How do we appraise equipment that's been destroyed or stolen? Of course we hope for good records - photos, equipment lists, maintenance records - but rarely are those available. Often whatever records might have existed have been lost in the same fire that destroyed the equipment. In most of the fire cases we've been called into, the underlying problem can be that either that the insurance company doesn't agree with the loss value submitted by the claimant or that nobody can confirm what has actually been lost.
Often in a fire loss case, the owner of the equipment cannot provide the basic building blocks of any equipment appraisal: what kind and quantity of equipment, manufacturer, model, age and condition. As mentioned in earlier articles, simply knowing that someone had 20 pickup trucks destroyed in a fire does not provide us with enough of the right kind of information to determine a value.
In hindsight, of course, a business owner would have an equipment appraisal done in conjunction with taking on an insurance policy and so would be able to use the report as a basis for the loss appraisal. We all know that best practices are not often followed; and of course this isn't always feasible for businesses that have a moving inventory, such as the used auto parts yard that was the subject of one of our fire loss appraisals.
Best practices and due diligence aside, the fire loss equipment appraisal cases that come to us consistently lack adequate records regarding the lost equipment. And yet, equipment was lost, that equipment does have a value that needs to be paid to the claimant, and it's our job to investigate, research and calculate that value. One of an equipment appraiser's most important tools in ambiguous situations like this is the extraordinary assumption, as defined in Valuing Machinery & Equipment, 3d edition:
Extraordinary Assumption: An assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser's opinions or conclusions.
The first extraordinary assumption we make is that the assets actually existed & that they bear some resemblance to the asset list provided by the claimant. Often these asset lists are handwritten, with very few supporting details. They do, however, provide us with a starting point! In many of our fire loss reports, you'll see a paragraph something like this one, just to clarify how little we know...
Descriptive information needed to accurately appraise many of the Subject Assets was not available; specifically, information regarding the make, model, size, capacity, quantities, meter readings and the appearance condition as of the effective dates is missing in many cases. In order to arrive at an opinion of value I have therefore made certain Extraordinary Assumptions about the description and the appearance condition of the Subject Assets listed in Appendix A based upon my estimate of what a typical subject for the given situation likely would be. (See Assumptions and Limiting Conditions later in this report for more information.)
This paragraph points to the next 2 extraordinary assumptions that help us provide a viable value for the lost equipment: descriptions and conditions.
Given the situation, the location, the business itself, we make the best estimate we can regarding the description and and condition of the assets. Were the assets purchased new? Were any purchased used? How much wear & tear have they undergone? What do the maintenance records indicate? If any equipment survived the fire, what is its condition? How long has the equipment been in use and under what conditions?
One of our first fire loss cases was an Italian restaurant on the Central Coast. Due to limited information about the equipment, we based a great deal of the valuation on extraordinary assumptions. We had a handwritten list of equipment created by the business owner after the fire (sample shown at right). We also knew that the restaurant had a seating capacity of 150 and that the catering operation could accommodate up to 400 guests. Our primary extraordinary assumption in this case was that "Subject Assets were assumed to be the usual and customary equipment found in similar restaurants of comparable size and function." We also depended upon the extraordinary assumption that the equipment had been used in a manner consistent with typical use patterns of similar subject assets.
The same assumptions could be made for most fire loss situations. Most machine shops, for example, use their equipment in similar patterns, as do most food processing facilities or farming operations. All of these cases include using equipment and machinery in a process that is typical of the industry.
Where fire loss cases sometimes get more challenging is in the case of inventory. We'll talk about some of those situations in another article.
Jack Young, ASA, CPA is an Accredited Senior Appraiser (ASA) of the American Society of Appraisers specializing in Machinery and Equipment Appraisals and a Certified Public Accountant (CPA). Mr. Young has also been awarded a Master Personal Property Appraiser (MPPA) designation from the National Auctioneers Association. He has thousands of hours experience as an Equipment Appraiser and is an active member of the Northern California Chapter of the ASA, where he serves as Chapter President.
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