week 7 - plant and equiptement Flashcards
what is P&E
Plant and Equipment (P&E) or Plant and Machinery are tangible assets,
sometimes called fixed assets
• P&E are used for the production or supply of goods or services, for rental
to others, or for administrative purposes. P&E is a very broad category of
assets which includes, but is certainly not limited to:
- Manufacturing equipment (production lines, processing plants, etc.)
- Transport assets (ships, trains, trucks, cars, aircraft, etc.)
- Infrastructure (pipelines, tanks, etc.)
- Utilities (water and sewerage treatment, power stations, etc.)
- Contents in this room (chairs, tables, projectors, etc.)
common purposes for P+E valuations
Transactions (pre and post deal)
• Financial reporting and taxation (statutory authority reporting)
• Insurance (protection)
• Finance (lending)
• Litigation (family law / disputes)
• Distressed sales (bankruptcy, asset disposal)
• Reconciliations (tying valuations to company fixed asset registers)
• Fixed asset register builds or clean ups
What are the two main valuation methods for P&E asset?
Market Comparison Approach
• Income Approach
• Cost Approach
explain the market comparision method
Definition: “The market comparison approach seeks to determine the
current value of an asset by reference to recent sales of similar assets”
• Similar to the way we would approach property using units-of measurement:
- Direct comparison
- Sales comparison
- Unit rates ($ / tonne, $ / meter, etc.)
• When an active and liquid market exists, and sufficient market evidence
is available; this approach should be used as the primary method
explain income approach
Definition: “The net cash flows projected over the appropriate period are
discounted back to a net present value using an appropriate discount rate
that reflects cost of capital, risk and required return of the asset”
• It is not possible to clearly identify cash flows which are directly
attributable to the particular assets
• This approach is more suited to valuing the whole business or real
property, and generally not used for valuing equipment
explain cost approach
Definition: “the estimated current cost of replacing the asset with a similar
asset which is not necessarily an exact reproduction, but which has
similar service potential and function (plus, where applicable, an amount
for installation), less an amount for depreciation in the form of accrued
physical wear and tear, economic and functional obsolescence”
• Used for valuing specialised assets where market evidence is limited or
does not exist
• In essence, it is about judging the amount of depreciation which an asset
has incurred from:
- Physical deterioration (physical wear and tear of asset)
- Functional obsolescence (inefficiency’s in the asset)
- Economic obsolescence (loss in value from external factors)
• It reflects the notion that a logical person would generally never
pay more for an older or inferior item than what it would for an equivalent brand-new unit
define replacement cost
The current cost of replacing the asset with a new
equivalent, including both hard and soft costs
define normal useful life
The estimated number of time (years/hours/km’s/etc.)
which an asset will be used for before being retired
define residual value
The estimated market value of the asset at the end of its
useful life. This may be an alternate use, salvage, scrap value, etc.
define depreication profile
The depreciation curve which the valuer chooses to
best replicate how they feel the market depreciates the asset
. Please give one example of Functional obsolescence and one example of Economic obsolescence for Plant and Equipment asset in mining industry
Physical deterioration
• Definition: loss in value resulting from the consumption of the useful life or service potential of
the asset caused by wear and tear, deterioration, exposure to various elements, physical
stresses, and similar factors
• Assessed preforming standard depreciation profiles
Functional obsolescence
• Definition: loss in value resulting from inefficiencies in the subject asset compared to a more
efficient or less costly asset
• Assessed by making a penalty deductions to the DRC value
• Examples may include: Excess operating costs and excess capital costs
Economic obsolescence
• Definition: loss in value caused by factors which are external to the asset itself
• Treated by making penalty deductions to DRC value after allowing for
function obsolescence
• Examples may include: Legislation changes, increased raw material costs,
reduced product sales/value or machine over capacity
What are the differences between Straight line method and Diminishing value method in the calculation of depreciation? Which method is suitable for P&E asset?
gracie bofff tits
. What factors do you think that cause the difference between Straight Line Pattern and Diminishing Value Pattern in the depreciation profile of P&E asset? P21 to P22
mia somerville
