AG 1998 08 17 - Laserfiche WebLink

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Construction in Progress The investment in production equipment which has not been placed into operation is typically identified in the taxpayers accounting records as CIP. As we have stated earlier, the CIP account represents tanglble personal property and is to be listed. Our position with regard to the appraisal of this property is that it should be appraised at 100% of the investment as of the date of the appraisal. The property has suffered no physical wear and tear, therefore no allowance for depreciation is warranted. The appraiser should remember that even new equipment may suffer from functional or economic obsolescence and where appropriate, adjustments to value should be made. Interest During Construction Construction projects take time to be completed. During the construction period, the expenditures for the materials, labor, and other resources .used in creating the asset must be financed. Financing has a cost. The cost may take the form of explicit interest on borrowed funds, or it may take the form of a return foregone on an alternative use of funds, but regardless of the form it takes, a financing cost is necessarily incurred. This construction period interest, based on the premise that the historical cost of acquiring an asset should include all costs necessarily incurred to bring it to the condition and location necessary for its intended use, should be included in the cost and appraisal of a subject property. Inventory and Non-Inventory Items Frequently there is confusion between what items are inventory and what items should be classified as spare parts and tools. While there is no firm answer to be applied to all cases, as a general rule only property that is immediately consumed in the manufacturing process is an inventory cost. Tools such as drill bits and grinding wheels etc. are tools and should be appraised accordingly. Spare parts held by the owner to be used in repair of that company's equipment are not inventory and should be appraised at cost. Expensed Items The appraiser should determine what type of property is being purchased and expensed and then determine an acceptable useful life for the property. This category should then be carried only for the useful life of the category and then dropped from the appraisal. For example, if a company purchases and expenses only small office equipment such as staplers, hole punchers etc., a three year life is appropriate. The appraiser should only consider expensed property for three years. The assumption is that property older than three years will have been discarded. Leased Equipment As a general rule, leased equipment should be appraised at the same rate as ow,led property. The only exception to this general rule is situations where the lessor is also the manufacturer 'of the property. Under this situation the manufacturer/lessor will be reporting current retail selling price. When making appraisals of this type of property, no index factor should be applied; instead the Page 7-21