TECHNICAL INFORMATION PAPER - VALUATIONS OF REAL PROPERTY, PLANT & EQUIPMENT FOR USE IN AUSTRALIAN FINANCIAL REPORTS

TECHNICAL INFORMATION PAPER - VALUATIONS OF REAL PROPERTY, PLANT & EQUIPMENT FOR USE IN AUSTRALIAN FINANCIAL REPORTS Reference ANZVTIP 8 Valuations of Real Property, Plant & Equipment for Use in Australian Financial Reports Effective 8 th March 2017 Review Owner National Manager Professional Standards 6 Campion Street Deakin ACT 2600 Telephone: Email: Website: 02 6282 2411 national@api.org.au www.api.org.au

Contents s... 4... 5 1.0 Introduction... 5 1.1 Purpose... 5 1.2 Objectives... 5 1.3 Status of TIPs... 5 1.4 Scope... 5 1.5 Development of Accounting Standards... 5 1.6 Australian Accounting Standards (AASs)... 6 1.7 Financial Statements... 6 2.0 Definitions... 6 3.0 The Australian Financial Reporting Framework... 7 3.1 Introduction... 7 3.2 Navigating AASs... 8 3.3 International Valuation Standards (IVSs)... 9 3.4 Basis of Value for Financial Reporting... 9 3.5 Comparability of the Asset to Book Value Equivalent... 9 3.6 Overview of AASs incorporating IFRSs... 9 3.7 Overview of other AASs... 10 4.0 Application... 10 4.1 Measurement of Fair Value... 10 4.2 NFP Entities... 11 4.3 Impairment Testing... 11 4.4 Assets Held for Sale... 12 4.5 Owner-occupied Properties... 12 4.6 Disclosure Requirements... 12 4.7 Fair Value Responsibility... 12 5.0 Other Issues... 12 5.1 Liaison with Auditors... 12 Page 2 of 14

5.2 Reliance to other parties... 13 6.0 Effective Date... 14 Page 3 of 14

s The principal objective of a (TIP) is to reduce diversity of practice by identifying commonly accepted processes and procedures and discussing their use. A TIP is designed to be of assistance to property professionals and informed users alike. A TIP will do one or more of the following: A TIP does not: provide information on the characteristics of different types of asset that are relevant to the advice, provide information on appropriate practices and their application, provide information that is helpful to property professionals in exercising the judgements they are required to make in specific situations. provide training or instruction, direct that a particular approach or method should or should not be used in any specific situation. The contents of a TIP are not intended to be mandatory. Responsibility for choosing the most appropriate approach is the responsibility of the property professional based on the facts of each task. Whilst TIPs are not mandatory, it is likely they will serve as a comparative measure of the level of performance of a Valuer. The reader should understand that legislation may change and whilst this TIP is accurate and relevant at the time it was completed, relevant referred reading and legislation should be investigated at the time of relying on this TIP. Page 4 of 14

Valuations of Real Property, Plant & Equipment for Use in Australian Financial Reports 1.0 Introduction 1.1 Purpose The purpose of this TIP is to provide information, commentary, opinion, advice and recommendations to Valuers producing valuations of Real Property, Plant & Equipment (including heritage and infrastructure assets) for use in Australian financial reports and to assist users of those financial reports to understand the basis upon which Real Property, Plant and Equipment valuations are undertaken. Assets other than Real Property, Plant & Equipment may also need to be valued for the purposes of use in Australian financial reports. 1.2 Objectives The objectives of this TIP are to: Provide guidance to Valuers when preparing valuations of Real Property, Plant & Equipment for use in financial reports; and Assist users of financial reports to understand the basis upon which valuations of Real Property, Plant & Equipment are undertaken. Address general concepts and principles for use in the preparation of valuations for use in financial reports. 1.3 Status of TIPs 1.4 Scope TIPs are intended to embody recognised good practice and therefore may (although this should not be assumed) provide some professional support if properly applied. While they are not mandatory, it is likely that they will serve as a comparative measure of the level of performance of a Valuer. This TIP applies to Valuers conducting valuations of Real Property, Plant and Equipment for use in Australian financial reports. This TIP does not apply where a valuation is undertaken for purposes other than for use in Australian financial reports. Valuers should consider other IVSC and API Standards and TIPs for guidance on matters such as the application of valuation approaches, etc. 1.5 Development of Accounting Standards The development of accounting standards involves an extensive process, including the preparation and publication of discussion papers and exposure drafts, and extensive industry consultation, by the Australian Accounting Standards Board (AASB) and the International Accounting Standards Board (IASB) amongst others. Page 5 of 14

1.6 Australian Accounting Standards (AASs) AASs issued by the AASB have the force of the Corporations Law. 1.7 Financial Statements Financial statements report the assets, liabilities, equity, revenues, expenses (the elements of financial statements) and cash flows of the entity. 2.0 Definitions The following AASB definitions are relevant to this TIP: ABS GFS Manual Business Combination Carrying Amount Cost Approach Fair Value General Government Sector (GGS) Investment Property Australian Bureau of Statistics (ABS) publications Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005 (ABS Catalogue No. 5514.0) and Amendments to Australian System of Government Finance Statistics, 2005 (ABS Catalogue No. 5514.0) published on the ABS website. A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals are also business combinations as that term is used in this Standard (AASB 3). The amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. A valuation technique that reflects the amount that would be required to replace the service capacity of an assets (often referred to as current replacement cost). 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. Institutional sector comprising all government units and non-profit institutions controlled and mainly financed by government. Defined in the ABS GFS Manual. Property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: Page 6 of 14

(a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. Property, Plant and Equipment Recoverable Amount Value In Use Tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. The higher of an asset s Fair Value less costs of disposal and its Value In Use. The present value of the future cash flows expected to be derived from an asset or cash-generating unit. 3.0 The Australian Financial Reporting Framework 3.1 Introduction In the Australian context it is important to understand the relationship between accounting, financial reporting and valuation standards published by the IASB, the AASB, the International Valuation Standards Council (IVSC) and the API. The IASB is the independent standard-setting body of the IFRS Foundation. The IASB sets International Financial Reporting Standards (IFRSs). IFRSs are accounting standards that are adopted by many jurisdictions. IFRS-compliant financial reports are accepted on many capital markets. In Australia, the Corporations Act 2001 (or other legislation) directs: which entities need to prepare a financial report for regulatory reporting purposes, and whether the financial report needs to comply with Australian Accounting Standards. IFRSs are adopted in Australia through AASs made by the AASB. AASs incorporate the IFRSs, modified as necessary for application by Not-for-Profit (NFP) entities. For-profit entities can state compliance with IFRSs. NFP entities may not be able to state compliance with IFRSs (see section 3.6 below). AASs are frequently updated, and care should be taken to ensure that the valuation is conducted in accordance with the AAS applicable in respect of the valuation date. In addition, this TIP does not deal with all conceivable issues that a Valuer may consider relevant to their financial statement valuations. Accordingly, Valuers should familiarize themselves with the detail of the individual AAS, effective as at the valuation date of their report, which the report addresses. Page 7 of 14

3.2 Navigating AASs The AASB issues AASs for application by both private and public sector entities. Australian pronouncement Corresponding IASB pronouncements AASs Numbered from 1 Numbered from 101 Numbered from 1001 International Financial Reporting Standards (IFRSs) International Accounting Standards (IASs) No equivalent AASB/UIG Interpretations Numbered from 1 Numbered from 101 Numbered from 1001 IFRS Interpretations Committee (IFRS IC) Interpretations Standing Interpretations Committee (SIC) Interpretations No equivalent IASs were issued by the International Accounting Standards Committee (IASC), while the IFRSs are issued by the IASB, which succeeded the IASC. A financial report is generally understood to mean the financial statements and accompanying notes. The financial report: AASs specify: reports on assets, liabilities, income, expenses and equity (elements of financial statements) reports the cash flows during the period. when assets, liabilities, income and expenses are recognised how to measure assets, liabilities, income and expenses how to present information in financial statements what to disclose in the financial statements Valuers may be engaged to assist entities in measuring assets and/or liabilities in accordance with AASs. Valuers may be able to assist in providing details about the valuation process, inputs, etc. that need to be disclosed. Page 8 of 14

3.3 International Valuation Standards (IVSs) The IVSC, has formulated and published, in the public interest, IVSs and promotes those standards for worldwide acceptance and observance. The IVSs have been developed for the procedural guidance of the valuation of assets for a variety of purposes including for use in financial statements and to harmonise standards amongst the world states and bring uniformity. The IVSC liaises with the IASB and other international bodies such as the International Federation of Accountants, International Organisation of Security Commissions and BASEL Committee on Banking supervision. The IVSC also provides advice and counsel relating to asset valuation to the accounting profession. The relevant sections of the IVSs are intended to comply with the IFRSs. 3.4 Basis of Value for Financial Reporting Fair Value is a basis of value specified by various AASs. Under AASs certain assets & liabilities are required to or may be measured at Fair Value. Fair Value is defined in AASB 13 Fair Value Measurement (and IFRS 13 Fair Value Measurement) this Standard sets out how to measure fair value. Fair Value as defined in the above referenced accounting standards will generally be consistent with Market Value as defined by the IVSC. It is important to note that Fair Value for financial reporting is not the same as fair value as used by Valuers in many other situations. Whilst fair value is the most common basis of value for financial reporting it is not the only basis of value which Valuers may be instructed to address. Valuers should seek to be instructed as to the appropriate basis of value for them to adopt for purpose of their report (e.g. value in use, fair value less costs to sell, net realisable value ). 3.5 Comparability of the Asset to Book Value Equivalent Valuers should seek instructions to clarify exactly the composition of the asset to be valued to make the result of the valuation properly comparable to the book value of the corresponding asset. For example, for investment properties, that property may be required to be valued exclusive of (or indeed inclusive of) management rights depending on the way in which management rights have been accounted for by the client. 3.6 Overview of AASs incorporating IFRSs A high-level summary of each IFRS is included in the IASB publication Pocket Guide to IFRS Standards: the global financial reporting language, available on the IASB website at http://www.ifrs.org/use-around-the-world/documents/2016-pocket-guide.pdf. Standards that are more likely to be relevant to Valuers conducting valuations of Real Property, Plant and Equipment include IFRS 3 Business Combinations, IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 13 Fair Value Measurement, IFRS 16 Leases, IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets and IAS 38 Intangible Assets. The AASB makes modification to IFRS for application by not-for-profit entities. The AASB is currently updating its summary of these modifications, which are likely to be available on the AASB website (www.aasb.gov.au) when complete. AASB modifications to IFRS for not-for-profit entities may pertain to recognition, measurement, presentation or disclosure. Page 9 of 14

3.7 Overview of other AASs In addition to AASs incorporating IFRSs, the AASB issues other Standards for application by Australian entities. Of note to Valuers is AASB 1049 Whole of Government and General Government Sector Financial Reporting. The objective of this standard is to specify requirements for whole of government general purpose financial statements and General Government Sector (GGS) financial statements of each government. This standard requires compliance with other applicable Australian Accounting Standards except as specified in this standard. Assets within the scope of AASB 116 Property, Plant and Equipment, AASB 138 Intangible Assets or AASB 140 Investment Property may be measured at cost or at Fair Value. However, AASB 1049 limits the measurement basis to that specified by the ABS GFS Manual. Accordingly, those assets that are assets under the ABS GFS Manual that are within the scope of those standards are required to be measured at Fair Value because the ABS GFS Manual requires those assets to be measured at Market Value. 4.0 Application 4.1 Measurement of Fair Value AASB 13 requires the use of valuation approaches that are appropriate in the circumstances and for which sufficient data are available to measure Fair Value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. AASB 13 identifies the following widely used valuation approaches: the market approach the cost approach the income approach The standard requires the use of valuation techniques that are consistent with one or more of these approaches to measure Fair Value. Valuers should note the following: a) In many instances in relation to Real Property, Plant and Equipment, Fair Value will be equivalent to Market Value. b) For specialised assets the valuation methods consistent with the market, cost or the income approaches could be appropriate methodologies for valuations for financial reporting purposes provided the value determined is consistent with the Fair Value definition. Page 10 of 14

4.2 NFP Entities Generally, the valuation of Real Property, Plant and Equipment owned by a NFP entity will proceed in a similar fashion to any other valuation. Real Property, Plant and Equipment of NFP entities is often specialised and by definition not cash-generating. For these reasons a Valuer may commonly use the depreciated replacement cost method to value such assets. Valuers should be aware of differences in the way in which the term Current Replacement Cost is used by Valuers and accountants. In the valuation world Replacement Cost is generally understood to mean the estimated cost to construct or acquire, as of the valuation date, a new modern equivalent asset. However, in the accounting world it is intended to reflect the replacement cost of an asset s remaining service capacity/economic benefits. For accounting, that might be determined as the cost of the same or similar (partly used) asset, if available, or as the cost of a new asset that provides the same (remaining) service potential/economic benefits as the subject asset. This does not preclude the use of the depreciated replacement cost method to arrive at Fair Value. There is currently some variation in practice and interpretation of the AASs in respect of the appropriate treatment of obsolescence and highest and best use in relation to valuations of Real Property, Plant & Equipment of NFP Entities. Valuers should therefore seek specific instructions on the exact basis and underlying assumptions which they should apply to the valuation 4.3 Impairment Testing Valuers may be called upon to provide valuation services to assist reporting entities in impairment testing. Entities are required to ensure that their assets are carried at no more than their Recoverable Amount. An asset is carried at more than its Recoverable Amount if its Carrying Amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired. For impairment testing, Recoverable Amount may be measured at Fair Value (in general, equivalent to market value) less costs of disposal. Valuers may also be asked to estimate the costs of disposal in this situation. If they are not, then they should note this limitation in their reports. Recoverable amount may also be determined as based on an asset s Value In Use. This is a specially defined basis of value relevant only to impairment testing. This basis of value effectively represents the specific value of the asset as used by the current owner under certain limited conditions. These limiting conditions include the exclusion of cash flows arising from capacity expansions or other value improvements that have yet to be implemented by the owner. If requested to perform such a valuation, the Valuer should seriously consider whether they are in a position to assess the value that the current owner can derive, and if the Valuer concludes that they are in a position to assess this value, that they are familiar with the conditions for the calculation of this basis of value under AASB 136. Please refer to Section 2.0 Definitions for definitions of Recoverable Amount, Carrying Amount and Value In Use. Page 11 of 14

4.4 Assets Held for Sale AASB 5 requires an asset held for sale to be measured at the lower of its carrying amount and fair value less costs to sell. Assets Held for Sale would normally be valued in a manner consistent with usual market valuation principles applied to surplus assets. 4.5 Owner-occupied Properties When adopting the income approach to value for owner-occupied property, it is common practice to adopt notional market lease terms and conditions including a market rental. These terms and conditions should be stipulated in the report and if applicable, any vacancy and/or letting-up allowances included. Where the income approach to value is used for financial reporting purposes in relation to owneroccupied property, a deduction is not made for vacancy or letting-up factors if continuation of owner-occupation represents the highest and best use of the property. Areas intended to be vacated should be valued on an alternative use basis. 4.6 Disclosure Requirements Various AASs specify disclosure requirements pertaining to a valuation; disclosures may be specified by both AASB 13 and another Australian Accounting Standard (for example, AASB 140). A Valuer should consider whether the valuation report prepared for financial reporting purposes includes sufficient information in respect of the valuation to enable the reporting entity to meet its disclosure requirements, for example, to enable the entity to classify the Fair Value measurement as Level 1, Level 2 or Level 3 in the Fair Value Hierarchy specified by AASB 13. 4.7 Fair Value Responsibility The application of AASs and IFRSs can be complex. Valuers completing valuations of Property, Plant and Equipment for financial reporting purposes should be aware of the inter-relationships and complexities. The application of Market Value concepts by Valuers will normally be the foundation of an independent assessment of Fair Value for financial reporting purposes. 5.0 Other Issues 5.1 Liaison with Auditors Auditors may request a Valuer to provide information or explanations related to the valuations and may also seek assurance that Valuers have experience in the location and category of the assets being valued. Auditors may also communicate with Valuers to: specify items the auditor expects the valuation report to cover clarify the Valuers relationship with the entity; and clarify the assumptions and methods to be used by the Valuer. Page 12 of 14

Auditors require assurance that the Valuer s work constitutes appropriate audit evidence. Issues which are of particular relevance to auditors are the sources of data used, assumptions and methods used and their appropriateness and consistency with the prior period. The auditor will consider these matters and the valuation itself in the light of the auditor s overall knowledge of the entity s business. The appropriateness and reasonableness of assumptions and methods used and their application are ultimately the responsibility of management of the entity, where the valuation is reflected in the financial report. Valuers must however apply appropriate scepticism, independence and professional judgement in completing the valuation. The audit needs to determine that they are not unreasonable, based on the auditor s knowledge of the entity s business. The Valuer is not required to assume any responsibility to the auditor for the completeness or otherwise satisfactory nature of their audit. Internal Valuers will normally be under instruction to comply with any request from an auditor. While independent Valuers may not be under a statutory or contractual obligation to comply with any reasonable request from an auditor, it is in the interests of the entity, its ownership group and the Valuer, that the Valuer should comply as failure to do so may mean that the auditor will not be able to express an unqualified opinion. The Valuer, whether internal or independent, should co-operate reasonably and responsibly if approached by the auditor. It is of particular importance that any special assumptions and/or limiting conditions be clearly and unequivocally disclosed by the Valuer. 5.2 Reliance to other parties Valuations for use in Australian financial reports have a very specific purpose, so that reporting entities can comply with their legislative requirements. The Valuer s legal duty is to the reporting entity only. It is critical to the integrity of the financial reporting regime in Australia, that professional advisors such as auditors and Valuers, be independent and free from any factors that may influence their opinion. As such, Valuers should take care to ensure that: the retainer agreement is with the reporting entity only the valuation report makes it clear that the valuation report is only for the use of the reporting entity and is not to be used for other un-related purposes such as mortgage purposes reliance is expressly not extended to financiers, shareholders or investors. If a Valuer wishes to value the same assets for a different purpose, this should be done pursuant to a separate retainer. Valuers should consider whether or not any other appointment puts them in a position of conflict with their obligations to the reporting entity. Page 13 of 14

6.0 Effective Date This TIP is effective from 8 th March 2017. Earlier adoption is permitted. The above TIP, ANZVTIP 8, replaces the superseded Guidance Note AVGN 1 Valuations for Use in Australian Financial Reports which operated until 22 nd March 2016. Page 14 of 14