FOR FINANCIAL REPORTS – ANZ NOTE
guidance note should be read in conjunction with International
Valuation Application 1 (IVA 1) & International Valuation
Guidance Note 8 (IVGN 8)
purpose of this guidance note is to provide information, commentary,
opinion, advice and recommendations to Members producing valuations
of property, plant & equipment assets (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 property, plant and equipment valuations are undertaken.
objectives of this guidance note are to:
Provide guidance to
Members when preparing property, plant and equipment asset valuations
for use in financial reports;
Assist users of
financial reports to understand the basis upon which property, plant
and equipment asset valuations are undertaken; and
concepts and principles for use in the preparation of valuations for
use in financial reports.
Status of Guidance Notes
notes 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 Member. They are an integral part of
guidance note applies to Members valuing property, plant and
equipment assets for use in Australian financial reports.
guidance note does not apply where a valuation is undertaken for
purposes other than for use in Australian financial reports.
Development of Accounting Standards
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).
Relationship to Accounting Standards
Standards issued by the AASB have the force of the Corporations Law.
statements report the assets, liabilities, equity, revenues, expenses
(the “elements” of financial statements) and cash flows of the
Standards are subject to the concept of materiality which is defined
to mean “in relation to information, that information which if
omitted, misstated or not disclosed has the potential to adversely
about the allocation of scarce resources made by users of the
financial report or the discharge of accountability by the management
or governing body of the entity”.
should reflect this concept when completing valuations for financial
2005 AASB accounting standards apply to annual reporting periods
beginning on or after 1 January 2005.
guidance note has been developed to reflect with the adoption of the
Australian equivalents to International Financial Reporting
the Australian context it is important to consider the relationship
between Australian Standards and International Standards.
International Accounting Standards Board (IASB) was charged with
preparing a set of International Financial Reporting Standards in
2000.The intention was to develop a single set of Accounting
Standards that would be accepted by capital markets worldwide.
International Valuation Standards Committee (IVSC), has formulated
and published, in the public interest, valuation standards and
promotes those standards for worldwide acceptance and observance.
IVSC valuation standards 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.
IVSC works closely 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.
IVSC has developed International Valuation Standards 7th Edition,
2005, the relevant sections of which comply with the International
Financial Reporting Standards as at 1 January 2005. In it’s press
release regarding the publication of its new standards dated 9
February 2005, the IVSC stated:
2004 the International Accounting Standards Board (ISAB) made a
number of significant changes to the Accounting Standards concerned
with Real Estate and other fixed assets as part of its own
improvements project. The IVSC revised its standards for the 2005
edition to reflect these changes.
two standards most affected by the revised International Financial
Reporting Standards are International Valuation Application 1 –
Valuation for Financial Reporting; and International Valuation
Guidance Note 8 – The Cost Approach for Financial Reporting –
Australia the Corporate Law Economic Reform Program Act of 1999
established the basis for new standard setting arrangements as a part
of the Commonwealth Government’s Corporate Law Economic Reform
Financial Reporting Council is responsible for the broad oversight of
the process for setting accounting standards for use in for-profit
and not-for-profit public and private sectors. The key function of
the Financial Reporting Council is to advise the Commonwealth
Government on the accounting standards setting process and
development of International Financial Reporting Standards and to
the broad strategic direction of the AASB.
Financial Reporting Council is not able to influence the AASB’s
technical deliberations and hence the content of any particular
International Financial Reporting Standards are adopted in Australia
through the Australian equivalents to IFRSs made by the AASB.
AASB accounting standards that affect the valuation of property,
plant, and equipment are summarised as follows: -
116 – Property Plant and Equipment;
117 – Leases;
136 – Impairment of Assets;
140 – Investment Property;
141 – Agriculture;
3 – Business Combinations1; and
5 – Non Current Assets Held For Sale and Discontinued Operation.
table below shows the relationship between the previous and new
Standards Current Standards
1015 – Acquisition AASB 3 – Business
116 – Property
1021 AASB 116 – Property
Plant and Equipment
1041 – Revaluation AASB 116 – Property
Non Current Assets Plant and Equipment
1008 – Leases AASB 117 – Leases
1010 – AASB 136 – Impairment
Amount of Assets
Non Current Assets
Previous Standard AASB 140 –
1037 – Self-Generating AASB 141 – Agriculture
1042 – Discontinuing AASB 5 – Non Current
Assets Held For Sale and Discontinued Operations.
International Valuation Standards
International Valuation Standards Committee (IVSC) publication
International Valuation Standards 2005, discusses the term
Fair Value at paragraph 8.1 (Pg 31-33) of General Valuation Concepts
and Principles by stating:
expression market value and the term fair value as it commonly
appears in accounting standards are generally
if not in every instance exactly equivalent concepts. Fair value, an
accounting concept, is defined in international financial reporting
standards and other accounting standards as the amount for which an
asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arms length transaction.
value is generally used for reporting both market and non-market
values in financial statements. Where the market value of an asset
can be established this value will equate to fair value.
AASB 116 – Property, Plant and Equipment
standard prescribes requirements for the recognition, measurement at
recognition and measurement after recognition, and de-recognition of
property, plant and equipment assets. After recognition as an asset,
an item of property, plant & equipment is measured using the cost
model or the revaluation model (at fair value).
objective of AASB 116 is to prescribe the accounting treatment of
property, plant and equipment so that the users of any Financial
Report may discern information about the entity’s investments in
its property, plant and equipment and any changes in such
standard also prescribes requirements for depreciation of property,
plant and equipment assets.
116 is equivalent to IAS 16 Property, Plant and Equipment issued by
Australian standards require heritage assets to be recognised as they
satisfy the definition of property, plant and equipment. Therefore
AASB 116 applies to heritage assets.
2.4 Relationship with
116 is related to other standards which consider the Fair Value
concept in certain specific areas. Depending on the classification of
an asset it may be necessary to consider asset valuation requirements
of the following:-
117 – Leases
is noted that AASB 117 may apply to the disposal of an asset by way
of sale and leaseback.This is important in considering the valuation
of an asset by way of sale and leaseback where necessary (Refer
definitions under Addendum “A” of IVA 1).
136 – Impairment of Assets
main requirement of this standard is to ensure that assets are
carried at amounts that are not in excess of their Recoverable
Amount. The requirement to test for impairment is the responsibility
of the directors of the reporting entity.
Recoverable Amount of an asset or cash-generating unit is defined as
the higher of its Fair Value less costs to sell and its Value In Use.
in Use is defined as the present value of future cash flows expected
to be derived from the asset or cash-generating unit or, the
depreciated replacement cost of the asset (when the future economic
benefits of the asset of a not for profit entity are not primarily
the assets ability to generate net cash inflows and where the entity
would, if deprived of the asset, replace its remaining future
standard also requires that where the Recoverable Amount of an asset
is less than the assets Carrying Amount the Carrying Amount of the
asset is reduced to its Recoverable Amount and the reduction is an
standard also requires the immediate recognition of Impairment Loss
as an expense in the Profit and Loss for assets carried at cost or in
accordance with the revaluation accounting for assets carried out at
the revalued amount.
140 – Investment Property
standard requires an entity to measure an investment property after
recognition at Fair Value or using the Cost Model specified in AASB
116.The standard applies to reporting periods beginning on or after 1
property is defined as “Land or a Building or a 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:
in the production or supply of goods and services or administrative
sale in the ordinary
course of business.
occupied property is property held (by the owner or by the Lessee
under a Finance Lease) for use in the production of supply of goods
or services for administrative purposes.
3 – Business Combinations
standard requires business combinations to be accounted for by
applying the purchase method. It requires an acquirer to recognise
separately, at the acquisition date, the acquiree’s identifiable
assets that meet
certain recognition criteria, regardless of whether they had been
previously recognised by the acquiree.
standard requires the identifiable assets that satisfy the stipulated
recognition criteria to be measured initially by the acquirer at
their fair values at the acquisition date, irrespective of the extent
of any minority interest.
5 – Non Current Assets Held For Sale and Discontinued Operation.
standard requires that assets that are classified as Held For Sale be
measured at the lower of the Carrying Amount and Fair Value less
costs to sell. It also requires that assets that meet the criteria as
being classified as Held For Sale be separately presented on the face
Value is defined in AASB 116 as follows:
. . . . . the amount
for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction.”
value is considered further in non-mandatory “Australian Guidance”
as an accompaniment to AASB 116 set out below.
The fair value of an asset is the best estimate of the price
reasonably obtainable in the market at the reporting date in keeping
with the fair value definition.
is the most advantageous price reasonably obtainable by the seller
and the most advantageous price reasonably obtainable by the buyer.
The estimate specifically excludes an estimated price inflated or
deflated by special terms or circumstances such as atypical
and leaseback arrangements, or concessions granted by anyone
associated with the sale.
Underlying the paragraph 6 definition of fair value is a presumption
that the entity is a going concern without any intention or need to
liquidate, to curtail materially the scale of its operations or to
undertake a transaction on adverse terms. Similarly, to determine the
fair value of an asset, it is assumed that the asset is exchanged
after an adequate period of marketing to obtain its most advantageous
fair value of an asset is determined by reference to its highest and
best use, that is, the use of the asset that is physically possible,
legally permissible, financially feasible, and which results in the
highest value. Opportunities that are not available to the entity are
not taken into account.
Where it is the market’s assessment that it is rational to continue
to use the asset, the revalued amount shall include estimated entry
the asset is held for sale AASB 5 Non-current Assets Held for Sale
and Discontinued Operations applies.
Where a quoted market price in an active and liquid market is
available for an asset, that price represents the best evidence of
the asset’s fair value. When a quoted market price for the asset in
an active and liquid market is not available, the fair value is
estimated by reference to the best available market evidence of the
price for which the asset could be exchanged between knowledgeable,
willing parties in an arm’s length transaction. This evidence
includes current market prices for assets that are similar in use,
type and condition (‘similar assets’) and the price of the most
recent transaction for the same or a similar asset (provided there
has not been a significant change in
circumstances between the transaction date and the reporting date).
Current market prices for the same or similar assets can usually be
observed for land, non-specialised buildings, used motor vehicles,
and some forms of plant and equipment. For land and buildings, these
prices can also be derived from observable market evidence (e.g.
observable current market rentals) using discounted cash flow
In some circumstances the fair value of the asset is not able to be
determined from market-based evidence as the market buying price and
market selling price of an asset differ materially because the asset
usually is bought separately in the new asset market, but if sold
separately, could only be sold for its residual value. In other
circumstances the fair value of the asset is not able to be
determined from marketbased evidence as there is no market evidence
of the asset’s market selling price.
circumstances will usually arise where the transaction price evidence
arises in a monopoly context or the asset is specialised and rarely
sold, except as part of a continuing business.
Where the fair value of an item of property, plant and equipment
cannot be reliably determined using market-based evidence as outlined
in paragraph 33 of AASB 116 , the asset’s fair value is measured at
its market buying price and the best indicator of an asset’s market
buying price is depreciated replacement cost or an income approach.
Depreciated replacement cost is the current replacement cost of an
asset less, where applicable, accumulated depreciation calculated on
the basis of such cost to reflect the already consumed or expired
future economic benefits of the asset.
Depreciated Replacement Cost IVSC Definitions
Replacement Cost. The current cost of reproduction or replacement of
an asset less deductions for physical deterioration and all relevant
forms of obsolescence and optimisation.
Property. Property that is rarely, if ever, sold in the market,
except by way of a sale of the business or entity of which it is
part, due to uniqueness arising from its specialised nature and
design, its configuration, size, location, or otherwise.
Buildings, structures, or modifications to land, or a permanent
nature, involving expenditures of labour and capital, and intended to
enhance the value or utility of the property. Improvements have
differing patterns of use and economic lives.
Profitability. When an asset has been valued by reference to
depreciated replacement cost, adequate profitability is the
test that the entity should apply to ensure that it is able to
support the depreciated replacement cost conclusion.
Potential. The capacity to provide goods and services in accordance
with the entity’s objectives, whether those objectives are the
generation of a net cash inflows or the provision of goods and
services of a particular volume and quantity to the beneficiaries
thereof. In the public sector, the concept of service potential
takes the place of the test of adequate profitability applied
in the private sector.
Equivalent Asset (MEA). An asset similar to an existing asset and
having the equivalent productive capacity, which could be built using
modern materials, techniques, and design. Replacement cost is the
basis used to estimate the cost of constructing a modern equivalent
Loss. The amount by which the carrying amount of an asset or a
cash-generating unit exceeds its recoverable amount. International
Accounting Standard 36 (IAS 36), para. 6.
The process by which a least cost replacement option is determined
for the remaining service potential of an asset. It is a process of
adjustments reducing the replacement cost to reflect that an asset
may be technically obsolescent or over-engineered, or the asset may
have a greater capacity than that required. Hence optimisation
minimises, rather than maximises, a resulting valuation where
alternative lower cost replacement options are available. In
determining the depreciated replacement cost, optimisation is applied
for obsolescence and relevant surplus capacity.
replacement cost is used where there is insufficient market data
to arrive at Market Value by means of market-based evidence.
116, Property, Plant and Equipment, paragraph 33, provides that in
the absence of market-based evidence an entity may need to estimate
the fair value of a specialised asset using an income or a
depreciated replacement cost approach.
Public Sector Accounting Standard (IPSAS) 17, Property, Plant and
Equipment, paragraphs 42 and 43, prescribe the use of depreciated
replacement cost for valuing specialised buildings and
other man-made structures as well as items of plant and
equipment of a specialised nature.
plant and equipment that is commonly traded in the market should be
distinguished from specialised assets.
classification of an asset as specialised should not automatically
lead to the conclusion that a depreciated replacement cost
valuation must be adopted. Even though an asset may be
specialised, it may be possible in some cases to undertake a
valuation of a specialised property using the market comparison
approach and/or the income
the absence of direct market evidence, depreciated replacement
cost is regarded as an acceptable method of assessing the value
of specialised assets but the methodology must incorporate market
observations by the Valuer with regard to land value(for property
assets), current cost, and depreciation rates. The methodology is
based on the same theoretical transaction between rational informed
parties as the Market Value concept.
applying the depreciated replacement cost methodology, the Valuer
should refer to IVGN 8.
conceptual approach to the valuation of specialised assets has not
altered in relation to assets which are not traded in the market
place. In the absence of direct market transaction evidence for
specialised assets, the use of depreciated replacement cost or income
methodologies, is endorsed at paragraph 33 of AASB 116 as follows:
there is no market-based evidence of fair value because of the
specialised nature of the item of property, plant and equipment and
the item is rarely sold, except as part of a continuing business, an
entitymay need to estimate fair value using an income or a
depreciated replacement cost approach.
depreciated replacement cost approach for financial reporting is
considered in GN8, IVSC Standards 2005.
term fair value less costs to sell used in Australian
Accounting Standards is not applicable unless the asset is held for
disposal. Market value will still apply in this circumstance to
property, plant and equipment, but not as part of a going concern.
that valuers should note are:
the majority of instances in relation to property, fair value will be
equivalent to market value;
specialised properties the application of the depreciated replacement
cost approach or the income approach is an acceptable methodology for
valuations for financial reporting purposes provided the value
determined is consistent with the fair value definition;
the absence of direct (market) transaction evidence, when the
depreciated replacement cost approach methodology is applied, valuers
should consider the elements of depreciation and their application;
depreciation should be based on market evidence (see IVSC
GN8).Valuers constantly analyse market transactions which indicate a
relationship between new cost, depreciation and value. These
transactions can be indicative of depreciation for depreciated
replacement cost purposes if care is taken to exclude influences such
as economic depreciation affecting property sold for a use other than
its original purpose-design use;
where the depreciated
replacement cost approach is adopted and the value of the land for an
alternative use is equal to or higher than the value of the (total)
asset - after allowing for the cost of works to bring the land to a
state in which the alternative use can be exploited (e.g. demolition
and removal of plant and equipment and its cost of relocation) - then
the land value, net of these costs, is the value of the asset;
also be given to the potential alternative use value of improvements
on the land e.g. a building shell after removal of all plant and
equipment. The alternative use value assessment does not necessarily
mean that the improvements have no value for the alternative use;
when an asset used in
a for-profit enterprise has been valued by reference to the
depreciated replacement cost, adequate potential profitability
becomes the test (an “impairment” test) applied by the entity to
the depreciated replacement cost estimate to determine whether the
asset can be carried at that amount; and
depreciated replacement cost approach methodology is expressed as
subject to the test of the adequate profitability (or service
potential in the case of assets employed in a not-for-profit
enterprise) of the assets held by the entity.
Fair Value Responsibility
application of Australian Accounting Standards and International
Accounting Standards is complex. Valuers of property, plant and
equipment assets for financial reporting purposes should be aware of
the inter-relationships and complexities.
application of market value concepts by professional valuers will
normally be the foundation of an independent assessment of value for
financial reporting purposes.
ultimately the determination of fair value is the responsibility of
the reporting entity.
Categorisation of Assets
Assets are categorised as follows:
Degree of Specialisation
assets may be non-specialised or specialised in whole or part. The
valuer assesses the degree of specialisation having regard to the
use to which the asset is put;
degree of special adaptation;
whether that category
of asset has a readily definable market; and
guidance by the directors and/or technical staff of the entity.
assets are those normally traded in an open market where market-based
price indicators are available to guide both market participants and
market observers. These non-specialised assets can be further
categorised as those assets which are common and regularly traded in
the marketplace and include offices, warehouses, shops, etc. and
those that generate an income or profit by their operation and are
traded in the open market and include trading hotels, hospitals and
assets are those not normally traded in any market, except as part of
a total enterprise by reason of their specific design, size, location
or other factor. These assets include, but are not limited to, oil
refineries, power stations, communication towers, notable public
buildings, roads and drains, parks and gardens, and can include
standard buildings such as offices or warehouses in a market where
there is little or no demand for the asset if it is no longer an
degree of specialisation will determine the valuation methodology
assets may possess elements that fall into more than one category,
for example multi-purpose or mixed use properties. Each element of
the asset should be valued on the designated basis reflecting the
degree of specialisation or non-specialisation.
Value in Use determination is entirely the prerogative of the
the Fair Value of specialised assets is calculated by the
depreciated replacement cost approach and advised to the
entity for inclusion in financial statements, the valuation will be
subject to the impairment test. Both Fair Value and Fair
Value less costs to sell are said to be asset specific whilst
Value in Use is entity specific. In current Australian
financial reporting practice, carrying amounts reported at Fair Value
are tested for impairment by the Fair Value of the cash generating
depreciated replacement cost of specialised assets and their
Value in Use are different approaches to value, which may not
yield consistent figures. Valuers should be aware that depreciated
replacement cost determinations will include items of functional and
economic obsolescence as well as physical depreciation. These items
are asset specific and will take into account current market
conditions for the
particular assets at the date of valuation.Impairment
Liaison with 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.
may also communicate with valuers to:
specify items the
auditor expects the valuation report to cover;
clarify the valuers
relationship with the client; and
assumptions and methods to be used by the valuer.
require assurance that the valuers 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
the auditors overall knowledge of the entity’s business.
appropriateness and reasonableness of assumptions and methods used
and their application are the responsibility of the valuer. The audit
needs to determine that they are not unreasonable, based on the
auditors knowledge of the entity’s business.
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. In such circumstances the approval of
the client should be obtained.
valuer, whether internal or independent, should co-operate reasonably
and responsibly if approached by the auditor.
is of particular importance that any special assumptions and/or
limiting conditions be clearly and unequivocally disclosed by the