I recently submitted a few examples of Machinery & Equipment Review problems–along with a sample review report–to an overseas valuation organization that’s putting together an in-house manual for its members.
What’s interesting to me is that although this organization follows International Valuation Standards (IVS) instead of USPAP, has a very different equipment market than we usually see here in the States, and is governmentally regulated in a way that ASA equipment appraisers are not, the problems of valuing machinery and equipment are no different, although the language used is sometimes different. Most obviously, IVS uses the term valuer or valuation rather than appraiser or appraisal. You can read more about the USPAP-IVS connection in The Appraisal Foundation’s A Bridge from USPAP to IVS 2018.
Whether valuers or appraisers, those who review the reports of others often encounter remarkably similar problems. The problems I submitted to the overseas organization provide a quick and interesting glimpse into what you might discover in the pages of a machinery and equipment appraisal/valuation review or expert rebuttal report. Where appropriate, I’ve rewritten the problems into American English …
Problem 1: Unexplained Adjustments to Comparables
Equipment valuations that use the Sales Comparison Approach will inevitably include adjustments to comparable sales. In many cases, however, the reports contain no logic or analysis supporting the adjustments made. The reader might suspect that adjustments are made based only the valuer’s opinion. Adjustments to comparable sales should be based upon verifiable evidence and logic. They should be presented in a reasonable manner. If the report does not explain why and how adjustments were made, the valuation may be unreliable and not credible. The reviewer must examine how adjustments are made to comparable sales to determine if those adjustments are supported by acceptable evidence and logic.
Problem 2: Vague Intended Use
The stated intended use of an equipment valuation is often vague and incomplete. For example, reporting that a valuation is written for “insurance purposes” is incomplete and lacks the specificity needed. When the asset property has been destroyed by fire and there is litigation pursuant to that loss, a reviewer must examine the stated intended use of the valuation under review to determine if it is understandable, as well as appropriate, acceptable, accurate, relevant and complete.
Problem 3: Cost Approach not Reconciled to Market Values
The Cost Approach is used in many equipment appraisals or valuations only as a mathematical “trend and bend” exercise that neglects all forms of depreciation–physical, functional and economic–as well as reconciliation to a market value. To reach a valid conclusion, however, appraisals using the cost approach must consider and include some reconciliation to a market value. This reconciliation to the market may be in the form of reconciling the Reproduction Cost New to the true Replacement Cost New and reconciling the final value to the market at least on a sample basis. The reviewer must examine the mechanics of the Cost Approach used in the valuation under review to determine if it has been appropriately and accurately reconciled to the market.
Other Problems
Of course, these are not the only errors a reviewer might find in a Machinery & Equipment appraisal report. Here are some of the more unsettling ones we often encounter:
- Poor or incomplete asset descriptions
- Omission of significant assumptions
- Incorrect market comparables for purpose
- Installation costs not considered or not depreciated properly
- Using historical cost as an original costl
- Utilizing the incorrect index
- Reproduction Cost New not reconciled to the market
- Use of incorrect equipment life, often due to disregard of equipment condition and use patterns
If you’d like to read more about appraisal report errors, take a look at our 15 Most Common Appraisal Report Mistakes. If you have specific questions about an equipment valuation you’ve received that you’re not confident you can trust, call me at 530.795.5536 for a consultation. We’re here to help!
Jack Young, ASA–MTS/ARM, CPA
NorCalValuation.com
