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Updating valuations for plant and equipment

Published: 15/08/2023

When updating valuations for plant and equipment it is always important to choose an appropriate inflation measure, even more so in these times of volatile inflation.

Whether you are preparing a Cost Model or a Revaluation Model using a previous valuation, or the original purchase price, BCIS produce and publishes a range of indices specifically for this purpose.

The BCIS Plant and Equipment Indices represent movement in the cost of new plant and equipment, they were developed in conjunction with the RICS Machinery and Business Assets Professional Group.

It is important to use a measure of inflation that most closely matches the plant and equipment being valued.

Price movement for machinery and equipment differs widely from movement in general inflation and will vary between plant from different sources and for different types of plant.

Graph 1 shows the movement in the UK Retail Prices Index (RPI) and prices for electric motors, generators and transformers from UK manufacturers and imported from European Union.

Figure 1: General inflation and plant and equipment from different sources

Figure 2 shows the differential movement in different types of plant and equipment.

Figure 2: Different types of plant and equipment

The BCIS Indices

The BCIS Plant and Equipment Indices represent movement in the cost of new plant and equipment. They were prepared in conjunction with the RICS Machinery and Business Assets Professional Group.

The Indices are based on Office of National Statistics Producer Price Indices (PPIs) and Import Price Indices (IPIs) and represent the changes in factory gate prices of goods sold by UK manufacturers, or in the case of imports dock gate prices, net of VAT, after any discounts.

The price changes of imported goods from the European Union (EU) and non-European Union (Non-EU) countries net of VAT, after any discounts.

In the construction of the IPIs, prices are converted to sterling from a number of different currencies as part of the monthly calculation.

The indices represent groupings of types of plant, machinery and equipment. In some cases, particularly for the import indices, the groupings are very broad. In choosing an index, awareness of all the types of equipment included in that category is recommended.

Some indices for the manufacture of metals have been included as they may give an indication for movement in cost of Plant and Equipment manufactured from them where no other information is available.

The indices relate to the factory gate price and therefore separate allowance may be needed for:

  • transport
  • installation
  • commissioning
  • consultants’ fees; and
  • non recoverable taxes and duties.

The coverage of each index is defined by reference to UK Standard Industrial Classification of Economic Activity 2007 codes (SIC Codes). A list of the indices, corresponding SIC codes and BCIS series numbers are included in the online documentation for the indices.

There are 37 indices for UK, 22 for EU and 22 for non-EU manufacture.

Application of indices in a valuation

The RICS guidance on valuationsi states that the basis of valuation (measurement in accounting terms) for plant and equipment is either of the cost model or the revaluation model.

It defines plant and equipment as tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and are expected to be used during more than one [accounting] period.

It states that ‘In the absence of relevant and meaningful market evidence, the replacement cost approach is usually adopted. Net current replacement cost is normally established by depreciating the gross current replacement cost to reflect age and obsolescence to arrive at the value attributable to the remaining portion of the total useful economic working lives of the assets. Gross current replacement cost is the total cost of replacing an existing asset with an identical, or substantially similar, new modern equivalent asset that has a similar production or service capacity, including costs of transport, installation, commissioning, consultants’ fees and non-recoverable taxes and duties.’

Where the plant and equipment is of a specialist nature or needs to be considered as an integrated package of assets, updating the original cost or a previous detailed revaluation may provide a suitable means of revaluation.

RICS applications guidanceii defines plant and equipment as broadly divided into three categories:

  • Plant: Assets that are combined with others and that may include items that form part of industrial infrastructure, utilities, building services installations, specialised buildings, and machinery and equipment forming a dedicated assemblage.
  • Machinery: Individual, or a collection or a fleet or system of, configured machines/technology (including mobile assets such as vehicles, rail, shipping and aircraft) that may be employed, installed or remotely operated in connection with a user’s industrial or commercial processes, trade or business sector (a machine is an apparatus used for a specific process).
  • Equipment: An all-encompassing term for other assets such as sundry machinery, tooling, fixtures, furniture and furnishings, trade fixtures and fittings, sundry equipment and technology and loose tools that are used to assist the operation of the enterprise or entity.

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i RICS Valuation – Global Standards 2017: UK national supplement (Issued November 2018, effective from 14 January 2019). Part 3 UK Valuation Practice Guidance Applications (UK VPGAs) – advisory.

ii RICS Valuation – Global Standards – Global, November 2021, Effective from 31 January 2022. VPGA 5 valuation of plant and equipment

 

Sector Percentage change 2Q2023 on
1Q2023 2Q2022
Housing Public 0.3 2.3
Housing Private -3.3 -9.3
Infrastructure 6.1 11.3
Public Other 2.3 5.8
Private Industrial -0.7 5.3
Private Commercial -3.4 0.7