Valuations of plant and equipment
The process for valuing plant and equipment can be summarised as:
- determination of the price (from sales information or market-derived depreciation allowances)
- establishment of value.
Similar to real property valuations, the direct sales or market comparison, depreciated replacement cost or income-based approaches are relevant for plant and equipment.
In accordance with AASB 116 – Property, Plant and EquipmentExternal Link, the definitions of 'market value' and 'fair value', and the valuation methodologies employed, are essentially the same as those for financial reporting purposes.
Specialised assets that can be freely traded in an open market are treated in a similar way to real property valuations.
Plant and equipment is an asset class with particular characteristics that distinguish it from real property. These characteristics affect the selection of the approach adopted in determining market value. Plant and equipment can normally be moved or relocated and will often depreciate faster than real property. The market value may also differ depending on whether an individual item is valued alone or in combination with other items within an operational unit. Influencing factors include whether the item is valued individually for exchange, is considered as in situ, or is to be relocated or removed. These considerations affect the resultant market value.
If you use the DRC approach, the depreciation rate should take into account the remaining life of the asset, relative to its total or effective life. The total or effective and remaining life of a plant or equipment asset may be limited by the broader business context within which it is used. For example, there may be contractual, statutory or other legal limitations to an asset's ongoing use in a particular business. Similarly, the length of a lease, or the effective life of, say, a mine or quarry might affect the total or effective and remaining life of a plant or equipment asset. The market value of the asset would reflect such circumstances.
Valuation by sample
In some instances, it may be impractical for you to value each asset individually because of the extent and diversity of the assets. In these cases, you may need to arrive at a valuation on the basis of a sample.
Sampling is less appropriate for a group of diverse assets than it is for a large number of very similar assets.
Where a group of assets have greater variability or diversity, sampling becomes more intense and more complex. For example, a collection of fictional novels involving a recurring theme could be valued on the basis of a sample of four or five items, whereas for a collection of rare books, the sampling would need to be far more intense.
Where weakness in an asset register is suspected, it can be tested and verified by sampling before valuation actually occurs.
Where you know all the relevant characteristics of the asset population, valuation may be simply the product of the calculation:
Assessed value per unit
(derived from sample)
population (number) of assets
If the assets are more variable, the size and composition of the samples need to be demonstrably random, and stratified if appropriate, to ensure no bias. For comparatively large and relatively varied populations, you could engage a specialised consultant to assist in this process.
Assets identified as being inconsistent with the sample characteristics (for example, unusually high or low-value assets) can be classified as 'outliers'. You should value outliers individually, with the remaining generic material valued by reference to a sample. The values applied to the two sets of assets can then be added together to provide a total value of all assets.
Generally, when using sampling, the overall valuation amount determined for financial reporting purposes should be reliable to a level of accuracy consistent with a relative standard error of up to 10%. This is to ensure that the valuation can be regarded as 'materially' correct.
If we are concerned about your method of sampling, we may require you to provide verification by a qualified expert statistician that the methodology and the reliability of the valuation are appropriate.