APPRAISAL OF

MACHINERY
 MACHINERY

Machinery embraces machines, equipment, mechanical

contrivances, instruments, appliances or apparatus, which may
not be attached, permanently or temporarily to the real property.
It includes the physical facilities for production, the installations
and appurtenant service facilities, those which are mobile, self-
powered or self-propelled, and those not permanently attached to
the real property which are actually, directly, and exclusively
used to meet the needs of the particular industry, business or
activity and which by their very nature and purpose are designed
for, or necessary to its manufacturing, mining, logging,
commercial, industrial or agricultural purposes.”

[Local Government Code. Section 199]

 Machinery

“Physical facilities for production, installations and appurtenant service facilities, those which
are mobile, self-powered, or self-propelled and those not permanently attached to the real
property shall be classified as real property provided that:

(1) They are actually, directly, and exclusively used to meet the needs of the particular
industry, business, or activity; and
(2) By their very nature and purpose are designed for, or necessary to manufacturing, mining,
logging, commercial, industrial, or agricultural purposes.

Machinery which are of general purpose use including but not limited to office equipment,
typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons),
microcomputers, facsimile machines, telex machines, cash dispensers, furniture and
fixtures, freezers, refrigerators, display cases or racks, fruit juice or beverage automatic
dispensing machines which are not directly and exclusively used to meet the needs of a
particular industry, business or activity shall not be considered within the definition of
machinery under this Rule.

Residential machinery shall include machines, equipment, appliances or apparatus

permanently attached to residential land and improvements or those immovable by
destination.” (LGC IRR, Article 290 (o))
 Valuation Approach

▣ The purpose of valuation is to produce a reasonably accurate assessment

of the ‘market’ or ‘fair’ value of the assets.

▣ LGC, Section 224 states that:

▣ “(a) The fair market value of a brand-new machinery shall be the acquisition cost.
In all other cases, the fair market value shall be determined by dividing the
remaining economic life of the machinery by its estimated economic life and
multiplied by the replacement or reproduction cost.

▣ (b) If the machinery is imported, the acquisition cost includes freight, insurance,
bank and other charges, brokerage, arrastre and handling, duties and taxes, plus
cost of inland transportation, handling, and installation charges at the present site.
The cost in foreign currency of imported machinery shall be converted to peso cost
on the basis of foreign currency exchange rates as fixed by the Central Bank.”
 Depreciation Allowance for Machinery

⮚ The LGC fixes the maximum rate of depreciation of plant,

machinery and equipment for real property tax purposes.

LGC, Section 225 states that:

“For purposes of assessment, an allowance shall be made for

machinery at a rate not exceeding five percent (5%) of its original
cost or its replacement or reproduction cost, as the case may be, for
each year of use: Provided, however, that the remaining value for
all kinds of machinery shall be fixed at not less than twenty
percent (20%) of such original, replacement, or reproduction cost
for so long as the machinery is useful and in operation.”
Basic Procedure in Valuation of Plant, Machinery and Equipment

▣ Conduct thorough inspection of machinery and

equipment
▣ 2. Determine the basis of valuation/methodology
▣ 3. Estimate the replacement cost new if the cost
approach is used
▣ 4. Gather and analyze the market data if the
market approach is used
▣ 5. Determine the loss in value (depreciation)
resulting from physical deterioration, functional
and economic obsolescence
 VALUATION METHODOLOGIES

▣ The Cost Approach and Market Approach are the usual methods
used to appraise machinery and equipment.

▣ a. The cost Approach or the Depreciated Replacement Cost (DRC) –

a cost estimate is made to replace the asset or group of assets
appraised in accordance with current market prices for similar
assets. This approach generally furnishes the most reliable
indication of value for assets when there is little direct evidence
available.
▣ b. The market approach considers recent prices for similar items
with adjustment made in the indicated market prices to reflect the
condition and utility of the appraised items relative to comparable
items in the market. Items or assets with active second - hand
market maybe valued by this approach.
 The Cost Approach

▣ Steps in Using the Cost Approach to Valuation:

1. Estimate the Replacement Cost New (RCN) of

the property as of the date of valuation
2. Deduct the loss in value brought about by
depreciation from all causes to derive the
market value of the plant, machinery and
equipment
 The Cost Approach

▣ The LGC requires the appraisal of machinery for annual RPT

purposes to be based on its acquisition cost to the owner, if brand
new.
▣ Value = AC X FERAC

▣ For second-hand or used machinery,

▣ Value = RCN x Remaining economic life

▣ Total economic life
▣ RCN = AC x D2 X P.I.
▣ D1
▣ and account for actual condition at reference date.
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ Two (2) major elements of cost involved in estimating

RCN:

1. Direct Costs – costs directly related to the acquisition and

installation of the unit such as basic cost, freight charges,
insurance, bank charges and commission, duties and taxes,
other landing charges and handling and cost of
transportation to site.
2. Indirect Costs – costs not directly related to the acquisition
of a property but relates to the installation and acquisition
of the entire property such as design and engineering,
technical know-how and pre-operating expenses.
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ Factors to be considered in estimating the RCN:

• Cost of basic machine

• Cost of auxiliaries and/or optional accessories
• Freight from source to the site including crating/packing charges
• Insurance
• Bank charges
• Brokerage, wharfage, arrastre and heavy lifts
• Customs duties and taxes
• Installation which includes controls and wiring, electrical and
mechanical connections, Millwright work and foundations
• Other additional data to aid pricing
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ Important information to properly identify a property:

1. Generic description (ex. Pumps, lathes, shapers, transformers)

Drive arrangement (ex. Variable belt motor drive, direct coupled,
etc.)
2. Brand name or manufacturer’s name
Prime mover/driver (ex. Gasoline/diesel engine)
3. General identifiers (ex. Model, type, catalogue no., size, capacity)
Control and wiring
4. Serial no. or other individual permanent identification
Pipe connections
5. Country of origin
Foundation
6. Further description of the machine-based process performed, materials of
construction, etc. Millwright work
7. Auxiliaries or modifications that alter base price
8. Other additional data to aid pricing
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ Techniques in Estimating the RCN

▣ 1. Re-pricing Technique

⮚ requires the valuer/appraiser to properly identify the items

being considered

⮚ establish the replacement cost new (RCN) of all items and

attachments.

⮚ Not difficult in modern stand-alone machine sold regularly

in the market. However, it will not be simple in case of
imported machinery, customised machines and older
machines where particular model is no longer available.
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

Steps in using the Re-pricing Technique:

1. Establish an inventory of the property as of appraisal date

2. Gather technical specifications of property items to be re-
priced
3. Compile the basic price information or unit prices for each
property items from manufacturers, suppliers or dealers
4. Develop unit prices covering all elements of cost
5. Apply the unit prices to the items to make up the
machinery to arrive at an indication of RCN
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

2. Indexing Technique

⮚ Assumes that a new item of the particular type being

considered would now cost the same as the original but
multiplied by a factor to take inflation into account,
changes in cost of materials and labour, etc.

⮚ Can be applied if original cost and date of acquisition of

property are known.

⮚ Complication arises when a machine of a certain nature is

superseded by a more efficient machine that costs less
than the particular machine.
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ a. Indexing of Locally Manufactured Machinery

▣

▣ Given: Acquisition Cost = P 12,200

▣ Price Index = 1.138 (price index for the period)
▣ Age = 8 years
▣ Depreciation = 5% per year

▣ Solution: RCN = Original Cost x Local Index Factor

▣ RCN = 12,200 x 1.138 = 13,884
▣ DRC = RCN - Depreciation
▣ Depreciation Rate = 8 x 5% = 40%
▣ Depreciation = 13,884 x .40% = 5,553
▣ DRC = 13,884 – 5,553 = 8,331 = P 8,300 (Rounded)
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

b. Indexing Imported Machinery (Preferred Method)

Factors to consider:
⮚ Foreign exchange rate at date of acquisition and valuation

⮚ Change in prices for the machinery in the country of origin from date

of acquisition to current date

RCN = Acquisition cost x Ex rate V x Price index of supplying country

Ex rate A

Where: Acquisition cost = cost of machinery, insurance & freight

Ex rate V = Exchange rate on the date of valuation
Ex rate A = Exchange rate on the date of acquisition
Price Index = International Price Index or Trending Factor
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ Example:

▣ The general revision of real property assessments will be effective January 1,

2006. In 1998, sets of machinery were imported from the USA and were
installed in a factory building. The cost are as follows:

▣ Cost of machinery = P8,500,000

▣ Freight, insurance = P850,000
▣ Total acquisition cost 1998 (CIF) = P9,350,000
▣ Local charges for handling, arrastre = P2,000,000
▣ Exchange rate on date of acquisition = $1:P40.8931
▣ Exchange rate on date of valuation = $1:P52.6171
▣ Price index = 1.16

▣ RCN = P11,350,000 x (P52.6171/P40.8931) x 1.16 = P16,940,676

▣
 The Cost Approach
Stage 1: Estimating Replacement Cost New (RCN)

▣ Determining the Depreciation Allowance

▣ Depreciation can be estimated using the straight line method.

▣ Amount of Depreciation = RCN x Economic life – Remaining economic life

▣
Economic life
▣ Effective age is the age compared with other machine performing
similar functions. It reflects the true remaining life of the machine while
accounting for the typical life expectancy of a machine of its class and
usage
▣ Economic life is the number of years that a machine is expected to
perform its function economically.

▣ Effective age of machine = Total economic life – remaining economic

life
▣
 DEPRECIATION

▣ The economic Life for each category of machinery can be estimated by

referring to the estimated economic lives of machinery and equipment.

▣ If the machine is expected to have an economic life of less than 20

years, then it must be adjusted to comply with Section 225 of the LGC.

▣ Sample:

▣ Drilling machine is expected to have an economic life of 10 years. If it

was 7 years old at the date of valuation with a REL of 3 years, it would
normally be valued at 30% of its RCN. For RPT purposes, it will be
valued as if it had an economic life of 20 years and a REL of 13 years. (P.
190 MAG)
 The Cost Approach
Stage 2: Verification

When required, an ocular inspection should be conducted prior to

valuation.

⮚ Discuss with management and accountant or financial manager the

Sworn Statement entries and verify the original acquisition cost,
including all direct and indirect costs, and the condition of the
machine when purchased.
⮚ Inspect the machinery to verify physical existence of the property
and identify entries, and confirm specifications and other
accessories.
⮚ Interview the plant and maintenance engineer and machine
operators to ascertain the service/maintenance history, general
condition and degree of obsolescence and expected remaining
economic life.
 The Cost Approach
Stage 2: Verification

▣Verification aims to check the completeness of the

information on the Sworn Statement and check whether
the economic and remaining economic lives are realistic.

▣Ifthe declared market value is still questionable, the

value may be checked with the manufacturer, supplier,
dealer, banks or other government agencies such as BIR,
BOC, SEC, etc.

▣Estimate the direct and indirect costs if data are not

available.
▣MARAMI PONG
SALAMAT!