banner ad
Experts Logo

articles

Considering Absorption In Equipment Values

As Originally Published by Auctioneer, May 2012.

By: Jack Young
Tel: 530-795-5536
Email Mr. Young


View Profile on Experts.com.


The concept of absorption is used relatively often in real estate appraisals and the same concept, known as "blockage," is well-documented in the art valuation world, particularly in tax-related appraisals.

The term "blockage" - used by the IRS - derives from issues related to selling a large block of stock and seeing the related market decline. Equipment Auctioneers, whether familiar with the term or not, certainly see the same effect when selling a high volume of similar equipment, such as a fleet of Peterbilt trucks or a yard full of John Deere backhoes. In the equipment appraisal profession, though, absorption is often underused.

Kyle Martin, Supervisory Estate Tax Attorney with the Internal Revenue Service in Oakland, Calif., has stated in public meetings that, in fact, underuse of blockage is one of the more common mistakes he sees in reviewing estate appraisals.

Defining absorption

So, what is absorption, and when is it appropriate to consider absorption in equipment valuation?

Absorption is essentially an effect of the basic economic law of supply and demand, which states that the greater the supply and the lower the demand, the lower the price will be. Using the concept of absorption in valuing equipment is a way to take into account the length of time needed for the assets to be absorbed by the current market and at a price. The question that needs to be asked, when considering whether absorption is a factor in equipment appraisals, is this: "Are there enough ready and able buyers willing to pay full price if the items were offered for sale at the same time?"

While you may not know the answer to that question, just asking it improves the quality of the equipment appraisal work being done. If you're not sure, and someone to ask. Your creditable source may be a used equipment dealer, another Auctioneer, or an expert in the particular industry. These are the same folks who can help you formulate your absorption rate calculation. For instance, in a recent equipment appraisal, I was researching values on propane tanks - values that are extremely price/volume sensitive.

Examples

. . .Continue to read rest of article (PDF).


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.

©Copyright - All Rights Reserved

DO NOT REPRODUCE WITHOUT WRITTEN PERMISSION BY AUTHOR.

Related articles

Jack-Young-Valuation-Expert-Photo.jpg

8/1/2016· Appraisal & Valuation

Factors in Appraising for Fire Loss or Theft

By: Jack Young

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.

Jack-Young-Valuation-Expert-Photo.jpg

8/31/2015· Appraisal & Valuation

3 Ways to Determine Equipment Value

By: Jack Young

Let's say you're getting an equipment appraisal on your metalworking facility, your food processing plant, or a manufacturing facility, restaurant, or trucking company. When you think about how an equipment appraiser might research the values for your fleet vehicles, your kitchen equipment and dining room furniture, or for your CNC machines, drills, presses, etc., you probably assume the sales comparison approach. And in most cases, you might be right. But don't forget: Uniform Standards of Professional Practice (USPAP) recognizes three distinct valuation methodologies and it's important to consider all three before determining the correct approach for a particular appraisal. These three appraisal methodologies, or approaches to value, are Sales Comparison Approach, Cost Approach, and Income Approach.

Jack-Young-Valuation-Expert-Photo.jpg

5/20/2016· Appraisal & Valuation

Expert Equipment Appraiser or Industry Expert?

By: Jack Young

Equipment appraisers often claim expertise in particular markets. And we do often become experts through our experience in valuing a particular industry throughout the years. In many situations, however, it's more important to be an equipment appraisal expert than an industry expert! An expert equipment appraiser knows how to research the processes and equipment lines of a specialty industry, is able to locate and interview dealers and other experts in that field, and understands how to calculate values for specialty equipment that often does not have a viable market for used equipment sales. An expert equipment appraiser is an expert in USPAP compliance, producing a well-written report in compliance with the research standards of USPAP.

;
Experts.com-No broker Movie Ad
Unicourt Logo Button

Follow us

linkedin logo youtube logo rss feed logo