary evidence, and, where appropriate, by inspection of the asset or related documentary evidence, or through confirmation with external parties, such as regulatory authorities, legal counsel, banks and other business counterparties.
Combined with existence and rights and obligations, valuation is the key assertion covered by the scope of our firm. Our assessment covers all items under the scope of our assignment that are material in value individually or as a pool. Apart from assessing a representative sample of assets, we pay attention to assets that warrant additional testing, impaired, or are near the end of estimated lifetime. We use our technical expertise to judge the physical condition of tangible assets, but also potential obsolescence from a technological or business point of view, which extends to intangible assets as well. Our procedures comprise inquiries of management (senior and functional area) and responsible staff, inspection of assets and related documents (e.g. purchase contracts) and possibly observation, confirmation, and re-calculation (e.g. of depreciation, net book values, fair market value, present depreciated value). Our report includes any findings as to the appropriateness of depreciation methods and related assumptions (accounting estimates) for tangible assets.
Detailed valuation procedures depend on the type of asset concerned.
Real estate (land, buildings)
The process for the valuation of property is rudimentary; typically it involves an inspection of the asset to check for defects and for the property’s configuration as well as an overview of activity in the immediate proximity. Following this full research is conducted into comparable transactions, any major development schemes that may affect the value positively or negatively, an understanding of the prevailing planning laws to understand if the property is under-utilised and can the property be enhanced. Once the research is complete, the inputs are derived and financial models are designed for each asset. This is then compared with any transactions that have occurred recently and the final value is derived.