Parts of an Appraisal
Often people only see the final work product of an appraisal and wonder why there is so much language that doesn’t apply to them. Why did an appraiser even mention an approach they didn’t conclude on? What was the point of saying that I am the client and the “Intended User.” Appraisers have to adhere to guidelines set by the Uniform Standards of Professional Appraisal Practice or “USPAP.” These rules and guidance ensure that your appraisal will be done in an expert manner that considers important valuation concepts. The final report is just one part of the Appraisal. Here is a walkthrough of the different parts of a Machinery & Equipment Appraisal. (Standards 7 & 8 of USPAP). For more information on USPAP, please visit the appraisal foundations website. Click here for the USPAP Website.
Scope & Identification
Every Appraisal starts with a scope. The scope tries to identify what the valuation services will be before any work has been performed. A report has to identify key information such as the intended user, their intended use of the report, the type of value, and what exactly they are valuing.
This stuff seems basic and frankly file filler, right? Well, in 2017, a big four accounting firm settled with the SEC over the misuse of an appraisal that was missing everything noted above. They took an old insurance valuation and applied it to Fair Value reporting, which caused the company’s value to be misstated by hundreds of millions of dollars for years.
Research & Analysis
Next, an appraisal will go into its research and analysis, which includes understanding the industry and marketplace the assets participate in, disclosing any hypothetical conditions or extraordinary assumptions, and reviewing the condition and information on the subject property. This can include a review of the fixed asset ledgers, discussions with management, and site inspections.
Why do assumptions matter? If an asset is assumed to be in good condition but destroyed because a scrap company accidentally scrapped it, it can affect an asset's value. Unfortunately, I’ve seen this happen more than once.
Methods & Approaches
All appraisals must consider the three approaches to value: Cost, Income, and Market. Not all the approaches will be used depending on the circumstances of your appraisal. The methods used in your appraisal should give you a basic idea of how your assets were valued. Did they consider the replacement cost and depreciate it down, or did they consider the adjusted market comparable, or did they use a discounted cash-flow?
Sometimes a certain approach is not able to be performed within the scope of an appraisal. Make sure to discuss with your appraiser what aspects of value might be missing if a certain approach is considered but not utilized.
Report & Work File
The report brings all these concepts together and gives the reader a glimpse into the appraisal process. Often it is not reasonable for a report to contain the full work product of an appraisal; that is why appraisers must keep a workfile. The workfile contains additional information that didn’t make it into the report. The work file is used to support conclusions for audits, reviews, and management decisions.
Appraisers are obligated to maintain a work file for 5 years after a project is completed and an additional 2 years if there is litigation. Moving from paper to cloud storage has helped me do my part for the environment. You don’t want to know how many wasted yellow pads I had before I found OneNote.
