Preservation of Value vs. Value Enhancement: What does money spent mean to value?

By John Hagist
Controller, VP Appraisal Services
(773) 496-5744
johnh@loebequipment.com

Fixed asset registers are an interesting list. Every time a business makes a purchase, the decision needs to be made if the purchase is being capitalized and subsequently added to the fixed asset register, or if the purchase is expensed, thereby having an effect on the P&L of the business. The Sarbanes-Oxley act (particularly sections 302 and 404) added to each businesses decision making process.

When Loeb Appraisal is engaged to perform a valuation on a facility, the facility will often send over their fixed asset list so that there’s a mutual understanding of the overall facility and the scale and scope of assets involved.

These lists can be both helpful and misleading at the same time.

Recently, we’ve encountered experiences where prior Loeb appraisals have been used for purchase price allocation purposes and where the appraisal list has been uploaded into the fixed asset register software. After a month or two, the next purchase on the register reads as “Replacement Motor” at a cost of $7,500. A machine already on the list has a motor that is now being replaced? When the purchase is a maintenance-related expenditure, it is NOT an enhancement to value but rather a preservation of the original value.

In simpler terms, if you buy a $10,000 used car and get into an accident where repairs will cost you $4,000 to fix it to pre-accident conditions, the car isn’t valued at $14,000, it’s still just a $10,000 car. This is the fallacy that often occurs with assets in these registers.

When a company purchases a new or used piece of equipment for $75,000 (as an example) they capitalize the purchase and add it to the register. They put it into service and begin using it. Throughout its use wear parts and service are purchased and expensed as “Preventative Maintenance” or “Cost of Goods” expenses. A replacement motor is purchased and added to the fixed asset registry. Is any consideration being made to expensing the balance of the cost of the motor that is being replaced? In short, usually not…

Change parts are also interesting because they often cost quite a bit but do not always have as large a value from the appraisal perspective especially when the dies or parts are customized or specific to the product being produced. There is little to no resale value if it can’t immediately be put into service for another end user.

Fixed asset lists need to be read and reviewed with a critical eye and understanding that there is not a straight translation into current market value regardless of the definition of value the appraisal is opining on.

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