Uniform Standards of Professional Appraisal Practice (USPAP) Guidelines
When appraising machinery/equipment there are several types of value possible and two types of appraisal reports. Each definition of value will yield a different result for the same piece of equipment. It is imperative that the appraiser you choose understands the intended use and clearly identifies the intended user(s). If not properly identified the appraisal could be misleading and in violation of USPAP. Each report type will yield a similar value conclusion. The desktop appraisal will be based on the extraordinary assumption that there is nothing unknown to the appraiser that would alter the opinion of value and using the typical remaining economic useful life. Desktop appraisals are not acceptable for all intended uses. Be sure to verify acceptance with all of the intended users before ordering this type of report. Gulf Atlantic Consultants, Inc. has years of experience appraising tangible personal property for the definitions of value identified.
Uniform Standards of Professional Appraisal Practice, commonly referred to as USPAP, can be considered the quality control standards applicable for personal property (machinery and equipment), real property and intangible asset appraisers performing a valuation service. When appraisers comply with USPAP the client and intended users have a reason to put their faith in the machinery and equipment appraiser’s opinions, analyses and conclusions and to believe that the appraisal is worthy of belief.
By its definition, an appraisal is an objective, impartial and unbiased opinion of defined value completed by a competent, ethical and qualified appraiser. It requires an understanding of the client’s machinery and equipment appraisal problem, an identification of the property type, its value-relevant characteristics, and the proper approach(s) to apply to appraise the machinery and equipment according to the purpose. Machinery and equipment appraisal reports must be USPAP compliant, meaningful to the client and intended users, relevant to intended use and not misleading.
Machinery Appraisers Should Identify the Problem
There are several elements of the client’s appraisal problem that must be properly understood by the machinery appraiser before the appraiser can proceed. This first step in the appraisal process is called problem identification, and is the most important challenge the machinery appraiser faces in every appraisal assignment. STANDARD RULE 7-2 of USPAP establishes the elements and requirements of problem identification.
The elements that must be identified include intended use, intended user(s), the effective date, the type and definition of value, the relevant property characteristics and assignment conditions. Intended use, or purpose for the appraisal, is by far the most important to determine with the client. Proper problem Identification is necessary to determine whether the appraiser is competent to complete the assignment credibly, and then determine the scope of work that will be necessary to solve the client’s appraisal problem credibly.
The Value Definition Determines the Relevant Market
The machinery appraiser’s choice of the value definition and the market level to investigate must be relevant to intended use and other assignment conditions. The value definition that is most relevant to intended use must be identified by the appraiser. Only then can the appraiser identify the relevant market or market level to research.
For instance, a forced liquidation value definition has conditions that impact the determination of the relevant market, which would entail machinery and equipment sold under forced sale conditions (auction). A replacement value appraisal is established by the terms of an insurance policy which focus on property replacement and cost rather than a pure market perspective mechanism. The appraiser must establish the applicable value definition and fulfill the conditions and requirements that apply to the chosen definition. These decisions are guided by how the client will use the appraisal (intended use). See definition of value page on this web site.
Machinery Appraisers Should be Competent
Appraisers must comply with the COMPETENCY RULE of USPAP. Prior to accepting a machinery and equipment appraisal assignment, or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently. The appraiser should have familiarity with the specific type of machinery and equipment, a market, a geographic area, or an analytical method in order to develop credible assignment results.
The machinery and equipment appraiser cannot accept an appraisal assignment (determine competency) until they properly understand (i.e. have identified) the appraisal problem; only then can the appraiser determine the scope of work (value approach, methods etc) required to develop credible assignment results relevant to intended use.
Machinery and Equipment Appraisers Should Determine Scope
No one benefits from too much or too little research and analysis. Too little causes unreliable opinions, while too much wastes time and incurs needless expense. Machinery and equipment appraisers must be prepared to demonstrate that the scope of work is sufficient to produce credible results. Machinery appraisers must properly understand the valuation problem and do whatever is necessary to solve the problem credibly.
The SCOPE OF WORK RULE of USPAP includes but is not limited to:
- the extent to which the property is identified;
- the extent to which tangible property is inspected;
- the type and extent of data researched; and
- the type and extent of analyses applied to arrive at opinions or conclusions
Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal. Credible assignment results require support by relevant evidence and logic. The credibility of assignment results is always measured in the context of the intended use.
Machinery and Equipment Appraisers Should be Ethical
Machinery and Equipment appraisers must perform assignments ethically and competently, in accordance with USPAP. The appraiser must perform assignments with impartiality, objectivity and independence, and without accommodation of personal interests.
The disclosure requirements of USPAP promote the public trust inherent in professional appraisal practice. The appraiser must disclose any past, present or prospective interest in a party or subject property, and any payments to procure an appraisal assignment. Disclosure must be made to the client and in the report. An appraiser cannot accept an assignment with an unethical fee contingency. An appraiser must protect the confidential nature of the appraiser-client relationship. An appraiser must establish and maintain a work file for each appraisal assignment.
A failure to comply with the ETHIC RULE of USPAP is a very serious violation which would likely undermine the credibility and reliability of the appraisal report. All appraisers, whenever acting as an appraiser, at all times must comply with the ETHICS RULE.
Machinery and Equipment Appraisers Should Properly Develop Assignment Results
All appraisers follow the appraisal process in order to properly develop a credible answer to the appraisal problem. STANDARD 7 requires that:
- The appraiser: knows what to do, does it right and not render an appraisal in a careless manner (USPAP SR 7-1)
- identify the client, intended users, intended use, and the appraisal problem (7-2 a-g)
- determine the scope of work necessary to produce credible assignment results (7-2h)
- define and analyze the appropriate market consistent with the type and definition of value (7-3)
- collect, verify, and analyze all information necessary for credible assignment results (7-4)
- when a market value opinion – analyze current offers, listings or sales agreements and past sales of the subject property (7-5)
- reconcile the quality and quantity of data available and analyzed within the approaches used, and reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s) (7-6)
- Machinery Appraisers Must Properly Report Assignment Results
- Compliance with STANDARD 8 of USPAP will provide a basis for the client to determine that the report is complete and properly communicates the appraiser’s scope of work. In reporting the results of an equipment appraisal, an appraiser must communicate each analysis, opinion, and conclusion in a manner that is not misleading. Reported assignment results should contain sufficient information to enable the intended users to understand the report properly. The appraiser must clearly and accurately disclose assignment conditions used in the assignment. Assignment results must answer the client’s value question.
- Compliance with STANDARD 7 and 8 of USPAP, as well as all applicable USPAP rules, such as the ETHICS RULE, must be stated, signed and certified in the appraisal report’s appraiser’s certification statement (USPAP SR 8-3).
Machinery Appraisers should have Confidence in their Opinions
USPAP is not an afterthought – it applies from the moment of initial client contact. Appraisers must comply with USPAP throughout the appraisal assignment. Before finishing up an assignment an appraiser must ask him or herself:
- Did I properly “identify the valuation problem”?
- Does my report properly answer the questions that were posed by the client?
- Are the opinions in my machinery and equipment appraisal worthy of belief?
- Is my report meaningful, not misleading, relevant to intended use, complete and properly communicated?
Whenever a machinery and equipment appraiser accepts and completes an equipment appraisal assignment the answer to these questions should always be answered “YES!” Gulf Atlantic Consultants, Inc. make every effort to comply with USPAP, as well as the ASA and NEBBI Code of Ethics and Professional Conduct.