The valuation of property, plant and equipment (PPE) for financial reporting purposes requires consideration of IAS 16, IFRS 13 and the International Valuation Standards. In practice, the most complex issues arise when valuing production equipment, engineering infrastructure and other specialised assets for which no well-developed secondary market exists.
The updated International Valuation Standards (IVS) and RICS Red Book Global Standards have been effective since 31 January 2025. The revised editions place particular emphasis on the quality of data and inputs, valuation models, documentation of professional judgements and interaction with auditors.
Let us consider the key issues relevant to the valuation of property, plant and equipment for financial reporting purposes.
1. Unit of valuation and the specific characteristics of specialised assets
At the initial stage, it is necessary to identify the asset being valued and determine the unit of valuation.
IAS 16 requires the exercise of professional judgement when determining the unit of account for property, plant and equipment. At the same time, the valuer must consider the characteristics of the assets, their functional interdependence and the assumptions underlying the valuation.
For example, individual equipment may have limited value when sold separately from an operating production facility. Its value when used as part of a functioning business may differ significantly.
When valuing specialised assets, the following factors should be considered:
- whether the asset can be used or sold independently;
- its functional interdependence with other assets;
- the availability of a secondary market;
- dismantling, transportation and reinstallation costs, where relevant to the adopted valuation premise;
- the intended use of the asset by market participants.
The specific considerations involved in valuing plant, equipment and infrastructure are addressed in IVS 300 Plant, Equipment and Infrastructure.
2. Fair value and market participant assumptions
IFRS 13 defines fair value as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
When analysing specialised assets, it is necessary to consider market participant assumptions, including the potential use of the asset and the factors affecting its value.
For example, an entity may operate equipment at a low utilisation rate due to temporary production constraints. The valuer needs to establish the reasons for this level of utilisation and determine the extent to which such circumstances would be typical for market participants.
A similar analysis is required in relation to planned upgrades, equipment productivity, operating costs and other parameters affecting value.
3. Selection of valuation approaches
IVS 103 Valuation Approaches addresses the market, income and cost approaches. The selection of an approach depends on the characteristics of the asset, the purpose of the valuation and the information available.
For standard equipment, the market approach may be applied where sufficient data on comparable transactions is available.
The cost approach is frequently used when valuing specialised production assets. It is based on determining the replacement cost, taking into account the relevant forms of obsolescence.
Replacement cost should reflect the cost of creating or acquiring an asset with equivalent utility. Consideration should also be given to current technologies, productivity, energy consumption and operating characteristics.
The selection of valuation approaches and methods should be justified with reference to the available data and the specific characteristics of the assets being valued.
4. Functional and economic obsolescence
When applying the cost approach, physical deterioration, functional obsolescence and economic obsolescence can have a significant impact on the valuation result.
Functional obsolescence may arise from excess capacity, high energy consumption, outdated technology or an inefficient equipment configuration.
Economic obsolescence results from external factors, including declining demand, changes in market conditions, regulatory restrictions and other circumstances.
For example, a production line may be in good technical condition but operate at only 40% of its designed capacity.
In such circumstances, it is important to establish the reasons for underutilisation, its expected duration and its impact on value from the perspective of market participants.
A low utilisation rate alone is not sufficient grounds for an adjustment for economic obsolescence. It is also necessary to avoid double-counting factors already reflected in other adjustments.
5. Quality of data and valuation models
The IVS edition that became effective in 2025 places particular emphasis on IVS 104 Data and Inputs and IVS 105 Valuation Models.
IVS 104 addresses the requirements for selecting and using data and inputs. IVS 105 focuses on the application and selection of valuation models and the justification for their use.
In the valuation of property, plant and equipment, a significant proportion of calculations may be based on manufacturers’ quotations, technical specifications, information provided by the client and professional assumptions.
The valuer must assess the relevance and reliability of the sources, the comparability of equipment specifications and the reasonableness of adjustments.
Particular attention should be paid to valuation models containing numerous interrelated parameters.
The documentation of calculations and professional judgements is also addressed in IVS 106 Documentation and Reporting.
6. Interaction between valuers and auditors: changes to the RICS Red Book
The 2025 edition of the RICS Red Book revises section VPGA 1 Valuations for Financial Reporting and introduces VPGA 11 Relationships with Auditors. These sections address valuations for financial reporting purposes and the interaction between valuers and auditors.
In practice, it is advisable to agree with the client in advance on the purpose of the valuation, the scope of assets, the applicable basis of value, the valuation date and the required documentation.
Particular importance should be attached to the verification of data and inputs, the explanation of material adjustments and the documentation of professional judgements.
Addressing these matters at an early stage helps reduce the number of follow-up requests and disagreements during the review of valuation results.
Conclusion
The IVS and RICS Red Book editions effective from 2025 place additional emphasis on the quality of data and inputs, valuation models and the documentation of results. These requirements are particularly relevant to the valuation of of property, plant and equipment involving specialised equipment and production facilities.
In our practice, the main issues arising during audit reviews relate to the unit of valuation, the determination of replacement cost, the treatment of obsolescence and the substantiation of significant assumptions.
Agreeing on the methodology, data requirements and scope of reporting documentation at the initial stage helps ensure consistency in calculations and the reliability of valuation results.
Sources
- International Valuation Standards, edition effective from 31 January 2025.
- RICS Valuation – Global Standards, 2025 edition.
- IFRS 13 Fair Value Measurement.
- IAS 16 Property, Plant and Equipment.
