11 March 2014
Position paper for the consideration
of SALGAG:
Determining Fair Value of Non-Financial
Assets controlled by LGAs for financial
reporting purposes according to
AASB 13 Fair Value Measurement
March 2014
Position paper for the SALGAG:
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ECM 595555
Determining Fair Value of Non-Financial Assets controlled by SA LGAs for
financial reporting purposes (11 March 2014)
Position paper for the SALGAG:
Determining fair value of Non-Financial Assets controlled by LGAs for financial
reporting purposes according to AASB 13 Fair Value Measurement.
TABLE OF CONTENTS:
Page
Executive Summary
4
Introduction and Terms of Reference
5
Background
5
Definitions
6
GAAP hierarchy
6
Fair Value Measurement
7
Stepping through AASB 13 and its application to non-financial assets
8
Application of the above analysis of AASB 13 Fair Value Measurement to non-financial
assets controlled by Local Government Authorities:
16
Analysis of the Impact on Valuation of Freehold Land not subject to restrictions,
Community Land and Investment Property,
16
Analysis of the Impact on Valuation of Non-Specialist Buildings on Freehold Land not
subject to restrictions and Non-Specialist Buildings on other land of different market
situations as defined in AASB 13.
18
Analysis of the Impact on Valuation of Specialist Buildings on Freehold Land not
subject to restrictions, and Specialist buildings on other land of different market
situations as defined in AASB 13.
21
Analysis of the Impact on Valuation of Transportable (or otherwise removable other
than by demolition) buildings including other structures of different market situations
as defined in AASB 13.
22
Analysis of the Impact on Valuation of Roads &Bridges, Stormwater Assets, Other
Structures and Land Improvements of different market situations as defined in
AASB 13.
23
Analysis of the Impact on Valuation of Artworks, Heritage & Cultural Assets of different
market situations as defined in AASB 13
24
Analysis of the Impact on Valuation of Property, Plant & Equipment, Office Furniture,
Fittings, Equipment and Library Books of different market situations as defined in AASB
13.
25
Overall Conclusions and Summary
25
The Author : Jim Dixon:
26
Curriculum Vitae – Jim Dixon
27
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Determining Fair Value of Non-Financial Assets controlled by SA LGAs for
financial reporting purposes (11 March 2014)
Position paper for the SALGAG:
Determining fair value of Non-Financial Assets controlled by LGAs for financial
reporting purposes according to AASB 13 Fair Value Measurement.
Executive Summary
Scope of Position Paper
EX1. The scope of this project is:
 To review the new guidance in AASB 13 Fair Value Measurement (AASB 13) to
provide analysis in relation to the application of this standard to non-financial assets
controlled by Local Government Authorities (LGAs).
 The non-financial assets included in this review are Freehold Land not subject to
restrictions, Community Land, Investment Property, Non-specialist buildings on
freehold land not subject to restrictions, Specialist buildings on freehold land not
subject to restriction, Non-specialist buildings on other land, Specialist buildings on
other land, Transportable (or otherwise removable other than by demolition) buildings
and other structures Roads, Bridges & Stormwater Assets, Plant & Equipment, Pools,
Sports fields, Parks, Waste Depot Assets, Office Furniture, Fittings and Equipment and
Library Books, Land improvements both depreciable and Non-Depreciable, Artworks &
Heritage Assets. (As AASB 13 is focused on the unit of account, the groupings of
Infrastructure, Land and Buildings are considered too high level to permit a clear,
detailed and meaningful analysis of the impact of AASB 13 on non-financial assets
controlled by LGAs)
 To provide the Local Government Association of South Australia (LGASA) with a
consistent approach to the valuation of Local Government assets and to the presentation
and content of Local Government financial statements with a view to providing a
generally accepted framework for the auditing of those statements.
 This Position Paper does not attempt to modify AASB 13 in any way. Instead the
Position Paper provides appropriate guidance on interpretation of AASB 13 for
application to circumstances where the existing guidance in the Standard, Basis for
Conclusions and Application Guidance is not explicit.
Fair value of non-financial assets
EX2. The application of AASB 13 Fair Value Measurement to non-financial assets that are
controlled by Local Governments in South Australia (LGSA) is an interpretative issue and
requires consideration of the fair value definition, being: “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” as well as the valuation techniques permitted by AASB 13.
EX3. Given that non-financial assets are assets and that the revaluation model under AASB 116
Property, Plant and Equipment applies to all material asset classes, then the fair value
determinations need now to be applied under AASB 13 Fair Value Measurement. The current
principle and brief guidance in AASB 116 would not satisfy the detailed requirements of AASB
13 Fair Value Measurement. Hence, as AASB 13 overrides AASB 116, LGSAs need to apply
the principles and authoritative guidance in AASB 13 to non-financial assets. When applying
AASB13 it should be noted that the application guidance has the same authority as other parts
of the Standard.
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EX4. There is a view that if fair value cannot be determined under the prescriptive requirements
then the carrying amount should be nil. Under this view, there are no buyer market participants
in relation to an orderly sale for the assets. In addition, the concept of highest and best use will
not allow consideration of the value as an alternative use (due to the presumption that current
use is the best use, unless there is compelling evidence otherwise). In which case, the assets are
not able to be measured at fair value since the principles in the definition are not satisfied. This
proposition is not accepted as an appropriate interpretation of the principles of AASB 13 for
the following reasons, each of which is considered in more detail below:





It is a fundamental tenet of the Standard that an asset or liability is exchanged in an
orderly transaction between market participants. (see paragraphs 31-38)
Accordingly, that there is therefore a market – actual or theoretical – in which the
transaction occurred. (see paragraphs 31-38)
Similarly, that there are actual or theoretical participants in such a market. (see
paragraphs 39-47)
Valuation techniques are to be appropriate to the circumstances and maximise the use of
observable inputs. (see paragraphs 52-59)
AASB 13 neither makes reference to, nor implies, that there is a default position for the
carrying value of an asset to be nil or returned to cost where a fair value is unable to be
determined.
Notwithstanding this, there will be a very few instances where a fair value cannot be determined
in accordance with the principles of AASB 13.
Introduction and terms of reference
1. The objective of this position paper “Determining the Fair Value of Non-Financial Assets
controlled by LGAs for financial reporting purposes according to AASB 13 Fair Value
Measurement is to consider non-financial assets held by South Australian Local Government
Authorities and the implications of AASB 13 Fair Value Measurement in valuing the nonfinancial assets. Further, the objective is to ensure that information contained in general purpose
financial reports is appropriate, useful for decision-making and for discharging the
accountability of management and governance. Also the analysis will ensure the existence of a
generally accepted framework for the auditing of these general purpose financial reports.
Background
2. Currently in South Australia there are at least two private firms of valuers who have been
separately contacting Local Governments, and making what appear to be inconsistent claims about the
effects of the new AASB 13 standard. The firms differ in their interpretations as to determining the
highest and best use of specialised buildings when an active and open market does not exist. One
interpretation supports the possible demolition to determine the highest and best use of the specialised
building and potentially results in a fair value of zero. The alternative interpretation supports valuation
using a cost approach to determine the current replacement cost of the service potential in the existing
asset. Unfortunately the rival interpretations, although inconsistent with each other, nevertheless both
seem to be capable of being regarded as consistent with AASB 13. However, given the context, I
support the alternative approach based on using the methodology of AASB 13 to derive the fair value
of the service potential of the existing asset using market participant‟s assessment of its current use.
(Refer discussion in paragraphs 75 &76)
3. Hence, with uncertainties around the application of AASB 13, the Local Government Association
of SA, along with the SA Local Government Financial Management Association, and the SA Local
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Government Auditors Group have agreed that it is in the public interest that there should be a
consistent approach to valuation of LG assets, LG financial statements and auditing of those
statements.
4. The application of AASB 13 to assets in the financial statements of Local Government
Authorities (LGAs), with particular reference to infrastructure, land and buildings, was
discussed at a meeting of SALGAG held on 8th November 2013. A summary of these
discussions, written by Mr Tim Muhlhausler, Chair of the SA LG Auditors Group, has been
made available to me, as the author of this position paper, by Mr Shane Sody, Program
Manager, Local Government Reform at the Local Government Association of South Australia
5. Mr Sody made it a pre-condition of accepting this commission that “the LGA would regard it
as essential that in preparing your opinion, you seek and have regard to the views of John
Comrie, (the LGA‟s lead consultant on financial sustainability) as well as the views of David
Maxwell (the author of the SA LG Model Financial Statements) and the views of Tim
Muhlhausler, (the chair of the SA LG Auditors Group)”. The author of this Position Paper
acknowledges the constructive support and detailed contributions of David Maxwell, Tim
Muhlhausler and John Comrie. However, the responsibility for the content of this Position
Paper and for any errors or unclear interpretations in the final publication remains with the
author.
6. Internal quality control procedures were conducted by Mr Colin Parker, Principal, GAAP
Consulting and Head of the GAAP Consulting Network; Colin has recently advised the
Queensland Audit Office on the issue of fair value determination of land under roads.
Ultimately the views expressed and the conclusions are mine.
7. AASB 13 Fair Value Measurement becomes effective for the first time for annual reporting
periods beginning on or after 1 January 2013. This also represented an opportune time to reevaluate the valuation methodology used for these assets based on the more extensive guidance
in AASB 13.
Part 1:
Definitions
8. All accounting terminology used in this position paper is consistent with the definitions and
terminology used in Australian Accounting Standards (AASs) issued by the Australian
Accounting Standards Board (AASB) including the definitions and terminology in AASB 13.
GAAP hierarchy
Requirements
9. AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors objectives
include criteria for selecting accounting policies. Accordingly, “when an Australian Accounting
Standard specifically applies to a transaction, other event or condition, the accounting policy or
policies applied to that item shall be determined by applying the Australian Accounting
Standard and considering any relevant Implementation Guidance issued by the AASB for the
Australian Accounting Standard” (AASB 108.7).
10. AASB 101 Presentation of Financial Statements requires an entity to disclose the
judgements that management has made in the application of its accounting policies.
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Specifically, AASB 101 requires “An entity shall disclose, in the summary of significant
accounting policies or other notes, the judgements, apart from those involving estimations (see
paragraph 125), management has made in the process of applying the entity’s accounting
policies that have the most significant effect on the amounts recognised in the financial
statements” (AASB 101.122). Such judgements would include judgements made by
management in determining: who controls the non-financial assets and the fair value of these
assets.
11. Under AASB 116 Property, Plant and Equipment, after initial recognition, the preparer is
permitted a one off choice of cost or revaluation model. Fair value is defined in AASB 116 as
“the amount for which an asset could be exchanged between knowledgeable willing parties in
arm‟s length transaction”. However AASB 116 contained limited guidance on the application of
the fair value principle. This guidance was:



Fair value of non-financial assets is usually determined from market-based evidence by
appraisal that is normally undertaken by professionally qualified valuers
If there is no market based evidence of fair value because of the specialised nature and
item is rarely sold then fair value may need to be estimated by the an income or a
depreciated replacement cost approach, and
The frequency of revaluations depends upon changes in fair value with carrying amount
being revised where there is a material change in fair value.
12. AASB 13 Fair Value Measurement replaced the fair value definition and specific guidance
in AASB 116 Property, Plant and Equipment.
13. AASB 13 Fair Value Measurement provides a revised definition of fair value and extensive
requirements and guidance on valuing assets at fair value and defines fair value for all assets as:
“the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.” Issues relating to determining the fair value of nonfinancial assets controlled by LGAs in accordance with AASB 13 are addressed later in this
paper.
14. This paper has been prepared based on accounting pronouncements in place at 31
December 2013, the conclusions reached will need to be reconsidered on issue of the revised
Conceptual Framework which is currently being developed by the International Accounting
Standards Board ( IASB) and if and when the AASB releases its Australian equivalent.
Part 2: Fair value measurement
Introduction
15. For a contemporary context asset valuation practices when applied to high level classes of
non-financial assets suggests that infrastructure assets are generally valued at depreciated
replacement cost, land assets are valued at the total area multiplied by average unimproved
value which approximates englobo value, with valuers using a highest and best use concept
adjusted for any restrictions on the land. Buildings are generally valued using a market based
approach, except where there is no active market often because of the specialised nature of the
building. In which case, a depreciated replacement cost is likely to be applied to value the
specialist building(s). Such valuation practices may well have met the previous definition of
“fair value” contained in numerous accounting standards; however, AASB 13 Fair Value
Measurement methodology would not have been applied.
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16. I have not considered whether the existing valuation methodologies are consistent and
appropriate in respect of the existing definition of fair value in AASB 116 Property Plant and
Equipment.
17. In addition to the AASB 13 Fair Value Measurement definition of fair value, there is now
significant guidance to assist in determining fair value. AASB 13 provides no specific
Australian not-for-profit guidance or the notion of service potential. After inquiry, I believe that
the AASB did not specifically consider whether the changes in the fair value definition,
requirements and guidance between AASB 116 Property Plant and Equipment and AASB 13
would lead to the de-recognition of assets that had previously been revalued to fair value under
AASB 116.
18. Prima facie the existing fair value measurement approach may be inconsistent with AASB
13 methodology as it does not appear always to consider the effect of restriction of use and title
that would be considered by a potential market participant. There is also the new requirement
of “highest and best use” to be considered and the presumption of existing use.
Stepping through AASB 13 and its application to non-financial assets
Objective
19. AASB 13 Fair Value Measurement has three stated objectives: to define fair value, set out a
framework for measuring value in a single standard, and specify disclosures about fair value
measurements (AASB 13.1).
20. Supporting this principle, the following elaborations were made:
1. Fair value is a market-based measurement not entity-specific measurement (AASB
13.2)
2. For some assets and liabilities, observable market transactions or market information
might be available; for other it might not. However, the objective of a fair value
measurement is the same – 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 (i.e., an exit price at the
measurement date from the perspective of a market participant that holds the asset or
owes the liability) (AASB 13.2)
3. When a price for an identical asset or liability is not observable, an entity measures fair
value using another valuation technique that maximises the use of relevant observable
inputs and minimises the use of unobservable inputs. As fair value is a market-based
measurement, it is measured using the assumptions that market participants would use
when pricing the asset or liability, including assumptions about risk. (AASB 13.3).
The objective and elaborations need to be kept firmly in mind in applying AASB 13.
21. AASB 13 Fair Value Measurement applies when another Standard requires or permits fair
value measurements or disclosures about fair value measurements (and measurements, such as
fair value less costs to sell, based on fair value or disclosures about those measurements), except
as specified in paragraphs 6 and 7 (AASB 13.5). The exceptions are not relevant in the current
circumstances. AASB 13 Fair Value Measurement applies to non-financial assets by the choice
of the application of revaluation model under AASB 116 Property, Plant and Equipment.
Hence, in this context, AASB 13 also applies to the initial recognition of assets acquired at no or
nominal cost when AASB 116 requires such assets be recognised at their fair values.
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22. The following statement in the Basis of Conclusion (AASB 113.BC 8) is noteworthy:
“IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures. It does
not introduce new fair value measurements, nor does it eliminate practicability exceptions to fair
value measurements (e.g. the exception in IAS 41 Agriculture when an entity is unable to measure
reliably the fair value of a biological asset on initial recognition). In other words, IFRS 13
specifies how an entity should measure fair value and disclose information about fair value
measurements.”
23. AASB 116 Property, Plant and Equipment does not contain an “inability to measure fair
value reliably”. The rebuttal presumption in AASB 141 Agriculture if met required the
biological asset to be measured at cost. AASB 13 Fair Value Measurement does not have an
explicit statement as inability to measure fair value reliably. However, AASB 116.7(b) does not
permit the recognition of an item of property, plant & equipment unless the cost of that item can
be measured reliably, which applies to not-for-profit entities for assets acquired at no or nominal
cost.
24. An alternative view is that AASB 141 Agriculture requires assets to be measured at fair
value but AASB 116 Property, Plant and Equipment permits a revaluation choice and therefore
AASB 116 does not need to have a rebuttable presumption because it has a default option of
using the cost model. Further AASB 13 is only relevant if fair value is used and there is no
need for a rebuttable presumption since it assumes that the criteria for fair value have been met.
Definition of fair value
25. Fair value is defined “as 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”
(AASB 13.6).
26. One of the intentions of the new definition is to clearly convey that fair value is a marketbased measure and not an entity specific measure and reflects current market conditions (which
reflect market participants‟, not the entity‟s current expectation about future market conditions)
(AASB 13.BC31). To achieve this outcome fair value measurement uses the assumptions a
market participant would use when pricing an asset or liability (AASB 13.BC55).
27. The fair value definition is supported by application guidance which states:
The objective of a fair value measurement 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. A fair value measurement requires an entity to
determine all the following:
a)
the particular asset or liability that is the subject of the measurement (consistently with its
unit of account).
b) for a non-financial asset, the valuation premise that is appropriate for the measurement
(consistent with its highest and best use).
c) the principal (or most advantageous) market for the asset or liability.
d) the valuation technique(s) appropriate for the measurement, considering the availability
of data with which to develop inputs that represent the assumptions that market
participants would use when pricing the asset or liability and the level of the fair value
hierarchy within which the inputs are categorised. (AASB 13.B2)
28. Unit of account as defined is the level at which an asset or a liability is aggregated or
disaggregated in a Standard for recognition purposes (AASB 13 “Definitions” section). The
“unit of account” is the explicit or implicit basis of recognition in AASB 1051 and AASB 116.
Where the “unit of account” is unclear then requirements of AASB 101 Presentation of
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Financial Statements regarding accounting policy disclosures come into play (AASB 101.117124). The requirement (b) (c) and (d) are addressed later in this paper.
Asset measurement
29. AASB 13 Fair Value Measurement requires that a fair value measurement is for a
particular asset or liability. When measuring fair value an entity shall take into account the
characteristics of the asset or liability if market participants would take those characteristics into
account when pricing the asset or liability at the measurement date. Such characteristics
include, for example, the following: the condition and location of the asset; and restrictions, if
any, on the sale or use of the asset (AASB 13.11).
30. While I address the issue of market participants in due course, I would envisage that such
participants would consider the following when pricing the asset:
 The various locations of the assets throughout South Australia (city, regional and rural
areas);
 Land generally has indefinite useful life except, for example, where natural disaster or
pollution had occurred during the reporting period, and
 Restrictions such as the various State Acts relating to land and associated legislation.
 It is beyond the scope of the Position Paper to analyse each and every type of restriction
and then determine the impact of the fair value in each case. Professional valuers are
the most qualified to assess the impact of any restriction on fair value. In this Position
Paper, restrictions are treated at a high level and include any form of limitation on an
entity to use, deal with or dispose of the asset in question.
The transaction
31. AASB 13 Fair Value Measurement assumes that the asset or liability is exchanged in an
orderly transaction between market participants to sell the asset or transfer the liability at the
measurement date under current market conditions (AASB 13.15). This is not a rebuttal
assumption but a fundamental tenet of the Standard.
32. Even when there is no observable market to provide pricing information about the sale of
an asset or the transfer of a liability at the measurement date, a fair value measurement shall
assume that a transaction takes place at that date, considered from the perspective of a market
participant that holds the asset or owes the liability. That assumed transaction establishes a
basis for estimating the price to sell the asset or to transfer the liability (AASB 13.21).
33. Based on the above, the view that where there is no observable market for the asset then
there is no fair value to be determined, or that fair value cannot be determined is not supported.
Accordingly, it is not considered that the asset whose fair value has been previously determined
under AASB 116 Property, Plant and Equipment would be nil under the application of AASB
13 Fair Value Measurement.
34. A fair value measurement assumes that the transaction to sell the asset or transfer the
liability takes place either: in the principal market for the asset or liability; or in the absence of a
principal market, in the most advantageous market for the asset or liability. These markets are
defined as:
 Principal market: The market with the greatest volume and level of activity for the
asset or liability, or
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
Most advantageous market: The market that maximises the amount that would be
received to sell the asset (or minimises the amount that would be paid to transfer the
liability), after taking into account transaction costs and transport costs (AASB 13.16)
35. In the absence of evidence to the contrary, the market in which the entity would normally
enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal
market or, in the absence of a principal market, the most advantageous market (AASB 13.17).
If there is a principal market the fair value measurement shall represent the price in that market
(whether that price is directly observable or estimated using another valuation technique), even
if the price in a different market is potentially more advantageous at the measurement date
(AASB 13.18).
36. In the current circumstances I am not aware of the existence of a principal market in
relation to most of the non-financial assets which are currently controlled by South Australian
LGAs. Therefore, the most advantageous market rules need to be applied to measure the fair
value of these assets (AASB 13.16).
37. When there is no observable market to provide pricing information about the sale of an
asset or the transfer of a liability at the measurement date, a fair value measurement shall
assume that a transaction takes place at that date, considered from the perspective of a market
participant that holds the asset or owes the liability (AASB 13.21).
38. Because AASB 13 Fair Value Measurement assumes that there is a principal market or
advantageous market then a market - actual or theoretical or otherwise- exists under the
construct of the Standard. I do not accept the proposition that is no market for non-financial
assets and I refer the reader to my comments in paragraph 40 below.
Market participants
39. AASB 13 Fair Value Measurement requires an entity to measure the fair value of an asset
(or a liability) using the assumptions that market participants would use when pricing the asset
(or liability), assuming that market participants act in their economic best interest (AASB
13.22). Market participants are defined as “buyers and sellers in the principal (or most
advantageous) market for the asset or liability that have all of the following characteristics:
(a) They are independent of each other, i.e., they are not related parties as defined in AASB
124, although the price in a related party transaction may be used as an input to a fair
value measurement if the entity has evidence that the transaction was entered into at
market terms.
(b) They are knowledgeable, having a reasonable understanding about the asset or liability
and the transaction using all available information, including information that might be
obtained through due diligence efforts that are usual and customary.
(c) They are able to enter into a transaction for the asset or liability.
(d) They are willing to enter into a transaction for the asset or liability, i.e., they are
motivated but not forced or otherwise compelled to do so” (AASB 13 „Definitions‟).
40. It is noted that when there is no observable market to provide pricing information about the
sale of an asset or the transfer of a liability at the measurement date, a fair value measurement
shall assume that a transaction takes place at that date, considered from the perspective of a
market participant that holds the asset or owes the liability (AASB 13.21).
41. Specific market participants are not required to be identified but rather the general
characteristics distinguishing market participants considering all of the following: the asset or
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liability; the principal (or most advantageous) market for the asset (or liability); and the market
participants with which the entity would enter into a transaction in that market (AASB 13.23).
42. It is noted that that Basis of Conclusion (AASB 13.BC.56) stated:
“The IASB concluded that the previous definition (sic „knowledgeable, willing parties in an arm‟s
length transaction‟ expressed the same notion as the definition of fair value in IFRS 13, but that
the previous definition was less clear. Thus, IFRS 13 defines market participants as buyers and
sellers in the principal (or most advantageous) market for the asset or liability who are independent
of each other (i.e. they are not related parties), knowledgeable about the asset or liability, and able
and willing to enter into a transaction for the asset or liability” (emphasis added).
Other potential market participants
43. There may be other classes of market participants based on the type of asset that require
consideration: For example: there is class of market participants operating in the infrastructure
market (probably a global market) consisting of investment banks, pension/superannuation
funds and entities in the revenue generating infrastructure market like toll road operators.
44. The other potential market participants may be developers who wish to purchase these
assets with a view to develop the asset for an alternative use (note this is consistent with highest
and best use AASB 13.IE7-8 & BC69).
45. However, it is unlikely that market participants exist on which to base a fair value for these
assets in general. (Refer to analysis below)
Lack of identification of market participants
46. While AASB 13.21 does allow in the absence of an observable market to provide pricing
information an assumption of a transaction with one exception AASB 13 is silent on where
there are no apparent market participants. The default position is the determination of fair value
is considered from the perspective of the market participant who holds the asset.
47. An argument could made that that a failure to identify market participants precludes the use
of fair value measurement as there is no basis for determining assumptions used in a fair value
measurement in the absence of a market participant. There is no basis within AASB 13, its
application guidance, Basis of Conclusions, to sustain that argument or the conclusion.
The price
48. Fair value is the price that would be received to sell an asset (or paid to transfer a liability)
in an orderly transaction in the principal (or most advantageous) market at the measurement date
under current market conditions (i.e., an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique (AASB 13.24).
49. A fair value measurement of a non-financial asset takes into account a market participant‟s
ability to generate economic benefits by using the asset in its highest and best use or by selling
it to another market participant that would use the asset in its highest and best use (AASB
13.25). It is important to note that the current use of a non-financial asset is presumed to be its
highest and best use unless market or other factors suggest that a different use by market
participants would maximise the value of the asset (AASB 13.29).
50. The highest and best use of a takes into account the following:
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(a) physically possible: A use that takes into account the physical characteristics of the
asset that market participants would take into account when pricing the asset (e.g. the
location or size of a property).
(b) legally permissible: A use that is legally permissible takes into account any legal
restrictions on the use of the asset that market participants would take into account
when pricing the asset (e.g., the zoning regulations applicable to a property).
(c) financially feasible: A use that is financially feasible takes into account whether a use
of the asset that is physically possible and legally permissible generates adequate
income or cash flows (taking into account the costs of converting the asset to that use)
to produce an investment return that market participants would require from an
investment in that asset put to that use.
51. Given the presumption and nature of the asset, the highest and best use is likely to be its
current use so determinations of physically possible, legally permissible and financially feasible
need to be made on current use and not alternative use. There is a rebuttable presumption that
the current use is the highest and best use, but as such this presumption will need to be tested
and documented at each revaluation. In the case of land, there is a close nexus between the use
of the land, and the buildings and structures thereon, and that it is probably realistic to assess the
highest and best use of those buildings and structures in accordance with the highest and best
use of the land. This applies even where the land is in a separate asset class from the buildings
and structures, which this paper assumes will be the case. Hence, there will be two separate
resultant values, one for „land‟ and one for „buildings‟. However, these values will be
determined simultaneously after applying AASB 13 criteria that is consistent with the same
valuation variables to the underlying circumstances affecting the value of both the land and the
buildings.
Valuation techniques
52. AASB 13 Fair Value Measurement requires the use of valuation techniques 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 (AASB 13.61). 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
13.62).
53. Three widely used valuation techniques are identified: the market approach, the cost
approach and the income approach. An entity is to use valuation techniques consistent with one
or more of these approaches to measure fair value (AASB 13.62).
Technique
Market
approach
Definition
A valuation technique that uses
prices and other relevant
information generated by
market transactions involving
identical or comparable (i.e.
similar) assets, liabilities or a
group of assets and liabilities,
such as a business.
Guidance
Valuation techniques consistent
with the market approach often
use market multiples derived
from a set of comparables.
Multiples might be in ranges
with a different multiple for each
comparable.
The selection of the appropriate
multiple within the range
requires judgement, considering
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Income
approach
Cost
approach
Valuation techniques that
convert future amounts (e.g.,
cash flows or income and
expenses) to a single current
(i.e., discounted) amount.
The fair value measurement
is determined on the basis of
the value indicated by
current market expectations
about those future amounts
A valuation technique that
reflects the amount that
would be required currently
to replace the service
capacity of an asset (often
referred to as current
replacement cost)
qualitative and quantitative
factors specific to the
measurement.
Those valuation techniques
include: present value techniques
for which there is further
substantive guidance in AASB
13; option pricing models; the
multi-period excess earnings
method (used to measure the fair
value of some intangible assets).
From the perspective of a market
participant seller, the price that
would be received for the asset is
based on the cost to a market
participant buyer to acquire or
construct a substitute asset of
comparable utility and condition,
adjusted for obsolescence. That
is because a market participant
buyer would not pay more for an
asset than the amount for which
it could replace the service
capacity of that asset.
In many cases the current
replacement cost method is used
to measure the fair value of
tangible assets that are used in
combination with other assets or
with other assets and liabilities.
54. AASB 13 does not mandate a particular valuation technique to a particular type of asset (or
liability) nor does it express a preference for one technique over another. Broadly AASB 13
requires:
 the techniques to appropriate in the circumstances bearing in the mind the valuation
objective
 maximising the use of relevant observable inputs (i.e., inputs that are developed using
market data, such as publicly available information about actual events or transactions,
and that reflect the assumptions that market participants would use when pricing the
asset or liability)
 minimising the use of unobservable inputs (i.e., inputs for which market data are not
available and that are developed using the best information available about the
assumptions that market participants would use when pricing the asset or liability)
 use of techniques consistent with one or more of the market approach, the cost approach
and the income approach
55. AASB 13 Fair Value Measurement establishes a fair value hierarchy that categorises into
three levels the inputs to valuation techniques used to measure fair value. Inputs are the
assumptions that market participants would use when pricing the asset or liability, including
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assumptions about risk, such as the following: the risk inherent in a particular valuation
technique used to measure fair value; and the risk inherent in the inputs to the valuation
technique. Inputs may be observable or unobservable.
56. The fair value hierarchy gives the highest priority Level 1 inputs and the lowest priority to
Level 3 inputs:
 Level 1 inputs: Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity can access at the measurement date
 Level 2 inputs: Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly, and
 Level 3 inputs: Unobservable inputs for the asset or liability.
57. AASB 13 Fair Value Measurement provides guidance about the approach to fair value to
be taken and requires that a valuation technique consistent with at least one of these approaches
should be used.
Specialised assets
58. It is noted that the Basis of Conclusions (AASB 13.BC.78) states:
“Valuation premise for specialised non-financial assets
“Some respondents to the exposure draft expressed concerns about using an exit price notion for
specialised non-financial assets that have a significant value when used together with other nonfinancial assets, for example in a production process, but have little value if sold for scrap to
another market participant that does not have the complementary assets. They were concerned
that an exit price would be based on that scrap value (particularly given the requirement to
maximise the use of observable inputs, such as market prices) and would not reflect the value
that an entity expects to generate by using the asset in its operations. However, IFRS 13 clarifies
that this is not the case. In such situations, the scrap value for an individual asset would be
irrelevant because the valuation premise assumes that the asset would be used in combination
with other assets or with other assets and liabilities. Therefore, an exit price reflects the sale of
the asset to a market participant that has, or can obtain, the complementary assets and the
associated liabilities needed to use the specialised asset in its own operations. In effect, the
market participant buyer steps into the shoes of the entity that holds that specialised asset”.
59. BC78 has been included as the final sentence of this paragraph may be used in this situation
to state that the market participant buyer could be assumed to be in effect the seller and
therefore the fair value basis should be based on the price that the seller would pay for the asset,
if indeed the seller was in the situation of having to acquire the asset. It allows for market
participant to step in place of the holder of an asset. This premise is based on the market
participant having or being able to obtain a complimentary asset. For this circumstance to be
relevant to these assets, the assets in question must be considered a “specialised asset” and the
asset in question and the associated asset must be considered complementary assets.
60. Certain non-financial assets are likely to be “specialised asset(s)”. It is noted The
International Valuation Standards Council (IVSC) released exposure draft “Valuations of
Specialised Public Service Assets”.
61. It is noted that Basis of Conclusions (AASB 13.BC.79) concludes:
“It is unlikely in such a situation that a market price, if available, would capture the value that the
specialised asset contributes to the business because the market price would be for an unmodified
asset. When a market price does not capture the characteristics of the asset (e.g. if that price
represents the use of the asset on a stand-alone basis, not installed or otherwise configured for use,
rather than in combination with other assets, installed and configured for use), that price will not
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represent fair value. In such a situation, an entity will need to measure fair value using another
valuation technique (such as an income approach) or the cost to replace or recreate the asset (such
as a cost approach) depending on the circumstances and the information available”.
(Note: In a paper prepared by Ernst &Young AASB 13 Fair Value Measurement Implications
for the not for profit and public sectors the following paragraph appears:
Management needs to be aware that there is a conceptual difference between the definition of
fair value under AASB 13 and under the International Valuation Standards (IVS) which are
often used by valuation agents. Accordingly, any values used for financial reporting that are
obtained from appraisals, whether external or internal, should be consistent with the objective of
a fair value measurement in accordance with AASB 13 (Further detail is provided in Section 8).
Hence, the definition of fair value in AASB 13 is consistent with market value as defined by the
IVSC. But, perhaps confusingly, it differs from the IVS definition of fair value. AASB requires
any advantages that would not be available to market participants generally to be disregarded
which is different from the IVSC definition of fair value. Management needs to be aware of this
conceptual difference to ensure any values used for financial reporting that are obtained from
appraisals are consistent with AASB 13. The results of the IVSC project will need to be used
with caution when it is finalised.
Valuation developments
62. The IVSC released exposure draft Valuations of Specialised Public Service Assets in
November 2012. The types of asset that are covered by this IVSC project included; buildings,
structures equipment and land used to provide transport, utilities and social, cultural and
recreational services. Comments were sought by 1 March 2013. At its meeting in June 2013
the Board agreed to narrow the focus of the project and to produce a revised draft for further
consultation. The revised exposure draft is due for release shortly. Developments in this area
should be monitored.
Application of the above analysis of AASB 13 Fair Value Measurement to nonfinancial assets controlled by Local Government Authorities:
63. The non-financial assets included in this review are:
 Freehold Land without restrictions, Community Land and Investment properties.
 Non-Specialist buildings on freehold land without restriction and on Other Land;
 Specialist buildings on freehold without restrictions and on Other Land,
 Transportable (or otherwise removable other than by demolition) buildings including
other structures;
 Roads, Bridges & Stormwater Assets;
 Plant & Equipment, Pools, Sports fields, Parks, Waste Depot Assets;
 Office furniture, Fittings and Equipment and Library Books;
 Land improvements both depreciable and Non-Depreciable; and
 Artworks, Cultural & Heritage Assets.
64. As AASB 13 is focused on the unit of account, the groupings of Infrastructure, Land and
Buildings are considered too high level to permit a clear, detailed and meaningful analysis of the
impact of AASB 13 on non-financial assets controlled by LGAs. Hence, the following analysis
gathers these non-financial assets into groups which have common elements in the impact of
AASB 13 on the individual assets within the group.
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65. The objective of a fair value measurement of non-financial assets, held and controlled by a
LGA, is to estimate the price at which an orderly transaction to sell the asset would take place
between market participants at the measurement date under current market conditions.
66. As explained above, fair value measurement of non-financial assets requires an entity to
determine the following:
a) the particular asset that is the subject of the measurement (consistent with its unit of
account).
b) the valuation premise that is appropriate for the measurement consistent with the
highest and best use of the non-financial asset.
c) the principal (or most advantageous) market for the asset or liability.
d) the valuation technique(s) appropriate for the measurement of non-financial assets,
considering the availability of data with which to develop inputs that represent the
assumptions that market participants would use when pricing the asset and the level of
the fair value hierarchy within which the inputs are categorised. (AASB 13.B2 adapted)
67. Analysis of the Impact on Valuation of Freehold Land without restriction Community
Land, Investment Property, of different market situations as defined in AASB 13. (Assuming
that land under roads pre 1/7/2008 is not recognised by the LGA)
Market situation
Observable
market inputs
AASB 13
approach
Market
approach
Applicable to
It is unlikely that identical land to that held
and controlled by a LGA is available. If no
unadjusted quoted prices for identical in active
markets can be observed, then there is no
Level 1 input available.
However, if there is an active market for
similar land then observable inputs would
provide reliable evidence of fair value can be
classified as a Level 2 input. The possible
market participants include buyers and sellers
in the residential and commercial property
market, including property developers.
If there is an active market for similar land or
there is available identical or similar land but
in inactive market(s) and therefore observable
inputs which would provide reliable evidence
of fair value. This approach is appropriate and
could be classified as a Level 2 Input.
If significant adjustments to these values are
necessary, for example, a restriction on the use
of the land like in the case of land that is
currently designated for sporting activities,
then a Level 3 Input classification would be
appropriate.
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If there is not an active market for identical or
similar land and therefore no observable direct
or indirect inputs which would provide reliable
evidence of fair value, then this approach is
not appropriate.
Value of the asset
is primarily
dependent on the
ability of the asset
to generate
income/profits
Income
approach
The valuation of the land held and controlled
by a LGA, except for investment properties is
not primarily dependent on its ability to
generate income/profit, since the land is used
to deliver services to ratepayers and the
community, rather than to generate income to
the controllers of the asset and therefore this
approach is not likely to be appropriate.
Where neither of
the above are
appropriate
Cost
approach
If neither of the above approaches is likely to
provide a reliable source of fair value, the cost
approach is likely to provide the best estimate
of fair value under AASB 13. This approach
reflects the amount that would be required
currently to replace the service capacity of the
land and is based on the cost to a market
participant buyer.
The cost (estimated fair value) would be the
amount paid by a market buyer to acquire a
substitute asset of comparable utility and
condition – this is the depreciated current
replacement cost of the land asset and would
be categorised as a Level 3 Input
68. In summary, for freehold land a market approach will generally be the most appropriate valuation
method, using Level 2 inputs. In determining the highest and best use of land, consideration of
restrictions (crown land, parks, reserves, cemeteries, other restrictions) is dependent on whether the
restriction would be transferred to market participants. If the restriction does transfer, then this will
restrict the potential highest and best use. (Note: the category „freehold land not subject to
restrictions‟ may be a little misleading as all land is subject to some form of restrictions, from a wide
variety of statutes, not to mention easements, mortgages and other potential encumbrances envisaged
under the Real Property Act 1886. Such restrictions should be reflected in the assessment of market
value.)
69. Current zoning of land is to be considered in determining the highest and best use of the land.
Zoning is not considered to be a self-imposed restriction, because changes require approval from the
Minister. Changes to zoning are only to be considered where they are highly likely to occur (e.g.
application has been submitted to the Minister).
70. „Community Land‟ is a particular variety of restrictions on land established by the Local
Government Act and that restriction can be applied to both freehold land and non-freehold land.
Councils are required to have a community land management plan per subsection 196(1) of the Local
Government Act 1999 and councils must manage community land in accordance with the management
plan (for which a public consultation process is required). Any restrictions within the plan may be self
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imposed restrictions, and may not be relevant to the restrictions under AASB 13, given that such
restrictions may not pass to any future buyer of the community land.
71. The standard easements –for power, water, sewer, etc can effectively be ignored, as the real estate
industry has a lengthy experience in handling them, and their effects on market value are well
documented.
72. Location would influence the determination of fair value and I would expect an asset (land or land
& buildings) located in a Central Business District to have a higher fair value than a similar asset in a
suburban or country/rural location. However, the extent of the difference in value, and an explanation
of the method determining this difference in value would be the responsibility of an expert valuer, like
the State Valuer-General.
73. Analysis of the Impact on Valuation of Non-Specialist Building on freehold land not
subject to restrictions and Non-Specialist buildings on other land of different market situations
as defined in AASB 13.
Market situation
Observable
market inputs
AASB 13
approach
Market
approach
Applicable to
It is unlikely that identical non-specialist or
general purpose buildings to that held and
controlled by a LGA are available. Hence, if
no unadjusted quoted prices in active
markets for such identical buildings in
identical condition can be observed, then
there is no Level 1 input available.
However, if there is an active market for
similar non-specialist, general purpose
buildings then observable inputs may
provide reliable evidence of fair value that
can be classified as a Level 2 input. The
possible market participants include buyers
and sellers in the residential and commercial
property market, including property
developers.
Value of the asset
is primarily
dependent on the
ability of the asset
to generate
income/profits
Income
approach
Where neither of
Cost approach
If significant adjustments to these values are
necessary, for example, because of
restrictions on the use of the building, then a
Level 3 Input classification may be
appropriate.
The valuation of non specialist buildings or
those being held for investment purposes by
a LGA may be dependent on its ability to
generate income/profit if the building is used
to deliver services to market participants.
Therefore this may be a level 3 input.
In respect of buildings constructed for a non-
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the above are
appropriate
specialist purpose neither of the above
approaches may provide a reliable source of
fair value. In which case, the cost approach
is likely to provide the best estimate of fair
value under AASB 13.
This approach reflects the amount that would
be required currently to replace the service
capacity of the building asset and is based on
the cost to a market participant buyer.
The cost (or estimated fair value) would be
the amount paid by a market buyer to
construct or acquire a substitute asset of
comparable utility and condition – this is the
depreciated current replacement cost of the
asset
74. In summary, the market approach is likely to be suitable for non-specialist buildings. Assuming
the current uses of the buildings equates to their highest and best use (including consideration of
alternative uses) using level 2 inputs.
Where an active and open market exists:
A market approach valuation will generally be suitable on the basis of the buildings highest and best
use using level 2 inputs. The income approach may also be appropriate (e.g. for some commercial
property) using level 2 or 3 inputs.
Where an active and open market does not exist:
The cost approach determining the current replacement cost based on level 3 inputs will generally be
applicable. This is because:
 market approach is not practical – generally no open and liquid market exists
 income approach using discounted cash flows may not be relevant - the value of most
buildings held by Local Government is not dependent on its income generating ability, but
rather in providing essential services to the community.
75. If a building (separate from the land) did not have alternative uses and/or it was condemned for
demolition, then I believe the fair value would be nil (or even negative). However, if the land &
buildings were together in a class, then the determined fair value of them be sold together would be
determined before adjusting for the value of the building, if to be reported separately. I believe the
existing use by the current holder of the land and buildings should be the basis of determining the fair
value when considering highest and best use. Further the assessment of fair value based on what
another market participant might use the land for after demolishing the building is definitely not a
practical or meaningful path to follow, particularly in the light of the notes to the financial statements
explaining the assumptions and judgments made if an endeavour was made to determining fair value
in this later context)
76. “Highest and best use is determined from the perspective of market participants, even if the entity
intends a different use. However, an entity's current use of a non-financial asset is presumed to be its
highest and best use unless market or other factors suggest that a different use by market participants
would maximise the value of the asset.”
77. Some auditors / valuers interpret this to mean that the current use can generally be taken to be the
highest and best use, unless there is evidence to suggest that Council could maximise the assets sale
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price (exit price) by selling the asset for an alternative use (This is similar to the idea of marketing a 3
bedroom / 1 study house as a 4 bedroom house to maximise the sale price).
78. Other auditors / valuers interpret the phase “a different use by market participants” to mean that in
valuing the asset, the valuer must identify the hypothetical potential highest and best use of a piece of
land, and assume that buyers will use the asset for that purpose. If the buyer would need to demolish
any existing structures on land to achieve this hypothetical highest and best use, then the price they
are willing to pay for the structures (the Fair value) is zero, or very little. This is taking the buyers
perspective, providing them with the highest and best use but minimising the sale price for Council
(the seller).
79. For buildings that are condemned for demolition, this interpretation is not an issue. It is most
critical for buildings in a perfectly good condition being utilised for a clearly Local Government
specialised function, which reside on high-value land on which could be developed a highly profitable
commercial building. The critical issue is should a fair value be assigned to the existing building on
the basis of its current use, or on the basis that it is likely the building will be demolished by the buyer
to make way for an alternative building?
80. As discussed in this Position Paper at paragraph 2, given the context, I support the alternative
approach based on using the methodology of AASB 13 to derive the fair value of the service potential
of the existing asset using market participant‟s assessment of its current use.
81. Analysis of the Impact on Valuation of Specialist Buildings on freehold land not subject to
restrictions, Specialist buildings on other land of different market situations as defined in AASB
13.
Market situation
Observable
market inputs
Value of the asset
is primarily
dependent on the
ability of the asset
to generate
income/profits
AASB 13
approach
Market
approach
Income
approach
Applicable to
There is not likely to be an active market for
specialist buildings controlled by local
government authorities and therefore there
are no observable inputs which would
provide reliable evidence of fair value.
Hence, this approach may not be appropriate.
The possible market participants include
existing operators of similar businesses to
those conducted in the specialist buildings
who may consider a privatised deal. Also
those operating in the commercial property
market, including property developers, who
may consider acquiring the buildings for
extensive modification, due to their
commercial potential in the current location.
The valuation of these assets controlled by
local government authorities is not primarily
dependent on its ability to generate
income/profit since these assets are used to
deliver services to ratepayers and the
community, rather than to generate income
to the controllers of the asset. Hence, this
approach may not be appropriate.
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Where neither of
the above are
appropriate
Cost approach
This approach reflects the amount that would
be required currently to replace the service
capacity of the asset and is based on the cost
to a market participant buyer.
The cost (or estimated fair value) would be
the amount paid by a market buyer to
construct or acquire a substitute asset of
comparable utility and condition– this is the
depreciated current replacement cost of the
infrastructure asset and would be categorised
as a level 3 input.
Examples of Level 3 inputs include:
• recent construction costs by the LGA or a similar
LGA;
• benchmarks against similar LGAs;
• details provided from an industry construction
guide (e.g. Rawlinson‟s Construction Cost Guide);
and
• valuers‟ in-house cost databases.
82. Whether Council offices are 'specialist buildings' would be subject to an assessment of the
facilities contained within these buildings. If there are buyer market participants for such
buildings, then the judgment may be that the particular building is not subject to constraints
that would be significant in a buyer market participant's determination of fair value.
83. Analysis of the Impact on Valuation of Transportable (or otherwise removable other than
by demolition) buildings including other structures of different market situations as defined in
AASB 13.
Market situation
Observable
market inputs
AASB 13
approach
Market
approach
Value of the asset
is primarily
dependent on the
ability of the asset
to generate
income/profits
Income
approach
Where neither of
the above are
appropriate
Cost approach
Applicable to
There is not likely to be an active market for
these assets controlled by local government
authorities and therefore there are no
observable inputs which would provide
reliable evidence of fair value. Hence, this
approach may not be appropriate.
The valuation of these assets controlled by
local government authorities is not primarily
dependent on its ability to generate
income/profit since these assets are used to
deliver services to ratepayers and the
community, rather than to generate income
to the controllers of the asset. Hence, this
approach may not be appropriate.
This approach reflects the amount that would
be required currently to replace the service
capacity of the asset and is based on the cost
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to a market participant buyer.
The cost (or estimated fair value) would be
the amount paid by a market buyer to
construct or acquire a substitute asset of
comparable utility and condition – this is the
depreciated current replacement cost of the
infrastructure asset and would be categorised
as a level 3 input.
Examples of Level 3 inputs include:
• recent construction costs by the LGA or a similar
LGA;
• benchmarks against similar LGAs;
• details provided from an industry construction
guide (e.g. Rawlinson‟s Construction Cost Guide);
and
• valuers‟ in-house cost databases.
84. Analysis of the Impact on Valuation of Roads &Bridges, Stormwater Assets, Other
Structures and Land Improvements of different market situations as defined in AASB 13.
Market situation
Observable
market inputs
AASB 13
approach
Market
approach
Value of the asset
is primarily
dependent on the
ability of the asset
to generate
income/profits
Income
approach
Where neither of
the above are
appropriate
Cost approach
Applicable to
There is not likely to be an active market for
these assets controlled by local government
authorities and therefore there are no
observable inputs which would provide
reliable evidence of fair value. Hence, this
approach may not be appropriate.
The valuation of these assets controlled by
local government authorities is not primarily
dependent on its ability to generate
income/profit since these assets are used to
deliver services to ratepayers and the
community, rather than to generate income
to the controllers of the asset. Hence, this
approach may not be appropriate.
This approach reflects the amount that would
be required currently to replace the service
capacity of the asset and is based on the cost
to a market participant buyer.
The cost (or estimated fair value) would be
the amount paid by a market buyer to
construct or acquire a substitute asset of
comparable utility and condition – this is the
depreciated current replacement cost of the
infrastructure asset and would be categorised
as a level 3 input.
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Examples of Level 3 inputs include:
• recent construction costs by the LGA or a similar
LGA;
• benchmarks against similar LGAs;
• details provided from an industry construction
guide (e.g. Rawlinson‟s Construction Cost Guide);
and
• valuers‟ in-house cost databases.
85. Analysis of the Impact on Valuation of Artworks, Heritage & Cultural Assets of different
market situations as defined in AASB 13.
Market situation
Observable
market inputs
AASB 13
approach
Market
approach
Value of the asset
is primarily
dependent on the
ability of the asset
to generate
income/profits
Income
approach
Where neither of
the above are
appropriate
Cost approach
Applicable to
While an active market may exist, it is more
likely that an active market for these assets
controlled by LGAs does not exist and
therefore there are no observable inputs
which would provide reliable evidence of
fair value. Hence, an approach classified as
using level 1 inputs may not be appropriate.
However, the market participants may
include the use of qualified and experienced
external valuers which may result in reliable
fair values that can be recognised in the
financial statements. These fair values would
be classified as using either level 2 and/or 3
inputs.
If an acceptable fair value cannot be
developed using observable market inputs,
then it is unlikely that either the income
approach or the cost approach will provide a
reliable measure of fair value. In which case,
the asset in question would not be included
in the financial statements
The valuation of these assets controlled by
local government authorities is not primarily
dependent on its ability to generate
income/profit since these assets are used to
deliver services to ratepayers and the
community, rather than to generate income
to the controllers of the asset. Hence, this
approach may not be appropriate.
The cost approach reflects the amount that
would be required currently to replace the
service capacity of the asset and is based on
the cost to a market participant buyer.
However, the fair value of artworks, heritage
and cultural assets is normally related to the
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intrinsic intangible benefits they provide and
not to just the cost of labour, materials and
overheads incurred in their production or
construction. Hence, while the cost approach
may be appropriate in some cases, this
approach is more likely not to be
appropriate.
86. The number and variety of heritage assets and cultural assets held by LGAs is considered too
extensive to address in this PP in determining fair value. Some Councils have developed quite
substantial historical precincts and displays where depreciated current replacement cost may well be
appropriate. Even historical equipment can often be acquired through special interest groups, etc.
While the calculation of an estimate of current cost should be based on contemporary information, the
intrinsic factors affecting fair value are likely to be difficult to assess e.g. special significance often is
attached to the time and place of construction and to whom was involved in the construction, which
cannot be replicated.
87. Analysis of the Impact on Valuation of Property, Plant & Equipment, Office Furniture,
Fittings, Equipment and Library Books of different market situations as defined in AASB 13.
Non-financial assets including property, plant & equipment, office furniture, fittings,
equipment and library books are not usually subjected to a fair value assessment. LGAs
usually adopt the once and for all choice of the cost option instead of the revaluation
option under AASB 116 Property, Plant & Equipment. However, if the non-financial
assets form a significant class of assets then the approach to fair value set down in the
Position Paper will apply. Given the generally accepted practice of adopting the cost
option, no further analysis has been done as to the possible impact of AASB 13 on these
assets
Overall Conclusions and Summary
88. My consideration of AASB 13 Fair Value Measurement did not identify any basis, (except
when a reliable measure of the asset is not available and hence would prevent its recognition in
the financial statements) that could justify an argument that fair value could not be determined
and, therefore, the carrying amount of would be nil or historical cost under AASB 13.
89. The methodology in AASB 13 Fair Value Measurement needs to be applied by a valuer. It
is recognised that many of these assets are rarely exchanged in the market. This will involve
challenges in the application of general measurement principles.
90. While it is possible that these assets could be measured using level 2 inputs, most will be
determined using level 3 inputs. While various valuations techniques are available under AASB
13 it is likely that many fair value determinations will be made applying current cost approach
(the amount that would be required currently to replace the service capacity of that asset).
91. Fair value measurement will involve estimates and judgements that require disclosure in
accordance with the specific requirements of AASB 13 (AASB 13.91-99) and the general
requirements of AASB 101 Accounting Policies, Changes in Accounting Estimates and Errors.
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92. The application of detailed requirements and the prescriptive nature of AASB 13 Fair
Value Measurement may result in a different valuation when compared to AASB 116 Property
Plant and Equipment.
93. The transition requirements of AASB 13 state that the Standard should be applied
prospectively as of the beginning of the annual reporting period in which it is initially applied,
i.e. 1 July 2013. Any adjustment to the valuation of would therefore be made at 1 July 2013
without the need to change the comparatives for the year ended 30 June 2013. Hence,
disclosures made at 30 June 2013 remain appropriate until such time as a revaluation is
performed.
94. The accounting treatment for any revaluation decrease would be in accordance with AASB
116 Property, Plant and Equipment where the revaluation decrease is recognised in other
comprehensive income to the extent of any credit balance in the revaluation reserve relating to
the same class of asset. Any excess of the revaluation decrement over the relevant balance in
the revaluation reserve is taken to the operating result.
***************
The author:
The principal author of this Position Paper is Jim Dixon FCPA, MBA, B Com, B.Ed. Associate,
GAAP Consulting.
Internal quality control procedures were conducted by Mr Colin Parker, Principal, GAAP
Consulting and Head of the GAAP Consulting Network
Ultimately, the views expressed and the conclusions are mine.
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Jim Dixon: Curriculum Vitae
GAAP Consulting Services Network Member
Qualifications:
Fellow CPA, MBA (Melb Uni), B.Com (Melb Uni), B.Ed. (La Trobe Uni)
Current Roles:
Associate, GAAP Consulting
Board Member and Treasurer, Arthritis Foundation Victoria
Board Member and Treasurer, Black Hole Theatre.
Chairman, Committee of Management, La Trobe Gardens Owners Corporation
GAAP Consulting provides independent financial reporting, auditing, quality assurance reviews,
and corporate governance solutions to reduce business and regulatory risks. The vision is to
be recognised as the pre-eminent provider of independent financial reporting solutions that
enhance economic decision-making and accountability by those charged with governance,
preparers, auditors, regulators and users.
Previous senior positions held:
Assistant Auditor-General, Office of the Victorian Auditor-General
Executive-Director, Accounting & Auditing Policy, Office of the Victorian Auditor-General
Technical Director, CPA Australia
Technical Director, Pitcher Partners
Senior Manager, Accounting Policy Research, National Australia Bank
Principal in Practice, Accounting & Taxation
Member of Urgent Issues Group (UIG) of Australian Accounting Standards Board
Experience:
More than 40 years consulting to entities in the private and public sectors.
Author of more than 300 articles and position papers.
Professional presenter at more than 400 seminars, training programs and conferences.
Co- author with John Howard & John Comrie,
Australian Infrastructure Financial Management Guidelines, IPWEA.
Course presenter for IPWEA, Infrastructure Financial Management Programs
Contact details
Mobile; 0400 098 515
Email: jimdixon@iprimus.com.au
*******
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