Cairns– Tropical Workshop Wednesday 26th March 2014

Valuations for Financial Reporting

AASB 13

Cameron Hurman Manager Client Valuations

State Valuation Service

Results of Audits Local Government Entities

AG Report to Parliament 2011-12

• Valuation of infrastructure assets remained the

most significant financial reporting issue for the

sector

• Significant volatility in valuations experienced

across councils from one year to the next.

Councils continued to face significant financial risks in

relation to the potential loss of past and future grant

revenues for their expenditures under Natural Disaster

Relief and Recovery Arrangements (NDRRA).

Valuation of Infrastructure Assets

Councils have ultimate responsibility for the

valuations.

Councils need to have an appropriate understanding of

the work performed by valuers, including:

• methodology

• limitations

• key assumptions

• inputs used in applying the valuation methodology.

Valuation of Infrastructure Assets

Accepting responsibility for the values reported in the

annual financial statements requires councils to:

• understand the process used by valuers

• interpret the results of the valuation process

• evaluate and challenge the key assumptions

• identify the reason for significant movements in asset values

• ensure there is adequate support for the values provided

• include adequate disclosure in the financial statements of all

key assumptions and inputs used to determine the asset

values.

Valuation of Infrastructure Assets

Areas where disclosures in valuers' reports are often

found to be deficient during an audit include:

• the extent of the investigations undertaken by the valuer

• physical inspection of assets

• verification of information supplied by the councils

• the sources of the data provided, or relied upon

• procedures completed to ensure the data was complete and

accurate

• identification of all key assumptions and inputs used in the

valuation process

Recommendations

Comparability and consistency in council infrastructure

asset valuations could be enhanced if councils used

the skills and experience available in the Office of the

Valuer-General in relation to the engagement of

professional valuers.

This assistance is to include:

• developing requests for proposals to engage valuers

• reviewing proposals received by valuers

• selecting valuers

• establishing a panel of pre-approved valuers and model

requests for proposals to engage valuers.

Outcomes from recommendations

To satisfy the recommendations of the Auditor-Generals

Report the State Valuation Service has:

1. Worked with Qld Treasury and Trade in developing requests

for proposals from valuers and instructions to valuers.

2. Established a Standing Offer Arrangement (SOA) for

engaging pre-approved valuers.

http://qcd.govnet.qld.gov.au/Pages/Home.aspx

3. Worked on the Roads Alliance Project as part of an expert

panel in establishing replacement cost unit rates for roads.

State Valuation Service

1.6 million statutory land valuations

SVS valuers and administration

officers are located in 19 offices

across the State

Valuations are used as a basis for

assessing:

– Local government rates

– Land tax (OSR)

– State land rental for leasehold

land (DNRM)

– Commonwealth Grants

Commission

Valuation Basis

• Site Value

• Unimproved Value

Valuations produced annually:

$1 billion in land tax

$2.5 billion in local government rates

$98 million in leasehold rents

$48 billion in Financial Reporting

Valuations

Valuer-General Queensland

The Valuer-General provides independent advice and transparency in the assessment and issuing of valuations.

• Is a statutory role

• Manages the statutory valuation of land in accordance with the Land

Valuation Act 2010

• Oversees QA and Peer Review

• Maintains the valuation roll

• Issues annual and maintenance valuations

• Determines and administers valuation objections

• Provides data to support the Commonwealth Grants Commission

• Undertakes valuations of State land assets

• Valuer General Property Market Movement Report

• Provides Financial Reporting and Market valuations

Local governments receiving an annual

valuation - 2014

Barcaldine Barcoo Blackall

Tambo

Boulia Brisbane Bulloo

Bundaberg Burdekin Burke Cairns Carpentaria Cassowary

Coast

Charters

Towers

Cloncurry Cook Croydon Diamantina Douglas

Etheridge Flinders Gladstone Gold Coast Goondiwindi Gympie

Lockyer

Valley

Longreach Mareeba McKinlay Moreton Bay Mount Isa

North

Burnett

Quilpie Richmond Scenic Rim Somerset Tablelands

Toowoomba Western

Downs

Whitsunday Weipa Winton.

The 41 local government areas valued

in 2014 are:

Approaches to Fair Value

Valuation methods used by valuers to

determine Fair value:

• Direct Comparison

• Depreciated Replacement Cost

• Capitalisation or income approach

– Summation or cost method

Direct Comparison

Direct Comparison method of valuation

– For property where there is available evidence

(Active Market)

• Land assets

• Residential

• Commercial

• Industrial

• Residential - Added value of Improvements

– Valuation by comparison with recent sales

• Sales of similar use

• Location

• Size

Hierarchy: Level 2

Depreciated Replacement Cost

Depreciated Replacement Cost Method

Specialised or Complex Assets

Heritage and Cultural Assets

• Determine the cost and depreciated value of improvements

• Building Costs and cost guides

• Quantity Surveyors/Valuers/Engineers

• Major components – Land/Buildings

• Depreciation

• Total life/Useful Life

Hierarchy: Level 3

Capitalisation or income approach

Capitalisation or income valuation approach

– Specific assets such as commercial or industrial

property

– Market valuation assessments

– Income determined by capacity and condition

– Capitalisation rate derived from

market research

Hierarchy: Level 2

Summation or Cost approach

Summation or cost method of valuation

– Land and buildings

• Land valued by direct comparison highest and

best use

• Buildings valued by depreciated replacement

cost

Summation of the two components

Check method of value

Complex Assets Components

Component valuations for various entities

– Requirements for determining complex asset components

• Separately identifiable

• Replaced at regular intervals

• Exceed threshold

• Significant individual value

• Different estimated useful life.

Asset Valuation Components

Component valuations for various entities

• Consider the requirements for components

• How many components?

– Fabric, Fit-out, Plant and Equipment, Infrastructure.

Building Building

Area

Fabric Rate /m2

Fabric %

Actual

Fitout & Fixtures

Rate /m2

Fixtures & Fitout

% Actual

Plant & Equip

Rate /m2

Plant & Equip % Actual Infrastructure

Total Building

Cost (Excl GST)

Building Cost /

m2

Administration 218 881 51% 722 41% 141 8% 0 379982 1744

Admin / Resource 287 723 51% 593 41% 116 8% 0 410483 1431

Admin / Resource 236 695 51% 570 41% 112 8% 0 324580 1376

Administration 349 795 51% 652 41% 128 8% 0 548788 1573

Administration 347 850 51% 697 41% 136 8% 0 583526 1682

Administration 364 844 51% 692 41% 135 8% 0 607805 1670

Land and Building Indexation

What index to use?

– Where to obtain indexation

• Land, Buildings and Infrastructure

» Land - SVS

» Buildings – BPI, QS Publications, Treasury IPD

» Infrastructure - Treasury IPD, QS/Engineers

• How to apply the index

• Date of Valuation – current data

• Check, validate and challenge results

Hierarchy: Level 2

Asset Valuation Reports

Asset valuation reports depend on:

– Valuer Instructions

• Issue good instructions to valuers and

• Understand the difference between various forms of

valuation

– What to look for in a good valuation

• What report?

• What should be included in the valuation report?

– Appropriate Methodology

– Qualifications

– Desktop or Full Inspection

– Valuation details

– Disclosures

Half Time

Quick Quiz

How would you value a…….

Park Reserve?

How would you value a…….

Cemetery Reserve?

How would you value a…….

War Memorial?

How would you value a…….

Town Hall?

Valuer Instructions

The valuation must conform to the fair value principles

and guidance in Non-Current Asset Policies and

AASB 13, including:

• Principal Market or most Advantageous Market

• market participant assumptions,

• and highest and best use of the asset which is:

• physically possible,

• legally permissible (particularly taking into account any

restrictions)

• financially feasible

Valuer Instructions

• The valuation instructions must ensure the valuer

uses:

• defensible and consistent methodologies

• valuation techniques when there are no obvious markets

• make maximum use of relevant observable data inputs, and

• minimum use of unobservable data inputs

• valuation provides supportable and sufficient evidence to

meet audit scrutiny

• support the reasonableness of the valuation whether there is

an increase, decrease or no change.

Valuation Report

The Valuation Report must include:

• The effective date of the valuation

• If land values are involved - a statement that the valuers are

registered under the Queensland Valuers Registration Act 1992

and have complied with the relevant accounting standards (e.g.

AASB 13) and Queensland Treasury and Trade’s Non-Current

Assets Policies;

• Was the asset physically inspected;

• Any significant assumptions used (whether the principal or

most advantageous market was used, restrictions that exist,

market participant expectations taken into account, who the

market participants would be, and what they would take into

account);

Valuation Report

The Valuation Report must also include:

• Highest and Best Use (whether this is on a standalone basis or

within a group of other assets/liabilities (and if so, what is included in that

group)) that is physically possible, legally permissible and financially

feasible;

• Valuation technique (including whether more than one valuation

technique was used, and justification for the technique chosen in terms

of the AASB 13 principles) and details of the calculations;

• Data inputs used and their sources (e.g. whether they are

observable or not, and whether or not transportation costs have been

included and why), and methods used to develop and substantiate

unobservable data;

Valuation Report

The Valuation Report should include:

• Where there are any significant unobservable data

inputs (or significant adjustments to observable data based on

unobservable inputs)

• the rationale for doing so,

• nature and possible variation in such data inputs,

• and any information required to provide narrative

sensitivity analysis (including inter-relationships between

unobservable inputs, and changes in fair values if an alternative

amount is applied to the unobservable inputs);

Valuation Report

The Valuation Report must include:

• the fair value hierarchy level of valuation;

• reason for any changes in valuation

technique/methodology or inputs used;

• pattern of consumption of service potential

assumed – for valuations undertaken using a cost

approach. (Depreciation)

Valuation Report

The Valuation Report must include:

• Any necessary information and matters pertinent to

the valuation for the client to determine how the

valuation was conducted and how the revaluation

amounts were derived

• A statement that all data supplied to the valuer and the

report and data provided by the valuer is the property

of the Client

• The client should have full access to any supporting

documentation for verification of reports, if required.

Market Update

The Queensland property market update:

• Slowdown in mining investment infrastructure

• Improved conditions in Brisbane

• Cairns and Gold Coast conditions stabilised

• Growth in Urban areas across Qld.

• Limited rural sales activity

• Ongoing effects of the drought and global

economic factors

Factors affecting market movement

Movements in value attributed to a number of factors

including:

– Relatively high Australian dollar still impacting on export

industries and tourism industries

– global financial volatility

– Growth (or lack of) associated with the resources industry

– slowing of population growth in Queensland

– difficulty obtaining development finance affecting investment

– economic uncertainty about the future

– interest rates stable;

– housing affordability increasing

– low borrowing costs

House Price Index

2006 to 2013

House Price Index

1988 to 2013

House Price Percentage Change

2006 to 2013

House Price Percentage Change

1988 to 2013

Conclusion

The importance of Financial Reporting

Valuations

Compliance (Audit)

Quality

Consistency

Questions?