IBBI Plant & Machinery cheat sheet
IBBI Plant & Machinery · Keep the key ideas within reach.
Plant and Machinery Valuation
Cost approach formula: Fair Value = Replacement Cost New (RCN) less physical deterioration, functional obsolescence and economic obsolescence; depreciation is applied to RCN, not to historical book cost.
Physical deterioration is commonly split into curable (deferred maintenance, repairs below cost-benefit threshold) and incurable (wear and tear beyond economic repair), quantified by age-life, observed condition, or breakdown methods.
Age-life depreciation = effective age / total economic life; effective age reflects actual condition and maintenance, not chronological age, and total economic life ends at the point of economic retirement, not physical scrap.
Functional obsolescence = cost to cure excess capital cost, excess operating cost, or inadequacy, less any curable portion; incurable functional obsolescence is measured by capitalised or discounted earnings loss over remaining life.
Economic obsolescence is external to the asset (demand, regulation, obsolescence of the product, locational factors) and is usually applied as a percentage reduction to the depreciated replacement cost of the whole asset group.
Market approach requires an active secondary market for comparable machinery; adjustments are made for capacity, age, condition, make, accessories, installation cost and delivery, and the resulting value is a gross or net realisable value depending on the premise.
Income approach suits income-producing plant (process lines, utilities, leased equipment): value = present value of the net cash flow attributable to the asset, discounted at a rate reflecting asset-specific risk, over remaining economic life.
Under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, the valuer must state the premise of value (liquidation, fair, or replacement) and the valuation date; liquidation value is the estimated realisable value on a forced sale within a defined time frame.
For a going concern, plant and machinery is valued on a synergistic basis; for liquidation, on an orderly or forced sale basis, and the report must disclose the basis, method, assumptions and any reliance on management representations.