The New standard and guide by CPA Australia

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David Edgerton FCPADirector

Quality + Expertise +Flexibility + Innovation =Confidence & Real Value

The New standard and guide by CPA Australia

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Agenda• Overview & Process• Feedback• AASB13 Fair Value

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OverviewJoint project: CPA & AAMCoG

Four sectionsOverviewTechnicalPractical AdviceAttachments

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Objective• Provide practical advice and guidance to -

– Non-technical people who only need high level understanding

– Assist with entire process (not just valuation and accounting)

– Technical people (to assist in valuation process)• Accountants• Valuers• Engineers

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Process• Draft 1 issued July 2012• 5 months public consultation and feedback• Workshops (held nationally)• Feedback received (formal and informal)• Considered by reference group (AASB, Audit, CPA)• Updated• Peer Review of guide and feedback (former Treasury and

AASB)• Launch – International Public Sector Accounting Conference

(Feb 2013)

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Feedback &Discussion• CPA Centre of Excellence• Accounting firms• Professional Bodies (API, AMC, IPWEA, CIPFA, ICEAW)

• Government Agencies (Australian and overseas - Treasury, Audit Offices, V-Gs)

• Individuals (including members of AASB & IPSASB)

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Specific Issues• Feedback generally very good and supportive• Some complex or contentious issues

– Reference group discussion and resolution• Some individuals expressed views that were

significantly inconsistent with the views of the other participants.

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Restricted Land

• Must be calibrated to transaction price• Market participants – not entity specific• Restriction must be intrinsic to the asset

– (can’t ever be removed)• Cost approach – base on sales of comparable

land

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Entities adopt incorrect patterns of consumption of future economic benefit

• Agreement from a range of participants• Straight-line cannot be used as a “default”• Entity needs to analyse and determine

appropriate pattern

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Criticism of specific approaches

• It does not criticise any particular approach• Nor does it promote any particular approach• Highlights –

– need to determine appropriate pattern– risks of using erroneous assumptions

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Relationship between condition and Future Economic Benefit

• Guide is clear…. There is no one-to-one relationship

• Need to determine relevant factors and determine method to assess level of remaining service potential and rate of consumption

• AASB13 requires adjustment to valuation input for condition and comparability

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Straight-line v Other patterns

• Real issue for some! (but only in SA)• Guide does not promote any particular

approach• Straight-line is appropriate…. If analysis determines

pattern to be constant

• Other patterns…. If analysis determines so

• Some who argued “straight-line only” also argued Reducing Balance is more correct !

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Relationship between depreciation and asset management performance

• Some debate over term “good asset management” - Wording enhanced

• But…. The arguments used also agreed that typically would expect good asset management to result in –– higher level of remaining service potential and – rate of depreciation would be lower as a

consequence of the useful life being extended

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Linkage between FV and Depreciation

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Linkage between Depreciation and Intergenerational Equity

• Depreciation estimates value of consumed future economic benefit

• Non-cash accounting measure• Nothing to do with Cost to deliver the service• Intergenerational Equity (pricing) decisions

should be based on cost to deliver the service• Therefore…. Nothing to do with depreciation

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Level of Service v Consumption of Future Economic Benefit

• Level of service = 4 litres per minute (potable)

• If 10 people use it for 10 minute each = 400 litres of consumed service potential

• If 20 people use it for 15 minutes each = 1,200 litres of consumed service potential

• Rate of consumption changes despite Level of Service remaining the same !

Analogy: amount of water equates to level of remaining future economic benefit

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Terminology

• New AASB13 terminology• Difference between Asset Accounting and

Asset Management terminology

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KPIs

• Some criticism of IPWEA/ACELG KPIs• Additional added for comparison at Asset

Class level

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References to source material

• Range of material (government, professional bodies and private sector)

• Private sector considered just as appropriate as non-private sector

• Aim is to provide best available guidance• Requests for additional material (none supplied)• Guide does not promote or recommend any

particular approach or material

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Inconsistency between AMPs and financials

• IPWEA noted –“Asset management plans are not yet widely in place across the local government sector, and more importantly, data indicates that there is no current relationship between the data in those plans and that reported in annual reports. “

• Hence the need to improve valuation and depreciation !

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Depreciation more than an arithmetic calculation and needs to based on relevant factors

• Suggested that depreciation did not need to reflect the consumption of future economic benefit….. It just need to be a systematic arithmetic calculation

• NO…. – Depreciation is to provide an estimate of the expected

consumption of the future economic benefit– If not… challenges relevance, reliability and truth and

fairness of the financials

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AASB13 Fair Value

Decision Trees available from

www.apv.netwww.fairvaluepro.com.au

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IFRS13/AASB13 “Fair Value”

• Issued late 2011• Applies for 1 Jan 2013 onwards• Fair Value consistency across all standards• New Definition …. “exit” price• New concepts• New complex disclosures

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Fair Value Definition

Will be: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Was: “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.”

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Residual Value Definition

Will be: “the amount an entity could receive for the asset currently (at the financial reporting date) if the asset were already as old and worn as it will be when the entity expects to dispose of it.”

Was: “is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.”

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New Concepts• Hierarchy of Valuation Input

– Level 1 (Quoted Price)– Level 2 (Observable Market Evidence)– Level 3 (Non-observable market evidence)

• Recurring v Non-Recurring Valuations

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Change in Process

• Same outcome for APV valuations

• Change in terminology

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New Disclosure• Dependent upon whether

– Recurring or Non-Recurring valuation– Level of Valuation Input

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Quoted prices in active markets for identical assets

Significant other observable

inputs

Significant unobservable

inputsDescription Gross Value WDV

30/06/2013(Level 1) (Level 2) (Level 3)

Recurring Fair Value MeasurementsLand

Freehold Title 4,250,000 4,250,000 4,250,000 Parks and Reserves 5,000,000 5,000,000 2,000,000 3,000,000 Other Restricted Land 700,000 700,000 700,000

9,950,000 9,950,000 - 6,950,000 3,000,000

BuildingsResidential 1,750,000 1,500,000 700,000 800,000 Commercial 5,000,000 5,000,000 4,000,000 1,000,000 Specialised 60,000,000 44,000,000 10,000,000 34,000,000

66,750,000 50,500,000 - 14,700,000 35,800,000

Road Network InfrastructureUnsealed Roads 22,000,000 20,000,000 20,000,000 Sealed Roads 56,000,000 50,000,000 50,000,000 Bridges 11,000,000 10,000,000 10,000,000 Footpaths 11,000,000 10,000,000 10,000,000

100,000,000 90,000,000 - - 90,000,000

Water Network InfrastructureTreatment Plants 12,000,000 9,000,000 9,000,000 Pipes 25,000,000 12,000,000 12,000,000 Meters and Services 8,000,000 4,000,000 4,000,000

45,000,000 25,000,000 - - 25,000,000

Investment Properties 3,000,000 3,000,000 3,000,000 224,700,000 178,450,000 - - 24,650,000 153,800,000

Non-Recurring Fair Value MeasurementsAssets Held for Sale 1,500,000 1,500,000 1,500,000

Total Non-Recurring Fair Value Measurements 1,500,000 1,500,000 - 1,500,000 -

Fair Value measurements at the end of the reporting period using

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(a) Valuation techniques used to derive fair values (i) Recurring fair value measurements

The following methods are used to determine the fair value measurements.

Land

Level 2 valuation inputs were used to value land held in freehold title as well as land used for special purposes which is restricted in use under current zoning rules. Sales prices of comparable land sites in close proximity are adjusted for differences in key attributes such as property size. The most significant inputs into this valuation approach are price per square metre.

There were also some parks and reserves for which there was no observable market evidence of sales prices for comparable sites in close proximity. These were subsequently valued at the level 3 valuation input hierarchy by using the professional judgement of a Registered Valuer who adjusted the price per square metre of sales from sites not in close proximity which provided only a low level of comparability.

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Land Buildings Road Network Infrastructure

Water Network Infrastructure

Opening Balance 2,750,000 25,000,000 80,000,000 25,000,000

Transfers

Into Level 3Out of Level 3To assets held for sale (500,000) - - Between asset classes 1,000,000 4,000,000 1,500,000

Included in profit or lossDepreciation (2,000,000) (5,000,000) (3,000,000)

Included in other comprehensive incomeNet Increase (Decrease) in Asset Revaluation Reserve

200,000 3,500,000 5,000,000 2,500,000

Purchases, Issues, Sales and SettlementsPurchases 100,000 5,000,000 6,000,000 - IssuesSales (50,000) 3,800,000 - (1,000,000) Settlements

Closing Balance 3,000,000 35,800,000 90,000,000 25,000,000

Fair value measurements using significant unobservable inputs (level 3)

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Description and fair value as at 30 June 2013

Valuation technique(s)

Unobservable inputs Range of inputs (probability – weighted average)

Relationship of unobservable inputs to fair value

Land with restricted use($3.0m)

Cost approach (replacement cost)

Price per square metre +/- 20% An over-estimation of 10% would result in a decrease in fair value by $272,000

Isolated residential and specialised buildings($34.8m)

Cost approach (depreciated replacement cost)

Relationship between asset consumption rating scale and the level of consumed service potential.

+/- 10% A change of 10% would result in an increase/decrease of $3.4m.

Commercial buildings in volatile market($1.0m)

Discounted cash flow

Long term rental yields in potentially volatile market

+/- 30% A reduction of 10% in cash flows/rental yields as a consequence of changes in the market flowing from changes in mining sector operations would result in a decrease of fair value by $100,000.

Road network infrastructure ($90.0m) And Water network infrastructure (excluding treatment plants)($16.0m) Total value $106.0m


Asset Condition

+/- 10% A change in the overall assessment of condition would impact the fair value. The impact of such a change is dependent on the inter-relationship with the following unobservable input.



Water network infrastructure(treatment plants)($9.0m)




Level 3: Valuation inputs and relationship to fair value (sensitivity)

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(i) Valuation processes

The council engages external, independent and qualified valuers to determine the fair value of the entities land, buildings, infrastructure and major plant on a regular basis. An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different from the fair value. If any variation is considered material a revaluation is undertaken either by comprehensive revaluation or by applying an interim revaluation using appropriate indices.

Changes in level 2 and 3 fair values are analysed at the end of each reporting period and discussed between the Director of Finance, CEO, valuation team, Council and Audit Committee. As part of this process the team presents a report that explains the reasons for the fair value movements.

As a 30 June 2013 a comprehensive revaluation was undertaken for all asset classes subject to revaluation by ABC Valuers Pty Ltd.

The main level 3 inputs used are derived and evaluated as follows –

Cost for land restricted in use – estimate cost to replace the existing land if council had to acquire it on the open market in competition with other market participants. Due to the restricted nature and unique characteristics of this land there was insufficient market evidence of directly comparable sales. Reference was made to sales of land with a limited level of comparability at distant locations and adjusted by the valuer using professional judgement to take account of the differing characteristics. These were evaluated for reasonableness against the price per area for other restricted in use land held by the council that had been valued as level 2.

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Draft CPA Guide, Tools & Help

APV website (www.apv.net)

Fair Value Pro websites (www.fairvaluepro.com.au)

[email protected]

Documents

The New standard and guide by CPA Australia