13. Reports of appraisers.—From time to time the necessity has arisen, from one cause or another, of determining the present-day value of mercantile prop erty. The great variety of property to be valued has resulted in the creation of several large appraisal companies which have gathered together a force of ex perienced engineers and valuers. These companies render a valuable service to the business community, and business undertakings are beginning to appre ciate the value of the service rendered.
The reader has already seen that the problem of depreciation is one of the most difficult which account ants and business men are called upon to face. In order that it may be known whether or not proper provision is being made for depreciation, it is neces sary to confirm by an appraisal the adequacy of the rates that are being used in depreciating the fixed as sets of a business undertaking.
In public utilities the question of a fair rate of return on the investment necessitates an appraisal of the fixed property used in rendering the service to the community for the purpose of determining the principal sum upon which the rate of return is to be calculated.
The capital accounts of other business undertakings may have been kept in a haphazard manner and the clear differentiation between revenue and capital charges may not always have been observed. Hence, the necessity of determining the actual value of the investment in fixed assets by means of a disinter ested appraisal.
The purchaser of a business would be very unwise to take for granted that the book value of the physi cal assets, subject to depreciation, was the actual value and in purchasing property of this character, the cost of an appraisal may be regarded as a very cheap form of insurance.
Business men who may, perhaps, have had an un satisfactory experience with insurance adjusters at the time of a fire loss realize the comparative ease with which their claims for loss may be proved if such claims are supported by a disinterested appraisal of competent valuers.
14. Basis of valuation.—Appraisal companies gen erally attempt to determine the value of physical as sets at the cost of reproduction under present day prices fpr material and labor after deducting the fair amount for depreciation sustained since the acquisi tion of the asset. In addition, the appraisers will usually indicate the insurable value which is the cost of reproduction less physical depreciation with a fur ther deduction for the value of that portion of the physical assets which is not the subject matter of in surance, such as foundations and excavations and sub soil structures. Provision is made for keeping the appraisal up to date by furnishing the company with a list of all after-acquired assets, and re-appraisals are usually made at periodic intervals.
15. Adjustment of book values to appraised values. —If the appraisal of property discloses that the value of any unit is less than the cost value as reduced by the accrued depreciation thereof, the book value should be adjusted to the appraised value. If the appraised
value discloses the fact that the present-day value, at the cost of reproduction, is in excess of the cost less accrued depreciation, it would not be conservative practice to adjust the book value to the increased ap praised value. It is not considered good practice to swell surplus accounts in this manner. It would be better to reduce the rate of depreciation in subsequent periods as the higher value indicates that excessive depreciation is being provided for.
In this connection, however, consideration must be given to the fact that appraisers are generally in fluenced in their consideration of value by the present day costs of raw material and labor. These may be higher or lower than the respective costs at the time the assets were acquired. As has been stated, the ac countants support the cost theory of value rather than the theory of cost of reproduction. The results shown by the appraisal should, as a general rule, be used only to correct the values of assets which appear to be over-stated but should not be used to change the value of assets which appear to be under-stated.
The appraisal also serves to justify the values en tered for fixed assets in a proof of claim in fire losses because a contract of insurance is a contract of indem nity and the insured is entitled to recover from the in surer the value of the property destroyed at the time of fire.
16. Reports of reader may be called upon to base his executive judgment upon the report of an engineer and the same care should be used in the interpretation of a report of this character as is used in interpreting the report of an auditor. The value of the report of an engineer depends, in large measure, upon his experience. In the majority of cases, his conclusions are subject to adjustments be cause of the greater number of variables involved. This is especially true of mining engineering. An engineer's repo-rt should be prepared in collaboration with that of a competent geologist.
Another important point to be borne in mind is that the report of the auditor usually deals with con clusions based upon known facts of past experience. The engineer is called upon to deal with problems more or less speculative in their nature. Therefore, there is more necessity on the latter's part for extreme caution in interpreting facts and determining future results. A liberal allowance for possible error on the engineer's estimates of costs should be provided for; it is a well-known fact that many engineers have an. inadequate conception of costs and accounts.
17. Conc/usion.—The value of any report depends primarily upon the factors of the experience, judg ment and integrity of the professional man who ren ders it. Conclusions based upon proven facts should be clearly distinguished from opinions based upon speculative deductions.