IPSAS 17: GUIDANCE NOTE 3 OPENING BALANCES & FAIR VALUE MEASUREMENT of PPE FOR 1 ST TIME ADOPTERS of IPSAS

IPSAS 17: GUIDANCE NOTE 3 OPENING BALANCES & FAIR VALUE MEASUREMENT of PPE FOR 1 ST TIME ADOPTERS of IPSAS Executive Summary At its June 2007 meeting, the Task Force on Accounting Standards (Task Force) requested further guidance on the determination of opening balances for property, plant and equipment (PPE) for first-time adoption of IPSAS. This guidance note provides guidance on best practices for the use of fair value in the determination of PPE opening balances for first-time adoption of IPSAS for PPE that are owned by United Nations System organizations. Guidance for PPE that are used but not legally owned is covered in System-wide Guidance Note, IPSAS 17: Guidance Note 4. This Guidance Note addresses this request by providing: a brief review of previously provided PPE valuation guidance; discussion on the specifics of the use of cost or fair value as valuation choices; fair valuation PPE classifications (specialized and non-specialized) and an overview of the three main fair value valuation methods (Sales Comparison, Income Capitalization and Cost approach); suggested best practices when using fair value as valuation for PPE including management s responsibility, use of valuation professionals, and International Valuation Standards; suggested valuation report and compliance statement requirements; and suggested disclosures when using fair value as valuation. Organizations have the choice, as per a Task Force decision in April 2007 to recognize PPE at either cost or fair value on first-time recognition. It is likely for most System-wide organizations that valuation at cost will be difficult. Therefore most valuations for PPE opening balances at the time of first-time recognition of IPSAS are likely to be based on fair value. For this reason, clarification of the valuation choices available, the use of best practices in valuation standards, valuation methodologies, and valuation reporting and disclosures across System-wide organizations is important. Adopters.doc 08/07/2008 Page 1 of 18

Table of Contents This guidance is subordinate to the Standard....3 Guidance Notes...3 Guidance Requested on Determination of Opening Balances & Valuation of PPE...3 Valuation of Property, Plant and Equipment using Fair Value...4 Other Relevant Paper(s)...4 1 st Time Recognition for Opening Balances - Cost or Fair Value...5 Previously Issued Guidance - Two Options Cost or Fair Value...5 Valuation Using Cost - Historic Cost or Cost as Fair Value at Acquisition Date...6 Cost as Historical Cost...6 Cost as Historical Fair Value - Fair Value at Acquisition Date...6 When Historical Cost & Historical Fair Value as Cost are Determinable but Fair Value is More Appropriate...7 Valuation Using Fair Value at Recognition Date...7 Class by Class Application...7 Accumulated Depreciation and Impairment - Not Required...8 Fair Value Best Practices...8 Management Involvement - Detailed Instructions and Review of Valuations...8 Accredited Valuation Professionals - Use if Practical...9 Consistent Valuation Standards - International Valuation Standards...10 Fair Value Classification and Valuation Methodologies...12 Fair Value Valuation Classification of PPE - Specialized or Non-Specialized?...12 Fair Value Valuation Methodologies - Sales Comparison, Income Capitalization and Cost approaches...12 Disclosures - Valuers Report and PPE Disclosure Requirements...15 Other Sources of Guidance...15 APPENDIX A: Detailed Example using Replacement Cost...16 APPENDIX B: Example of Income Capitalization Approach...16 APPENDIX C: Suggested Disclosures for Valuers Report & Compliance Statement 17 APPENDIX D: Suggested Disclosures for PPE using Fair Value...18 Adopters.doc 08/07/2008 Page 2 of 18

DRAFT: IPSAS 17: GUIDANCE NOTE 3 OPENING BALANCES & FAIR VALUE MEASUREMENT of PPE for 1 ST TIME ADOPTERS of IPSAS May 2008 This guidance is subordinate to the Standard. 1 This guidance aims to meet the requirements of International Public Sector Accounting Standards (IPSAS), including the requirements in IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors (IPSAS 3) with respect to choice of accounting policies and IPSAS 17 Property, Plant and Equipment (IPSAS 17). 2 The final authority on IPSAS 17 requirements is the Standard itself. If a conflict between the guidance and the Standard is identified, then the requirements of the Standard apply. Guidance Notes 3 Guidance Notes aim to support organizations as they implement IPSAS requirements. They may include explanations of what a particular standard means, how a standard should be understood when applied to United Nations System specific situations, transactions or events, descriptions of the range of acceptable practices which may include identification of a best practice where one exists, and guidance on practical implementation tasks. Guidance Requested on Determination of Opening Balances & Valuation of PPE 4 The Task Force on Accounting Standards (Task Force) requested further guidance on the determination of property, plant and equipment (PPE) opening balances for firsttime adoption of IPSAS. 1 2 This Guidance Note provides coverage of best practices for the use of fair value in the determination of PPE opening balances for first-time adoption of IPSAS for PPE that are owned by United Nations System organizations. 5 This Guidance Note addresses this request by providing: a brief review of previously provided PPE valuation guidance; discussion on the specifics of the use of cost or fair value as valuation choices; fair valuation PPE classifications (specialized and non-specialized) and an overview of the three main fair value valuation methods (Sales Comparison, Income Capitalization, and Cost approach); suggested best practices when using fair value as valuation for PPE including management s responsibility, use of valuation professionals and International Valuation Standards; 1 Task Force on Accounting Standards, April 2007 Item #4 in Accounting Issues and Guidance_Action Points Sept 07.doc. 2 Questions received from System-wide organizations requesting clarification on the use of Cost or Fair value for PPE and if Fair Value is used whether the use of a professional valuer is a necessity and what valuation methods should be used. Email 07/05/2008 UNIDO IPSAS sub-group. Adopters.doc 08/07/2008 Page 3 of 18

suggested valuation report and compliance statement requirements; and suggested disclosures when using fair value as valuation. Valuation of Property, Plant and Equipment using Fair Value 6 IPSAS 17 for first-time recognition of PPE allows either historical cost at acquisition date when determinable, fair value as cost at acquisition date or fair value at date of recognition for first-time recognition of PPE. 3 The use of historical cost as the basis for cost determination is fairly straight forward and only dealt with briefly in this paper. Furthermore, it is likely that for most PPE, United Nations System organizations will not have reliable cost information for first-time recognition in opening balances. It is therefore likely that the use of fair value as cost at acquisition date or at first-time recognition date will be required. Fair value determination however involves complexities especially when active markets do not exist. 7 IPSAS 17, paragraph 12 defines fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. 8 The Task Force on Accounting Standards has an approved policy that the choice is to be applied on a class by class basis when fair value is used at recognition date for first-time adoption and opening balances of PPE. This means that if fair value at recognition date were used for a particular asset at first-time adoption then all the assets within that asset class would also need to be valued at fair value. 4 Other Relevant Paper(s) 9 This Guidance Note builds on guidance and policies previously provided in the following System-wide papers: # 13: IPSAS 17 Property, Plant and Equipment Accounting Policies and Practices - provides a summary of accounting policies and recommended practices with respect to accounting for PPE; # 19: IPSAS 17 Property, Plant and Equipment Accounting Policies and Practices: Firsttime Recognition - discusses the option available to System-wide organizations to choose for valuation of PPE, at either cost or fair value on a class by class basis, for first-time adoption of IPSAS; # 23: Guidance on First Time Recognition of Property Plant and Equipment - provides guidance on first-time recognition of PPE, including the determination of opening balances for PPE. Sources of guidance on determination of opening balances for PPE and determination of fair value are also provided. 10 Guidance for PPE that is used by organizations but not legally owned will be covered in a further Guidance Note, IPSAS 17: Guidance Note 4. 3 The United Nations Task Force on Accounting Standards in April 2007, agreed on an accounting practice giving System-wide organizations the choice to recognize PPE on first-time recognition at either cost or fair value. 4 Task Force on Accounting Standards Accounting Practice First-time recognition of PPE: Recognize at either cost or fair value agreed April 2007 Task Force Meeting. Adopters.doc 08/07/2008 Page 4 of 18

11 Detailed guidance on determination of opening balances for intangibles on firsttime recognition has been provided to the Task Force in System-wide Policy Paper #38: Determination of Intangible Assets Opening Balances for 1 st Time Adopters of IPSAS. 1 st Time Recognition for Opening Balances - Cost or Fair Value Previously Issued Guidance - Two Options Cost or Fair Value 12 Previously issued guidance to the Task Force has confirmed that organizations when determining PPE opening balances for the first-time adoption of IPSAS have the choice of using either cost or fair value. 5 Figure 1.0 shows the decision flow in chart form. Figure 1.0: Determination of PPE Opening Balances for 1 st Time IPSAS Recognition 5 System-wide Paper # 19: IPSAS 17 Property, Plant and Equipment Accounting Policies and Practices: First Time Recognition refers to IPSAS 17, paragraph 96 as part of Transitional Provisions for PPE. The use of either Cost or Fair Value for recognition of PPE for determination of opening balances at 1 st Time Adoption was agreed at the April 2007 Task Force Meeting. Adopters.doc 08/07/2008 Page 5 of 18

Valuation Using Cost - Historic Cost or Cost as Fair Value at Acquisition Date 13 Valuation of PPE using Cost can be determined by using either the item s historic cost or a cost surrogate. The fair value of the item at the time of its acquisition date is a surrogate for historic cost. Each of these is discussed below in further detail. 14 Cost is defined in IPSAS 17 as the amount of cash or cash equivalents paid and the fair value or other consideration given to acquire an asset at the time of its acquisition or construction. 6 Cost as Historical Cost 15 The historical cost of an item of PPE is the amount expressed in currency terms given to acquire or construct an asset. This is determinable when an entity has supportable documented evidence of the amount or consideration paid. Examples of supporting documentation include a purchase invoice, purchase contract or a title transfer document indicating the amount paid. If the amount actually paid cannot be tangibly supported through these or similar types of documents, historical cost will not be determinable and cannot be used. Cost as Historical Fair Value - Fair Value at Acquisition Date 16 Historical fair value as at an asset s acquisition date 7, can be used as a surrogate for an asset s cost. This method of determining an asset s cost can be used when tangible supportable evidence showing the price paid for the asset does not exist. However, the price that most likely would have been paid at that date will need to be determined. That information is determinable through such evidence as industry records, purchasing catalogues or market analysis available from that time. 17 The Cost option requires entities to retrospectively determine depreciation and impairment to the cost of the asset from the date the asset was acquired to the recognition date in order to reflect usage and impairment over time. Any resulting accumulated depreciation or impairment would then have to be shown as part of the opening balances on the financial statements prepared for first-time adoption of IPSAS as if it they had always applied. 8 Application on Class by Class Basis Does Not Apply 18 When Fair Value is used to determine cost at the asset s acquisition date the application of the valuation is not on an asset class by asset class basis but rather on the basis of the individual asset being valued. For example, if the cost of a satellite dish acquired a few years ago was being determined using fair value at acquisition date, the entire class of assets to which the item of PPE relates (Communication and IT Equipment) 9 would not also have to be valued on the same basis on the individual asset does. This is an important distinction from an asset measured at fair value at recognition 6 IPSAS 17, Definitions section. 7 Acquisition Date refers to the date title to the asset was acquired by the entity. 8 IPSAS 17, paragraph 99. This is consistent with the IPSAS 3 requirement to retrospectively apply accounting policies. 9 Refer to IPSAS paper # 13, IPSAS 17 Property, Plant and Equipment Accounting Policies and Practices. Adopters.doc 08/07/2008 Page 6 of 18

date 10 where valuation on a class by class basis is required (see paragraph 22). In effect, the class is still being valued on the same basis (i.e. Cost), but a cost surrogate has been used for that one item. When Historical Cost & Historical Fair Value as Cost are Determinable but Fair Value is More Appropriate 19 The application of Historical Cost although supportable through available supporting documentation or the determination of Historical Fair Value through past market based evidence may not always be the most practical way to do a first time valuation of PPE. The Cost option requires entities to retrospectively determine depreciation and impairment to the cost of the asset from the date the asset was acquired to the recognition date in order to reflect usage and impairment over time. This may not be practical for organizations, especially when active markets for an item of PPE exist and the fair value reflecting the most current value of the asset is readily available. Valuation Using Fair Value at Recognition Date 20 Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. 11 The existence of active market prices for assets is usually the easiest determinant of fair value. For example an active commercial real estate market for land and buildings would be an appropriate use of fair value. The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal. 12 21 If fair value cannot be determined directly from market prices then techniques such as Depreciated Replacement Cost (DRC) or reproduction cost are used (discussed later in this paper). Class by Class Application 22 If first-time recognition valuation for PPE is done using fair value as the determinant at recognition date, it is important for System-wide organizations to understand that this option is applied on a class by class basis and not on an asset by asset or on a pool of assets basis. For example, if an organization was in the process of determining first-time recognition balances for its telephone equipment, the organization would not only have to recognize all telephone equipment at fair value, not just certain models of equipment even if they had cost information for some but also recognize all equipment in the Task Force approved PPE classification Communication and IT 10 Recognition Date refers to the date of 1 st Time Adoption of IPSAS standards for the purposes of presenting opening balances on the financial statements. 11 IPSAS 17, Definitions section. 12 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Pg. 5. Adopters.doc 08/07/2008 Page 7 of 18

Equipment 13 at fair value. The decision to use fair value thus would affect a much broader range of assets than just the telephone equipment. The rationale for application of fair value on a class by class basis is to ensure that the valuation of a PPE classification on the face of the financial statements is consistent. The relevance of some communication equipment at a mix of both cost and fair value and IT equipment for example just cost would be confusing and potentially misleading for initial recognition. Accumulated Depreciation and Impairment - Not Required 23 When fair value is used as the initial valuation for PPE, the valuation is based on market evidence. The valuation is as of the date of initial recognition. There is no need to estimate or recognize any accumulated depreciation or impairment write down. The asset s fair value already assumes these in the valuation, as an active market would only pay a price for PPE reflective of its remaining useful and value for use. Fair Value Best Practices 24 Literature 14 on the subject of valuation suggests that whenever possible, valuation using fair value should be undertaken by independent valuation professionals, using named valuation standards within a framework of detailed instructions provided to the valuation professional by management for which the valuation is being undertaken. This is discussed in further detail in this Guidance Note. Management Involvement - Detailed Instructions and Review of Valuations 25 The use of fair value to determine the first-time recognition of opening balances for PPE is important and must be done with care. Ultimately management is responsible for the accuracy of valuations, even when performed by external valuers. 15 Detailed instructions must be provided to valuers before a valuation exercise begins. Instructions requiring valuers to provide a value and estimated useful life for each asset and instructions stating which specific professional valuation guidelines are applicable must be made clear. 26 Management must also review the valuation for completeness and reasonableness before asset records are entered into the Assets module of the ERP system and ultimately included on the financial statements. 16 27 IFAC Study 14 provides useful guidance on the fair value valuation of PPE includes general steps for management to consider during the valuation exercise. The study states the following: 13 Refer to IPSAS paper # 13, IPSAS 17 Property, Plant and Equipment Accounting Policies and Practices. 14 Literature cited includes: IFAC Study 14, the International Valuation Standards Committee, New Zealand Treasury Valuation Guidance for PPE 2007. 15 International Federation of Accountants Study 14: Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities (December 2003). Paragraph 6.112. 16 Ibid. Adopters.doc 08/07/2008 Page 8 of 18

Paragraph 6.103: Steps for management in valuing assets include: develop valuation policies, including the valuation method, for each class of asset; decide whether assets within those classes are to be valued; prepare instructions for valuers; collate information required by valuers; select valuers; and perform management review of valuations. Paragraph 6.108: Suggestions to management for developing instructions for valuers include: requiring valuers to establish the completeness of the list of assets at a given site; requiring valuers to provide a value and an estimated useful life for each asset; using a relatively low capitalization threshold for valuations and applying this threshold to gross values (as opposed to net values). The threshold used in the asset register can be higher than this, but sufficient data is required to make an informed judgment; being explicit about whether valuations are to include or exclude relevant taxes and duties; stating which set of professional valuation guidelines is applicable. Accredited Valuation Professionals - Use if Practical 28 In the interests of independence, reliability and consistency, in most situations the valuation of PPE using fair value should be determined or reviewed by accredited valuation professionals 17 using named valuation standards. The fair value of property, Plant and Equipment is determined or reviewed by an independent valuer who holds a recognized and relevant professional qualification and who has recent experience in the location and category of the property plant and equipment being valued. 18 29 It is understood however that in some situations, professional valuation may not be required or may not be feasible. For example, when readily available markets and prices already exist or when it is cost prohibitive to do so. In such cases, internal staff may need to conduct the valuation. Even in such cases, it is clear that best practices and valuation standards used by valuation professionals should be followed to support the determination of the valuation. 17 Valuation in the Present Scenario of Liberalization, Privatisation and Globalisation (N. Vittal Vigilance Commissioner): shows that the Valuers Acts in Australia, Malyasia, Singapore, Sri Lanka, New Zealand, Fiji, Nigeria, Kenya, Tanzania, Zambia, Zimbabwe, South Africa, United Kingdom, Canada and the United States as examples require both specific qualification and experience in valuation in order to work as a valuation professional. 18 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Pg.6. Adopters.doc 08/07/2008 Page 9 of 18

Qualified external valuers are generally used to obtain reliable and independent valuations. However, the cost of obtaining valuations may mean that internal staff may be used to value some assets. The use of internal staff may be more appropriate where computer-based models, price indices and catalogues are being used to obtain approximations of historic cost or current value. Where internal staff are used to perform valuations, it is important that the valuations are in full accordance with the best practice followed by firms or professional valuers and that sound audit trails (including references to price indices and catalogues used) are established. 19 Consistent Valuation Standards - International Valuation Standards 30 The International Valuation Standards Committee (IVSC) states as one of its key objectives the following: As a global valuation standard setter, it is one of the IVSC objectives to help minimize differences in how companies and auditors in different countries interprete and apply the RS and in particular to promote consistency in the measurement of assets and liabilities for IFRS financial reporting purposes. 20 31 A study 21 conducted by the IVSC to determine the level of consistency in the valuation standards applied and the valuation definitions used for the valuation of real estate assets in Europe holds relevance for United Nations System organizations. The study showed that the majority (65%) of companies surveyed disclosed that the valuation was carried out in accordance with named valuation standards and guidance. However, the study also found that as many as ten different valuation standards/guidance sources were used and in some cases, two or more standards/guidance were referred to in the same set of financial statements and in some cases the terminology and definitions used in the various standards differed. 22 Specifically the study found that just under half (49%) of the companies surveyed reproduced a definition of market value or of fair value in the notes to their financial statements and only 17% accurately reproduced either the IVS definition of market value or the International Accounting Standards Board (IASB) definition of fair value. 32 The reference towards many different sets of valuation standards and different valuation terminologies and definitions in the standards/guidance creates the potential for 19 International Federation of Accountants Study 14: Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities (December 2003). Paragraph 6.111. 20 International Valuation Standards Committee: Valuation Under International Financial Reporting Standards (26 March 2007). 21 International Valuation Standards Committee: Valuation Under International Financial Reporting Standards (26 March 2007). 22 International Valuation Standards Committee: Valuation Under International Financial Reporting Standards (26 March 2007). The Valuation standards/guidance used found in the survey included: International Valuation Standards, Appraisal and Valuation Manual of the RICS (the Red Book ), French Autorite des Marches Financiers, 1998 property appraisal and valuation charter and the 2000 report published by the joint working group of the Commission des Operations de Bourse (COB) and the Conseil National de la Comptabilite (CNC), Uniform Standards of Professional Appraisal Practice and Code of Ethics, Belgian Asset Managers Association, The Committee of European Securities Regulators (CESR) Guidance on Property valuations, Appraisal directive in the ROZ/IPD Vastogoedindex, TEGoVA standards. Adopters.doc 08/07/2008 Page 10 of 18

confusion, inconsistent application of valuation standards and inconsistent results for recognition on the financial statements. The findings of the study suggest and its importance for System-wide organizations is that there would appear to be a need for the use of internationally accepted valuation standards and consistency in their application when valuing PPE using fair value. 33 The view of the IVSC is that the ultimate objective to improve consistency of valuation for IFRS reporting purposes is the adoption of one single set of uniform global valuation standards. 23 IFAC study 14 in Paragraph 6.102 recognizes IVS by stating that The International Valuation Standards Committee issues internationally accepted valuation standards. These standards seek compatibility with International Financial Reporting Standards (IFRSs). 34 The Exposure draft of Proposed International Valuation Application Valuation of Public Sector Assets for Financial reporting issued by the IVSC in March 2006, applies the principles in IVS s to the requirements of IPSAS. The exposure draft focuses on the valuation requirements under IPSAS 17 and IPSAS 21, Impairment of Non-Cash- Generating Assets. 24 35 In practice, several national institutions and regional associations are converging their valuation standards with IVSC Standards. For example, the IVSC website lists the national valuation associations of 45 countries as members of the IVSC and a further eight as observers. 25 South Africa, Australia, New Zealand, Romania, Tanzania and Malawi are or have already adopted IVS as national standards. In the United Kingdom, national standards managed by the Royal Institute of Chartered Surveyors are being harmonized with IVS and regional groups such as the Association of South East Asian Nations (ASEAN) Valuers Association and the Union of Pan American Valuers (UPAV) 26 27 have adopted IVS as National Standards. 36 It is important to note however, that although the alignment of IVS with IPSAS is a good development and definite plus for consistent application, the use of IVS s may not always be feasible or preferred. It is likely that in some cases, valuation professionals in certain countries or regions may not be familiar with the standards and not be willing or able to use them to determine fair value. 37 United Nations System organizations should consider the use of International Valuation Standards (IVS) in order to promote consistent valuation across organizations when practical, but at the very least be aware of the differences in other 23 International Valuation Standards Committee: Valuation Under International Financial Reporting Standards (26 March 2007), Section 5 -Conclusions. 24 The International Valuation Application (IVA) (section 4.0-Relationship to Accounting Standards) issued by the International Valuation Standards Committee applies the principles applied in IVS 1, IVS 2, IVS 3 and IVA 1 to the requirements of IPSAS. 25 The International Valuation Standards Committee web-site is: www.ivsc.org. 26 Canadian Appraiser (Volume 49, Book 1, 2005): Key to Success: A Profession Speaking with a United Voice. Joseph Vella. 27 International Valuation Standards have been translated into Arabic, Chinese, Spanish, Italian, Russian, Polish, Slovakian, Finnish, Turkish, Slovenian and Romanian. Ibid. Adopters.doc 08/07/2008 Page 11 of 18

standards/guidance if they are used and implications for the determination of opening balances if any. Fair Value Classification and Valuation Methodologies Fair Value Valuation Classification of PPE - Specialized or Non-Specialized? 38 There are three main valuation methodologies to determine the fair value of PPE, each of which are discussed in paragraphs 41-53 of this paper. The valuation methodology that should be used is dependent on whether or not the asset can be valued by reference to market based evidence. Where the value of an asset can be determined by market based evidence such as active market prices, the asset is regarded as nonspecialized. If the value of the asset, cannot be determined using market based evidence, the asset is regarded as specialized. 28 39 Examples of non-specialized PPE are likely to include most land and buildings such as an organization s headquarters, most vehicles and commercially purchased communication and IT equipment. It would be reasonable to expect that active markets or other market based evidence would be available to support valuation using fair value. 40 Specialized items are likely to include PPE that due to some specialized physical factor such as internally developed or highly customized machinery and equipment specific to an organization or geographic factor such as the remoteness of location, that it is unlikely an active market would exist and for that reason valuation against market evidence may not be possible. 29 Examples of specialized PPE are likely to include roads and runways constructed in remote field locations. Fair Value Valuation Methodologies - Sales Comparison, Income Capitalization and Cost approaches 41 The three main approaches to determining the fair value of PPE are the: 30 Cost approach (reproduction and depreciated replacement cost approach); Sales Comparison approach (comparable sales method, direct market comparison); Income Capitalization approach (includes discounted cash flow analysis); 42 The Cost approach usually applies when the item of PPE is of a specialized nature and market based evidence to determine fair value is not available. 43 The Sales Comparison Approach (SCA) and the Income Capitalization Approach (ICA) generally apply to non-specialized PPE where the availability of market based evidence enables the value of the asset to be reliably determined, evidence exists that there is or would be demand for the asset in its current use in the absence of specific 28 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Page 14. 29 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Page 11. 30 International Valuation Guidance Note 3: Valuation of Plant and Equipment (Revised 2005) issued by the International Valuations Standards Committee. Section 5.0 Guidance, Page 3. Adopters.doc 08/07/2008 Page 12 of 18

entity operations, and the asset is material in the context of the overall value of property assets. 31 Both the SCA and the ICA are often used in the valuation of real estate property. The choice of which approach to use is up to the valuer, however, the ICA is generally used for income producing property. 44 Figure 2.0 shows these different situations and the fair value valuation method usually applied. Figure 2.0: Valuation using Fair Value Cost Approach Depreciated Replacement Cost 45 Cost based valuation approaches such as Reproduction Cost and Depreciated Replacement Cost (DRC) use the cost of reproducing the asset, or the modern equivalent of the asset as an estimate of the asset s fair value based on the rationale that potential buyers will pay a cost-related price, which is equivalent to the cost of reproducing the asset themselves. 32 46 The Reproduction Cost of an asset is the cost of reproducing an asset with exactly the same appearance and character, and using the same materials, where available, or where these could be specially manufactured. Reproduction cost is most applicable when valuing assets of a special character that are intended to be retained in their present form 31 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Pgs. 14 & 15. 32 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Pg. 15. Adopters.doc 08/07/2008 Page 13 of 18

such as a heritage building. 33 Given that United Nations System organizations are not capitalizing heritage assets at this time, it is unlikely that Reproduction cost will be used for valuation purposes. 47 Depreciated Replacement Cost is the minimum cost of replacing or replicating the service potential of an existing asset with modern equivalent assets taking into account physical deterioration and obsolescence due to the age and condition and use of the asset. 34 48 DRC in the case of property is the: 35 fair value of the land; and current gross replacement costs of improvements less allowances for physical deterioration, and optimization for obsolescence and relevant surplus capacity. 49 A detailed example showing the use of Replacement Cost is provided with this paper as a separate file: APPENDIX A _Replacement Cost (Pgs 42-64_NZ_2007).pdf. Please note that although the example provided is comprehensive, due to assumptions made in the scenario, it did not factor depreciation or obsolescence in respect of the building s age as part of the replacement cost. 50 Indices that would be used as part of a valuation to discount asset values to the original year of purchase or construction should be industry or asset class specific given that they tend to be more accurate than generic price indices such as the Consumer Price Index. 36 Sales Comparison Approach 51 The SCA 37 is commonly used in real estate appraisals. It uses a units of comparison methodology by comparing a subject property s characteristics with those of comparable properties which have recently sold in similar transactions. 52 The SCA uses one of several techniques such as trend analysis, market surveys and statistical regression analysis to adjust the prices of the comparable transactions according to the presence, absence, or degree of characteristics which influence value. The SCA relies on the assumption that a matrix of attributes or significant features such as a property s location and proximity to amenities, lot size, the age and condition of the property among other factors influence its value. The SCA is based on the principles of supply and demand and substitution. Supply and demand determines value by the market forces of buyers and sellers and substitution implies that a purchaser would not purchase an improved property for any value higher than it could be replaced for on a site with equivalent utility, assuming no undue delays in construction. The use of statistical 33 Ibid. 34 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Pg. 16. 35 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, Including Specialized Items in the Health and Education Sectors, 2007. Pg. 6. 36 Public Sector Accounting Standards Board (PSAB)/Asset Management Newsletter No. 16 - Valuing Tangible Capital Assets -Estimating His torical Cost. John Rockx, KPMG. Issued by the Municipal Finance Officers Association of Ontario (MFOA) and the Association of Municipal Managers, Clerks and Treasurers of Ontario (AMCTO). 37 Sales Comparison Approach Wilkipedia. http://en.wilkipedia.org/wiki/sales_comparison_approach Adopters.doc 08/07/2008 Page 14 of 18

techniques based on multiple regression methods are used to compare a larger number of more geographically dispersed property. 38 Income Capitalization Approach 53 The ICA is a valuation method used by appraisers to estimate the value of income producing real estate. It is based on the expectations of future benefits. This method bases valuation on the market rent that a property can be expected to earn and the resale value when the property is sold. ICA converts anticipated cash flows into a present value by capitalizing net operating income by a market derived capitalization rate. The capitalization rates are determined from sales of similar properties and applied to the net income of a subject property to determine its value. An example of the ICA is provided in Appendix B. Disclosures - Valuers Report and PPE Disclosure Requirements 54 Appendix C in accordance with IVS provides a listing of disclosures including a compliance statement that a valuers report to management should contain. 55 Appendix D provides a listing of suggested disclosures in the notes to the Accounts sourced from IPSAS 17 and other authoritative support, for PPE when fair value is used as the valuation determinant. Other Sources of Guidance 56 Other useful sources of reference material in addition to those referenced in this guidance note are: The Appraisal of Real Estate, 12 th Edition by the Appraisal Institute (an industry recognized textbook, which is useful for the Sales Comparison Approach) Valuation of Impaired Property, When Bad Things Happen To Good Property. Throupe, Mundy, & Spiess. Robert Simmons, ed. 2006. 38 Ibid. Adopters.doc 08/07/2008 Page 15 of 18

APPENDIX A: Detailed Example using Replacement Cost A1 A detailed example showing the use of Replacement Cost is provided with this paper as a separate file: APPENDIX A _Replacement Cost (Pgs 42-64_NZ_2007).pdf. Please note that although the example provided is comprehensive, due to assumptions made in the scenario, it did not factor depreciation or obsolescence in respect of the building s age as part of the replacement cost. APPENDIX B: Example of Income Capitalization Approach 39 B1 The following example estimates an offering price for a property that has no predetermined holding period and for which rents are not expected to vary greatly over time. B2 Potential gross income is forecasted based upon the analysis of competitive rentals of similar property types. B3 Operating expenses are estimated based on comparative properties in the same market. These include normal expense items typically paid by the landlord such as real property taxes, insurance, major maintenance and property management. Total operating expenses are then deducted from effective gross income to derive net operating income. Potential Gross Income 14 units @ $900 per month X 12 months 151,200 Less: Vacancy/Collection Loss (7,560) 143,640 Effective Gross Income Less: Operating Expenses Property Taxes (13,500) Lawn Care (3,500) Supplies/Maintenance (8,500) Remodeling (3 units annually at $2400) (7,200) Common lighting (1,400) Water & Sewer (4,600) Hazard Insurance (7,100) Management (14,364) Reserves (3,500) (63,664) Net Operating Income 79,976 Capitalized @ 10%* (79,976/0.10) 799,760 Rounded = 799,800 *Capitalization rates can vary according to interest rates, specific investor return requirements, financial/managerial risk, degree of liquidity, management burden, and other factors. For the purposes of this example, the capitalization rate is assumed to be 10%. 39 Income Approach in Appraising Income Capitalization. http://www.propex.com/c-g_inc.htm Adopters.doc 08/07/2008 Page 16 of 18

APPENDIX C: Suggested Disclosures for Valuers Report & Compliance Statement C1 In accordance with International Valuation Standard (IVS), section 5.0, the Valuer s written report provided to management should disclose the following: Clearly and accurately provide the conclusions of the valuation in a manner that is not misleading; Identify the client, intended use of the valuation and relevant dates (i.e. date at which the valuation estimate applies, the date of the report and the date of the inspection) Specify the basis of the valuation, including the type and definition of value; Identify and describe the property rights or interests to be valued, physical and legal characteristics of the property and classes of property included in the valuation; Describe the scope/extent of work used to develop the valuation; Specify all assumptions and limiting conditions upon which the valuation is contingent; Identify special, unusual, or extraordinary assumptions and address the probability that conditions will occur; Include a description of the information and data examined, the market analysis performed, the valuation approaches and procedures followed and the reasoning that supports the analysis, opinions and conclusions in the report; Contain a clause prohibiting the publication of the report in whole or in part, or any reference thereto, or to the valuation figures contained therein, or to the names and professional affiliation of the Valuer s; and Include a Compliance Statement that the valuation has been performed in accordance with IVSs, disclose any departure from the specific requirements of IVSs and provide an explanation for such departure. C2 The Compliance Statement included in the Valuer s written report shall also confirm: The statements of fact presented in the report are correct to the best of the Valuer s knowledge: The analysis and conclusions are limited only by the reported assumptions and conditions; The Valuer has no (or if so, a specified) interest in the subject property; The Valuer s fee is not contingent upon any aspect of the report; The valuation was performed in accordance with an ethical code and performance standards; The Valuer has satisfied professional education requirements; The Valuer has experience in the location and category of the property being valued; The Valuer has (or has not) made a personal inspection of the property; and No one, except those specified in the report has provided professional assistance in preparing the report. Adopters.doc 08/07/2008 Page 17 of 18

APPENDIX D: Suggested Disclosures for PPE using Fair Value D1 The disclosure requirements for PPE are detailed in IPSAS 17 paragraphs 88-94 and these should be referred to for a comprehensive listing of the disclosures required for PPE. D2 IPSAS 17, paragraph 92 presents disclosures required for revaluations. The disclosure requirements that would appear to be applicable to fair value valuations are as follows: 92(a): The effective date of the (re)valuation; 92(b): Whether an independent valuer was involved; 92(c): The methods and significant assumptions in estimating the assets fair values; 92(d): The extent to which the assets fair values were determined directly by reference to observable prices in an active market or recent market transactions on arm s length terms or were estimated using other valuation techniques. D3 Additional disclosures used in practice that may also prove relevant include: 40 the name of the valuer; a statement in respect of each valuer as to whether they are an employee of the entity or whether they are contracted as an independent valuer; the total fair value of property, plant and equipment valued by that valuer; and where the valuation has been conducted by an employee of the entity the name of the independent valuer who reviewed the valuation. D4 Where an independent valuer has not been used, because there is an active market or readily available price indices that establish the fair value of an item of plant or equipment with reasonable reliability, this fact shall be disclosed. 41 40 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, including Specialized Items in the Health and Education Sectors: Pg. 6 (with reference to NZ IAS 16 para 77.2) 41 New Zealand Treasury: Valuation Guidance for Property, Plant and Equipment, including Specialized Items in the Health and Education Sectors: Pg. 7 (with reference to NZ IAS 16 para 77.3) Adopters.doc 08/07/2008 Page 18 of 18