Plant and Machinery Valuation - IBBI Registered Valuers
Domain focus
The Plant and Machinery domain tests whether a registered valuer can identify the asset boundary, select and apply the cost, market or income approach, and defend depreciation and obsolescence adjustments for a valuation report used in insolvency, financial reporting or secured lending.
Asset boundary and cost build-up
Plant is the apparatus with which the business is carried on; machinery is a mechanical contrivance. Annexation is not decisive - a machine bolted to a foundation remains plant if the purpose is production, not permanent enhancement of the land. Capitalise the replacement cost new (RCN) on a landed basis: ex-works price plus freight, transit insurance, customs duty, erection, foundation, commissioning and pre-operative trial costs, net of eligible input tax credit. Exclude raw material, working capital and land/building unless separately valued.
Approaches
Cost approach: depreciated replacement cost (DRC) = RCN of a modern equivalent asset less physical deterioration, functional obsolescence and economic obsolescence. Apply each to the surviving value, multiplicatively. Market approach: adjust comparable sale prices for capacity, age, condition, make and location. Income approach: capitalise the earnings attributable to the asset, carefully avoiding double counting with the business enterprise. For long-lived handling equipment, sinking-fund depreciation may better reflect replacement funding than straight-line accounting depreciation.
Worked example
A 12-year-old hydraulic press has a modern-equivalent RCN of ₹2.00 crore. Physical deterioration 35%, functional obsolescence 10% for higher energy consumption, economic obsolescence 5% from lower demand. DRC = 2.00 × 0.65 × 0.90 × 0.95 = ₹1.11 crore. Add erection and foundation if the RCN was quoted ex-works.
Marks-losing traps
Adding 35% + 10% + 5% = 50% and reporting ₹1.00 crore; using historical book value as RCN; ignoring foundation and erection; applying Schedule II accounting lives as market depreciation; valuing land inside the machinery block; double counting income already captured in the business valuation; omitting basis of value, highest and best use and key assumptions from the report.