Plant Appraisals and Fixed Asset Management
Does your plant’s depreciation record accurately reflect your facility’s equipment? For most biorefineries, the answer is a resounding “no.” Many plants don’t have their fixed assets properly identified, tagged and matched in company books and accounting systems. Often the plant’s equipment has been entered into the books in groups such as “tank farm” or “process equipment” instead of specifying each piece separately. Pieces of equipment have been pulled out of service, sold or otherwise disposed and new assets have been added without being recorded, and there is no list of equipment that matches labeled equipment actually in the plant. The result is that when any outside source tours the plant, any inventory or inspection consists of a series of explanations by the plant management about why new equipment is present or old equipment is absent. A well-managed plant has each piece of equipment listed separately (including year of manufacture, make, model, serial number and date placed in service), and each entry is matched to a permanently tagged piece of equipment in the plant.
Typical plant equipment that is included in a fixed asset audit includes all process and support equipment such as boilers, air compressors and lab equipment; all office support equipment including furniture and computers; and all inventory. Whether a plant’s equipment was not documented accurately to begin with or assets were disposed of without updating the books or new assets were added, a fixed asset audit and continuing asset management is a good way to clean house. It speaks volumes about a plant when an appraiser, investor, buyer or tax official can walk through a plant without the owner and see each piece of equipment tagged and matched to a fully informational, corresponding entry in the books.
While managing fixed asset records might not seem like a high priority, the truth is that a comprehensive and current fixed asset inventory appraisal assists plants in many ways. It makes financial reporting and capital expenditure planning easier and much more accurate. The audit can help clean up the books with a clear, updated description of the asset. This involves both plant management and the plant’s accounting personnel. A detailed listing all of all assets, their location, description, condition and age, must be developed. Groups of assets must be broken out as to individual costs and updated values placed on individual assets. Each piece of equipment must be properly tagged and must match a corresponding entry in the books. Finally, a fixed asset management system should be put in place so that when equipment is added or removed, the system can be easily updated.
While these fixed asset audits can be done any time, they are quite often done in conjunction with an appraisal since the professional is already on site. That said, two things should be noted. First, every plant should have asset management in place, whether an audit is in its future or not. Second, not all appraisers perform asset management audits, so be sure to check when doing an appraisal.
The time and expense of such an audit pays for itself in many ways. Clean fixed asset records that accurately describe, and are easily matched to pieces of equipment in the plant, bring several benefits. They help lower property taxes, insurance costs and claims; improve financial planning and capital budgeting; reduce expenses on future appraisals and audits as less time is needed to identify and research equipment; and insure accurate accounting and help in establishing higher values when selling or seeking investment.
The longer a plant goes without performing such an audit, the greater disconnect between the records and the actual plant equipment. This results in a greater potential for higher taxes or insurance premiums, and a much more difficult budgeting, sale or investment process.
At Lee Enterprises Consulting, plant appraisals are commonplace services. Our appraiser does appraisals for owners trying to raise capital or preparing for sale, lenders or investors trying to determine the value of their proposed collateral, in matters where ownership is changing, or even where the plant is involved in legal matters such as foreclosures and bankruptcies. Regardless of the reason hired, the appraisers find certain common trends. One of those is that well-managed and well-kept plants are usually worth more. To some, this fixed asset management is akin to keeping the plant clean. Not only does it save money, but it separates the well-managed from the average.
Authors: Wayne Lee, Catherine J. Rein
CEO; Appraiser, Lee Enterprises Consulting