DIFFERENT PURPOSES OF VALUATION

DIFFERENT PURPOSES OF VALUATION
INTRODUCTION:

This defines the value concept, which satisfies the purpose of valuation already ascertained and thus solves problems posed. The basis and purpose of valuation do not usually mean the same thing through closely related, for instance if a client requires a valuation of his assets with the intent to insure same, the purpose will be the value that secures the replacement of the acts in case of damage or loss.

In the valuation of plant and machinery, bases of valuation vary in accordance with purpose for which the valuation is required. The purposes of valuation as earlier stated, include financial, open market, insurance, compulsory purchase (compensation) and rating. Bases of valuation for the different purposes of valuation are as follows:

1. COMPULSORY PURCHASE/ACQUISITION/COMPENSATION:

Compensation for disturbance, which includes removal costs, losses of equipment fixtures, stocks, plant and machinery, etc, is treated separately from compensation for the land and building. If as a result of acquisition business is totally extinguished, compensation for disturbance represented by the losses on plant and machinery will be the loss of forced sale of any plant and machinery less scrap value(if any). The owner here must show that he has obtained the best price either by advertising, auctions or any other way of machinery sale.

Usually compensation is related to cost less depreciation due to the difficulties of a true going concern valuation. The disturbance claim is in two parts whereby the business relocated as a result of acquisition of the former site. The first part involves or rather covers the cost of dismantling, removal, re-erection and reconnection of plants that can be moved while the second part will be for the new plant and machinery to replace, the old which cannot be removed. In a situation where it is necessary to decide whether production should be started at the new premises before it ceases at the old, since some industrials process takes some time to start; due to the testing of these plants. It becomes necessary to ask the acquiring authority at the early stage for claims of double interest or claim for temporary loss of customer or order, loss profits, loss of staff and perhaps penalties. Therefore, the going-concern value is estimated by reference to what it is thought a tenant would pay for plant and machinery if he were to run the business. This depends, of course, on the replacement cost, age, condition, efficiency and the profitability of the business. In exceptional cases the last factor is left out of account in valuing the plant because it will be taken into account in estimating compensation loss or profits. Compensation for plant and machinery is, therefore the difference between the going-concern value and either scrap value or the sum realized on an actual sale, known as the “loss on forced sale” as a result of compulsory purchase.

2. RATING: valuation of plant and machinery for rating is by “contractor’s test”. Annual value of plant and machinery and possibly at a different percentage on capital value is added to the value of the land and buildings. When actually has to be considered is the value of the complete hereditament. An “end allowance”  if due, is given to the total assessment including the element for plant and machinery. Probable lifespan must be taken into consideration in the valuation. The hypothetical tenant is responsible for repairs and insurance and other expenses necessary to maintain the hereditament in a state to command the annual gross rent; the hereditament here includes ratable plant and machinery. In profit basis valuation provision is made for a renewal for fund replacement of the hereditament  when it is worn out. However, there may be grants for allowance of a renewal fund in the estimate of the tenants bid when applying  contractor’s theory to the rating of short-lived plant and machinery.

Valuation of electricity equipment, which is considered as a wasting asset, involves averaging its value over its future life, having regards to future costs of maintenance, repairs and replacements, and possible obsolescence. Their value, however, should not be based on an estimate of their current usefulness and prospects from year to year. Effective capital value, therefore, is either their going concern value as part of the factory or its cost when new, including the cost of fitting and installation less any allowance necessary for depreciation, obsolescence, etc.

3. PROBATE VALUATION

This is the worth of an interest in landed property for purpose of assessing estate duties on the interest of deceased owner. Lake order statutory valuation.

Valuation in this regards is often approached by laid down procedure as contained in the relevant legislation concerning estate duty. But in most cases, the approaches is often that of the open market value with necessary allowance for whatever might be item of deduction as stipulated by the relevant legislation.

The basis of probate valuation of plant and machinery for probate valuation purposes is statutory valuation.

4. VALUATION FOR INSURANCE PURPOSE: This is also based on the replacement of old asset either on their statement or indemnity bases. In the case of reinstatement, when the loss or damage incurred against occurs, the insurer takes responsibility for full repair replacement of equipment with a new equivalent substitute. Where the insurance policy is based on indemnity, the insurer takes due consideration of obsolescence of the equipment and makes monetary compensation reflecting such to the insured to restore him in the same position he was prior to the loss or damage.

The basis of valuation for insurance of plant and machinery assets is the cost indemnifying the insured. That is the cost of putting him back Into a position no better and no worse than his position before suffering the damage or loss. Virtually, most of the insurance policies in Nigeria, for instance, have a reinstatement memorandum include, which modifies the principle of indemnity. In the event of any loss, the insurance company will pay out not the cost of replacing the lost asset with a similar asset in similar condition but the full price of purchasing a brand new asset to replace the lost plant or machinery. This is a “new” for “old” approach and is devoid of any depreciation allowance. Reinstatement with new insurance value should however, take full allowance made for cost of debris removal. Where the policy permits for a lost assessor, allowance should be made for any additional cost which maybe incurred in the rebuilding following damages, as a result of the requirement of public authorities to re-equip in a different manner to the original installation, as it is the case with new plants which may have to meet pollution emission controls which are not met by the existing plant. Again the principle factor, which determines whether or not individual items should be Included in a valuation, is responsibility rather than ownership, and as such, items held on loan or under the terms of operating leases, will almost certainly have to be included in the valuation. On the other hand, industrial fire insurance policies are subject to the condition of average.

REFERENCES

Kuye, O.. (2009). Practical Approach for Plant and Machinery Valuation. Yaba College of Technology, Lagos.

Mr. Jones Fuanekwu (2004): Property Taxation In Nigeria. Published By Debo

 Publishing Company Iwo