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

• Background
• AASB13 refresher
• Issues discussed at AASB
• CPA Australia guide
• Auditing of Valuations www.apv.net

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• All assets to be at Fair Value
– Land
– Buildings
– Infrastructure
– Parks
– Plant
• Disclosure consistent with Special Schedule 7 www.apv.net

“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.”
(Exit Price) www.apv.net

• AASBs (13, 116, 136, 5)
• Australian Interpretations (1030, 1050)
• IFRIC 1, 4
• IFRIC 12 / IPSAS 32
Service Concession Arrangements www.apv.net

• Auditor required to express an opinion
• Compliance with the Australian Auditing
Standards
• (cover later in presentation) www.apv.net

• Most material figures
• Highly subjective
• Non-compliant or overly simplistic approaches
• Significant impact on KPIs & Sustainability
Measures www.apv.net

• This is not an engineering exercise !
• Nor is it a ‘market valuation’ exercise
• It is –
– Valuation
– Based on Accounting Standards
Essential to have right expertise with right experience www.apv.net

• Using overly simplistic approaches
• Based on poor in incorrect assumptions
• That do not reflect asset management reality
• Resulting in materially incorrect results www.apv.net

• Fair Value significantly under-stated
• Depreciation Expense (following years) significantly overstated
• KPIs make asset position and asset management performance look worse than actual www.apv.net

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Overview of Accounting Standards
• AASB13 about the valuation
• AASB116 & others about specific asset types
• Fair Value and depreciation concepts are critical
• Disclosure –
– Now critical
– Major part of the output www.apv.net

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AASB116 Property Plant and
Equipment www.apv.net

• Market
• Income
• Cost
– Typically used for road & infrastructure
– Note differences between Cost (AASB13/116) and
Depreciated Replacement Cost (AASB136) www.apv.net

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6 "Depreciable amount“ is the cost of an asset, or other amount substituted for cost, less its residual value.
43 Each part .... shall be depreciated separately.
50 Allocated on a systematic basis over its useful life.
51 The residual value and the useful life of an asset shall be reviewed at least at the end of each annual reporting period
60 The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity.
61 The depreciation method applied to an asset shall be reviewed at least at the end of each annual reporting period and...... the method shall be changed to reflect the changed pattern. www.apv.net

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• Future Economic Benefit
– What does the asset provide?
– drivers of consumption?
• Replacement Cost (existing v proposed)
• Depreciable Amount
– Residual Value and Useful Life
• Pattern of Consumption
• Accumulated Depreciation (% RSP) www.apv.net

GCRC = $100,000
Actual Age = 40 years
Original assumptions
Assume
Pattern of Consumption is constant
Useful Life = 45 years
Residual Value = nil
Current condition assessment
RUL = 30 years www.apv.net

• Asset was renewed 10 years ago ?
• Expect to renew asset back to as new in 5 years time at cost of $50,000 ?
• After the renewal in year 30 the level of RSP was assessed as = 80% www.apv.net

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Depreciation = 10,000 / 5 years = 2,000 p.a
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• Segmentation
• Componentisation www.apv.net

AASB13 Fair Value Measurement www.apv.net

• GFC and Sovereign Debt Crisis
• Valuation = Subjectivity
• Need for greater information
• Greater Risk = Greater Disclosures
Enables users to identify
‘dodgy, risky or non-compliant’ valuations www.apv.net

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• Recurrent: required to be done on regular basis (e.g. infrastructure)
• Non-Recurrent: Only done is special circumstances (e.g. asset held for sale) www.apv.net

• Highest and Best use
• From the perspective of other market participants
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Valuation Hierarchy / Level of
Valuation Input
• Three levels
• Need to maximise level of input
• May use multiple levels for each asset
– Level 1 (Quoted price)
– Level 2 (Observable market evidence)
– Level 3 (Non-observable market evidence) www.apv.net

Valuation Hierarchy based on –
• Lowest level of input
• Unless input is insignificant
Need to –
• Identify ALL significant inputs
• Classify as level 1, 2 or 3
• Technique DOES NOT determine hierarchy www.apv.net

What are the inputs?
(observable or unobservable)
• Asset design, location and specification
• Condition (and Scoring methodology)
• Componentisation / Segmentation
• Replacement Cost (Unit Cost)
– what level?
– How developed?
• Component level details (NOT at asset level)
– Residual Value
– Pattern of Consumption
– Useful Life
• Future Use / Obsolescence?
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• AASBs mandate that depreciation be applied at component level
• AASB13 requires these disclosures at component level
• Whole of asset depreciation assumptions are
‘inappropriate’ www.apv.net

• Probably the biggest issue
• Totally missed by many !
• All disclosures by ‘Asset Class’
• ‘Asset Class’ defined by paragraph 94 www.apv.net

94 An entity shall determine appropriate classes of assets and liabilities on the basis of the following:
(a) the nature, characteristics and risks of the asset or liability; and
(b) the level of the fair value hierarchy within which the fair value measurement is categorised.
The number of classes may need to be greater for fair value
measurements categorised within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity.
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• If you have used a different valuation process then this would be a different ‘asset class’
• Idea is to provide the ‘reader’ with all the information about each different valuation
• Indicators include different –
– Technique
– Level of Valuation Hierarchy
– Approach / Algorithms
– Inputs / Assumptions
– Level of risk or uncertainty www.apv.net

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• General Disclosures (policies and reconciliations)
• For each ‘Asset Class’
– Valuation Techniques and Inputs
– If level 3
• For each level 2 input (no disclosures)
• For each level 3 input
– Where did it come from
– How was it evaluated
– Quantitative info (eg. min and max)
– How reliable is it (sensitivity +/- %)
– Impact ($) on Fair Value Measurement www.apv.net

Techniques and Inputs
(for each asset class)
• Market / Income/Cost (or combination!)
• High level overview of process
– Segmentation
– Componentisation
– Condition scoring process
• Identify and disclose ALL inputs
• Classify each input as level 1, 2 or 3 www.apv.net

• Increasingly more complex and specialised
• More changes ahead in accounting standards
– IFRIC4 & 12 / AASB15 (control and service concessions)
– Conceptual Framework (definition of asset)
– AASB review of disclosure requirements
– IPSASB conceptual framework
• CPA Australia Guide (AASB standards) www.apv.net

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• AASB13 Disclosures for Public Sector
• Residual Value
• Difference between Replacement Cost
(AASB13) and Value in Use (Depreciated
Replacement Cost – AASB136) www.apv.net

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• CPA Australia’s Guide to asset valuation and depreciation for not-for-profit and public sector physical assets under accrual based accounting standards
• Download from CPA website
• 18 month public consultation
• Peer Review Peter Batten (former member AASB)
• Covers high level, technical and practical issues
• AASB version under development www.apv.net

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• Key outcome is that auditors need to ensure valuation and methodology –
– Is sound and makes sense
– Complies with all relevant accounting standards
– Undertaken by expert with relevant knowledge and expertise
– Can be supported by sufficient and appropriate audit evidence
– Supported by appropriate report and disclosures www.apv.net

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• Valuations dominate Balance
Sheets
• Depreciation usually highly material
• Maintenance v Capital: Impact highly material
• Significant impact on long term financial viability
Consequence
Low Moderate Major Qualification
Certain Mod
Likely Low
Possible Low
Unlikely Low
High
Mod
Low
Low
Extreme Extreme
High
Mod
Low
Extreme
High
Mod www.apv.net

Audit Risk – Identification &
Analysis
• Assets may not exist
• Asset Register not complete or accurate
• Valuation or depreciation methodology might be flawed
• Critical assumptions may be wrong
• No evidence to support assumptions
• Poor previous Audit History
Consequence
Low Moderate Major
Certain Mod
Likely Low
Possible Low
Unlikely Low
High
Mod
Low
Low
Extreme
High
Mod
Low
Qualification
Extreme
Extreme
High
Mod
Audit Risk = HIGH to EXTREME www.apv.net

Appropriateness , expertise and experience of the valuer
• Cannot just assume that they have the right background
• I’m an accountant who specialises in asset valuation and depreciation
– Would you let me do tax returns?
– How about giving financial planning advice?
• Understand the requirements and assess how much reliance you can place on the ‘expert’
• Adjust testing appropriately www.apv.net

• What has the entity done to ensure the list provided to the valuer lists all assets?
• Do they understand concept of ‘control’?
• What has the valuer done to address this issue?
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• How have the underlying inputs been validated?
– Full inspection?
– Sample test?
– Just Assumed?
• What have you done to test?
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• What controls are in place to ensure –
– Only assets controlled are in books
– There is no duplication
– Erroneous assumptions have not been made about the existence of components www.apv.net

• Risk is not whether additions and deletions have been recorded
• Nor whether or not the system correctly recalculates depreciation
• Real risk is whether methodology makes sense and fully complies with all aspects of the standards www.apv.net

• Right technique
• Segmentation / Componentisation
• Assessment at component level
– Useful life
– Residual Value’
– Pattern of Consumption
• Appropriateness of Factors used
• Sufficient and appropriate evidence to support critical assumptions www.apv.net

• Do the results make sense?
• Is WDV as % of Gross reasonable given general condition?
• Are assets unreasonably written down to Nil or very low values?
• Has valuation used ‘condition’ or ‘age’ ?
• Have values been based on overly simplistic or unsupported assumptions ?
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• Note that IVSC is not consistent with
IFRS/AASB
• Different definition
• Some approaches inconsistent
• IVSC focuses on ‘value to entity’ whereas Fair
Value is ‘ highest and best use that market participants would pay’
• Not well understood by ‘valuers’ www.apv.net

• Understand you professional obligations
• Tailor audit program to the greatest risks
• Doing Fair Value requires much more than some calculations (calc is only 25% of work)
• Easy to get key concepts wrong
– Understate value
– Overstate Depreciation Expense
• Check off disclosures against AASB13 (don’t rely on model statements) www.apv.net

Council gets data and prepares Aug - Sept
Council goes to market
Valuer to prepare proposal
Council to assess proposal and awarded contract
Oct
Oct
Nov
Valuer appointed and work scheduled
Council to provide asset listing and other data
Dec
Dec - Feb
Confirmation of assumptions
Inspections and valuation preparation
Mar
Mar / Apr
Draft valuation report
Council quality assurance review
May
Jun
Final Valuation Report Jun
Audit review of valuation
Finalise accounts
Final Audit review and Sign Off
Aug
Sept
Oct www.apv.net

David Edgerton FCPA
Email: David@apv.net
Web: www.apv.net
Mob: 0412 033 845
Work: (07) 3221 3499 www.apv.net