Valuation of Tangible Fixed Assets For Insurance Purpose:

Tangible fixed assets are long-term assets with a physical presence that are held by a company to support its operations and generate economic benefits over multiple accounting periods. These assets are not intended for sale in the ordinary course of business

For insurance coverage, accurate valuation of tangible fixed assets need consideration for depreciation, potential obsolescence, and the need for repair or replacement option in the event of a damage.

Valuation of tangible fixed assets assists in determining insurance coverage and replacement costs, ensuring proper risk management and asset protection.

There are two methods of Fire insurance coverage in India for determining the appropriate value of a loss under commercial fire insurance.

1.     Indemnity: best described as compensation for a loss sustained, and all contracts of property insurance are referred to as contracts of indemnity.

The intension of a party to the contract is that the insured, on the happening of an insured event, will be placed by the insurer, in the same pecuniary position that the insured occupied immediately before the event. This is subject to any limitations which may have been agreed and written into the contract!

Replacing "like for like”

In other words, if an item of equipment which was 5 years old was damaged beyond repair insurers would be liable to indemnify the insured based on the value of an item of a similar age and condition. Depreciation will be considered.

An important point to note that balance useful life calculation for depreciation calculation of the insured property may significantly differ from that of financial reporting standard. 

2.     Reinstatement Value Condition Clause:

Reinstatement cost, often termed as the 'replacement cost', an alternative method of settlement, refers to the amount of money needed to rebuild or restore a property back to its original state after it has been damaged or destroyed, without considering its age or condition prior to the damage. In other words depreciation is not considered in the claim value calculation.

Reinstatement value claims are only valid if the damaged property has been repaired or replaced. The sum insured depends on the replacement value of the damaged property or asset.

Re-instatement Cost Method:

Apart from Fire insurance, Sum insurance for Engineering Insurance policies like Machinery Insurance, Electronic Equipment Insurance, Contractor’s Plant & Machinery Insurances are mandatorily R.I Value based.

The valuation of tangible fixed assets using the reinstatement cost method involves determining the value of an asset based on the cost of replacing it with a similar new asset at current market prices. This approach assumes that the value of an asset is equivalent to the cost of acquiring or constructing a new asset of similar utility.

The replacement cost method is particularly useful when the asset being valued is unique or custom-built and does not have readily available market comparable. R.I. basis of valuation provides insights into the costs of replacing the assets and helps businesses understand the potential investment required to obtain a similar asset.

An insurance reinstatement value assessment is totally independent of the market value of a property.

 Valuation Process

The process typically begins with identifying the specific assets to be valued and gathering relevant information such as purchase records, maintenance history, and any appraisals or assessments previously conducted, and type of insurance policy needed.

The frequency of performing valuations of tangible fixed assets varies depends on several factors. Generally, it is recommended for companies to conduct valuations periodically or whenever significant changes occur, such as acquisitions, disposals, or major capital investments.

Valuing tangible fixed assets can pose several challenges. One common challenge is determining an accurate indemnity/fair market value, especially for unique or specialized assets with limited comparable market data.

Assessing depreciation and obsolescence accurately can also be challenging, as it requires a thorough understanding of the asset’s condition, usage, useful life, and technological advancements.

Additionally, valuation challenges may also arise from changing market conditions, inflation, economic uncertainties, or discrepancies in data availability.

Higher valuations may result in increased insurance premium while lower results in inadequate coverage for the assets in case of any mishap.

The above interpretation is absolutely personal in nature and is not binding on any individual/ organization in particular