David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value www.apv.net

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www.apv.net

Joint project: CPA & AAMCoG
Four sections
Overview
Technical
Practical Advice
Attachments
David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value www.apv.net

• Provide practical advice and guidance to -
– Non-technical people who only need high level understanding
– Assist with entire process (not just valuation and accounting)
– Technical people (to assist in valuation process)
• Accountants
• Valuers
• Engineers www.apv.net

• Draft 1 issued July 2012
• 5 months public consultation and feedback
• Workshops (held nationally)
• Feedback received (formal and informal)
• Considered by reference group (AASB, Audit, CPA)
• Updated
• Peer Review of guide and feedback (former Treasury and AASB)
• Launch – International Public Sector Accounting
Conference (Feb 2013) www.apv.net

• CPA Centre of Excellence
• Accounting firms
• Professional
Bodies (API, AMC, IPWEA, CIPFA, ICEAW)
• Government Agencies
(Australian and overseas -
Treasury, Audit Offices, V-Gs)
• Individuals
(including members of AASB & IPSASB) www.apv.net

• Feedback generally very good and supportive
• Some complex or contentious issues
– Reference group discussion and resolution
• Some individuals expressed views that were significantly inconsistent with the views of the other participants.
www.apv.net

• Must be calibrated to transaction price
• Market participants – not entity specific
• Restriction must be intrinsic to the asset
– (can’t ever be removed)
• Cost approach – base on sales of comparable land www.apv.net

• Agreement from a range of participants
• Straight-line cannot be used as a “default”
• Entity needs to analyse and determine appropriate pattern www.apv.net

• It does not criticise any particular approach
• Nor does it promote any particular approach
• Highlights –
– need to determine appropriate pattern
– risks of using erroneous assumptions www.apv.net

• Guide is clear…. There is no one-to-one relationship
• Need to determine relevant factors and determine method to assess level of remaining service potential and rate of consumption
• AASB13 requires adjustment to valuation input for condition and comparability www.apv.net

• Real issue for some! (but only in SA)
• Guide does not promote any particular approach
• Straight-line is appropriate….
If analysis determines pattern to be constant
• Other patterns….
If analysis determines so
• Some who argued “straight-line only” also argued Reducing Balance is more correct !
www.apv.net

• Some debate over term “good asset management” - Wording enhanced
• But…. The arguments used also agreed that typically would expect good asset management to result in –
– higher level of remaining service potential and
– rate of depreciation would be lower as a consequence of the useful life being extended www.apv.net

www.apv.net

• Depreciation estimates value of consumed future economic benefit
• Non-cash accounting measure
• Nothing to do with Cost to deliver the service
• Intergenerational Equity (pricing) decisions should be based on cost to deliver the service
• Therefore…. Nothing to do with depreciation www.apv.net

• Level of service = 4 litres per minute (potable)
• If 10 people use it for 10 minute each = 400 litres of consumed service potential
• If 20 people use it for 15 minutes each = 1,200 litres of consumed service potential
• Rate of consumption changes despite Level of Service remaining the same !
Analogy: amount of water equates to level of remaining future economic benefit www.apv.net

• New AASB13 terminology
• Difference between Asset Accounting and
Asset Management terminology www.apv.net

• Some criticism of IPWEA/ACELG KPIs
• Additional added for comparison at Asset
Class level www.apv.net

• Range of material (government, professional bodies and private sector)
• Private sector considered just as appropriate as non-private sector
• Aim is to provide best available guidance
• Requests for additional material (none supplied)
• Guide does not promote or recommend any particular approach or material www.apv.net

• IPWEA noted –
“Asset management plans are not yet widely in place across the local government sector, and more importantly, data indicates that there is no current relationship between the data in those plans and that reported in annual reports . “
• Hence the need to improve valuation and depreciation ! www.apv.net

Depreciation more than an arithmetic calculation and needs to based on relevant factors
• Suggested that depreciation did not need to reflect the consumption of future economic benefit….. It just need to be a systematic arithmetic calculation
• NO….
– Depreciation is to provide an estimate of the expected consumption of the future economic benefit
– If not… challenges relevance, reliability and truth and fairness of the financials www.apv.net

Decision Trees available from www.apv.net
www.fairvaluepro.com.au
www.apv.net

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

Was: “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.”
Will be: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” www.apv.net

Was: “is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.”
Will be: “the amount an entity could receive for the asset currently (at the financial reporting date) if the asset were already as old and worn as it will be when the entity expects to dispose of it.” www.apv.net

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

• Same outcome for
APV valuations
• Change in terminology www.apv.net

• Dependent upon whether
– Recurring or Non-Recurring valuation
– Level of Valuation Input www.apv.net

David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value www.apv.net

www.apv.net

www.apv.net

Description
Recurring Fair Value Measurements
Land
Freehold Title
Parks and Reserves
Other Restricted Land
Buildings
Residential
Commercial
Specialised
Road Network Infrastructure
Unsealed Roads
Sealed Roads
Bridges
Footpaths
Water Network Infrastructure
Treatment Plants
Pipes
Meters and Services
Investment Properties
Non-Recurring Fair Value Measurements
Assets Held for Sale
Total Non-Recurring Fair Value Measurements
Fair Value measurements at the end of the reporting period using
Quoted prices in active markets for identical assets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3) Gross Value WDV
30/06/2013
4,250,000
5,000,000
700,000
9,950,000
4,250,000
5,000,000
700,000
9,950,000
1,750,000
5,000,000
60,000,000
66,750,000
1,500,000
5,000,000
44,000,000
50,500,000
-
4,250,000
2,000,000
700,000
6,950,000
3,000,000
3,000,000
-
700,000
4,000,000
10,000,000
14,700,000
800,000
1,000,000
34,000,000
35,800,000
22,000,000
56,000,000
11,000,000
11,000,000
100,000,000
20,000,000
50,000,000
10,000,000
10,000,000
90,000,000 -
20,000,000
50,000,000
10,000,000
10,000,000
90,000,000
12,000,000
25,000,000
8,000,000
45,000,000
9,000,000
12,000,000
4,000,000
25,000,000
3,000,000
224,700,000
3,000,000
178,450,000 -
-
-
-
9,000,000
12,000,000
4,000,000
25,000,000
3,000,000
24,650,000 153,800,000
1,500,000
1,500,000
1,500,000
1,500,000
1,500,000
1,500,000 www.apv.net

(a) Valuation techniques used to derive fair values
(i) Recurring fair value measurements
The following methods are used to determine the fair value measurements.
Land
Level 2 valuation inputs were used to value land held in freehold title as well as land used for special purposes which is restricted in use under current zoning rules. Sales prices of comparable land sites in close proximity are adjusted for differences in key attributes such as property size. The most significant inputs into this valuation approach are price per square metre.
There were also some parks and reserves for which there was no observable market evidence of sales prices for comparable sites in close proximity. These were subsequently valued at the level 3 valuation input hierarchy by using the professional judgement of a Registered Valuer who adjusted the price per square metre of sales from sites not in close proximity which provided only a low level of comparability. www.apv.net

Fair value measurements using significant unobservable inputs (level 3) Land Buildings Road Network
Infrastructure
Water Network
Infrastructure
2,750,000 25,000,000 80,000,000 25,000,000 Opening Balance
Transfers
Into Level 3
Out of Level 3
To assets held for sale
Between asset classes
Included in profit or loss
Depreciation
Included in other comprehensive income
Net Increase (Decrease) in Asset Revaluation
Reserve
Purchases, Issues, Sales and Settlements
Purchases
Issues
Sales
Settlements
Closing Balance
(500,000)
1,000,000
-
4,000,000
-
1,500,000
(2,000,000) (5,000,000) (3,000,000)
200,000 3,500,000 5,000,000 2,500,000
100,000 5,000,000 6,000,000 -
(50,000) 3,800,000 (1,000,000)
3,000,000 35,800,000 90,000,000 25,000,000 www.apv.net

Level 3: Valuation inputs and relationship to fair value (sensitivity)
Description and fair value as at 30 June 2013
Land with restricted use
($3.0m)
Valuation technique(s)
Cost approach
(replacement cost)
Unobservable inputs Range of inputs
(probability
– weighted average)
Price per square metre +/- 20%
Relationship of unobservable inputs to fair value
An over-estimation of 10% would result in a decrease in fair value by $272,000
Isolated residential and specialised buildings
($34.8m)
Cost approach
(depreciated replacement cost)
Relationship between asset consumption rating scale and the level of consumed service potential.
+/- 10%
A change of 10% would result in an increase/decrease of $3.4m.
Commercial buildings in volatile market
($1.0m)
Discounted cash flow
Long term rental yields in potentially volatile market
+/- 30%
Road network infrastructure
($90.0m)
And
Cost approach
(depreciated replacement cost)
Asset Condition +/- 10%
Water network infrastructure (excluding treatment plants)
($16.0m)
Total value $106.0m
Water network Cost approach
Relationship between asset consumption rating scale and the level of consumed service potential.
+/- 10%
Relationship between +/- 10%
A reduction of 10% in cash flows/rental yields as a consequence of changes in the market flowing from changes in mining sector operations would result in a decrease of fair value by $100,000.
A change in the overall assessment of condition would impact the fair value. The impact of such a change is dependent on the inter-relationship with the following unobservable input.
A change of 10% would result in an increase/decrease of $10.6m.
www.apv.net
A change of 10% would result in an increase/decrease

(i) Valuation processes
The council engages external, independent and qualified valuers to determine the fair value of the entities land, buildings, infrastructure and major plant on a regular basis. An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different from the fair value. If any variation is considered material a revaluation is undertaken either by comprehensive revaluation or by applying an interim revaluation using appropriate indices.
Changes in level 2 and 3 fair values are analysed at the end of each reporting period and discussed between the Director of Finance, CEO, valuation team, Council and Audit Committee. As part of this process the team presents a report that explains the reasons for the fair value movements.
As a 30 June 2013 a comprehensive revaluation was undertaken for all asset classes subject to revaluation by ABC Valuers Pty Ltd.
The main level 3 inputs used are derived and evaluated as follows –

Cost for land restricted in use – estimate cost to replace the existing land if council had to acquire it on the open market in competition with other market participants. Due to the restricted nature and unique characteristics of this land there was insufficient market evidence of directly comparable sales. Reference was made to sales of land with a limited level of comparability at distant locations and adjusted by the valuer using professional judgement to take account of the differing characteristics. These were evaluated for reasonableness against the price per area for other restricted in use land held by the council that had been valued as level 2. www.apv.net

APV website
(www.apv.net)
Fair Value Pro websites
(www.fairvaluepro.com.au)
Email
David@apv.net
www.apv.net