CPA-Guide-on-Fair-Value-and-Depreciation

Report
The New standard and
guide by CPA Australia
David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value
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Agenda
• Overview & Process
• Feedback
• AASB13 Fair Value
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Overview
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
Objective
• 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
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Process
•
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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)
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Feedback &Discussion
•
•
•
•
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)
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Specific Issues
• 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.
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Restricted Land
• 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
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Entities adopt incorrect patterns of
consumption of future economic benefit
• Agreement from a range of participants
• Straight-line cannot be used as a “default”
• Entity needs to analyse and determine
appropriate pattern
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Criticism of specific approaches
• 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
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Relationship between condition
and Future Economic Benefit
• 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
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Straight-line v Other patterns
• 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 !
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Relationship between depreciation
and asset management performance
• 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
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Linkage between FV and Depreciation
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Linkage between Depreciation and
Intergenerational Equity
• 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
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Level of Service v Consumption of
Future Economic Benefit
• 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
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Terminology
• New AASB13 terminology
• Difference between Asset Accounting and
Asset Management terminology
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KPIs
• Some criticism of IPWEA/ACELG KPIs
• Additional added for comparison at Asset
Class level
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References to source material
• 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
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Inconsistency between AMPs and
financials
• 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 !
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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
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AASB13 Fair Value
Decision Trees available from
www.apv.net
www.fairvaluepro.com.au
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IFRS13/AASB13 “Fair Value”
•
•
•
•
•
•
Issued late 2011
Applies for 1 Jan 2013 onwards
Fair Value consistency across all standards
New Definition …. “exit” price
New concepts
New complex disclosures
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Fair Value Definition
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.”
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Residual Value Definition
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.”
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New Concepts
• Hierarchy of Valuation Input
– Level 1 (Quoted Price)
– Level 2 (Observable Market Evidence)
– Level 3 (Non-observable market evidence)
• Recurring v Non-Recurring Valuations
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Change in Process
• Same outcome for
APV valuations
• Change in terminology
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New Disclosure
• Dependent upon whether
– Recurring or Non-Recurring valuation
– Level of Valuation Input
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David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value
www.apv.net
www.apv.net
www.apv.net
Fair Value measurements at the end of the reporting
period using
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
Gross Value
Quoted prices in
active markets for
identical assets
(Level 1)
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
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
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
1,500,000
1,500,000
1,500,000
1,500,000
-
4,250,000
2,000,000
700,000
6,950,000
-
700,000
4,000,000
10,000,000
14,700,000
-
-
-
Significant other
observable
inputs
(Level 2)
-
3,000,000
3,000,000
800,000
1,000,000
34,000,000
35,800,000
-
20,000,000
50,000,000
10,000,000
10,000,000
90,000,000
-
9,000,000
12,000,000
4,000,000
25,000,000
3,000,000
24,650,000
-
Significant
unobservable
inputs
(Level 3)
153,800,000
1,500,000
1,500,000
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-
(a)
(i)
Valuation techniques used to derive fair values
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.
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Fair value measurements using significant
unobservable inputs (level 3)
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
Land
Buildings
Road Network
Infrastructure
Water Network
Infrastructure
2,750,000
25,000,000
80,000,000
25,000,000
(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
3,000,000
35,800,000
-
90,000,000
(1,000,000)
25,000,000
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Level 3: Valuation inputs and relationship to fair value (sensitivity)
Description and fair value
as at 30 June 2013
Valuation
technique(s)
Unobservable inputs
Range of
Relationship of unobservable inputs to fair value
inputs
(probability
– weighted
average)
+/- 20%
An over-estimation of 10% would result in a decrease
in fair value by $272,000
Land with restricted use
($3.0m)
Cost approach
Price per square metre
(replacement cost)
Isolated residential and
specialised buildings
($34.8m)
Cost approach
(depreciated
replacement cost)
Relationship between
+/- 10%
asset consumption
rating scale and the level
of consumed service
potential.
Commercial buildings in
volatile market
($1.0m)
Discounted cash
flow
Long term rental yields
in potentially volatile
market
+/- 30%
Road network
infrastructure
($90.0m)
Cost approach
(depreciated
replacement cost)
Asset Condition
+/- 10%
A change of 10% would result in an increase/decrease
of $3.4m.
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.
And
Water network
infrastructure (excluding
treatment plants)
($16.0m)
Total value $106.0m
Relationship between
+/- 10%
asset consumption
rating scale and the level
of consumed service
potential.
A change of 10% would result in an increase/decrease
of $10.6m.
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(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.
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Draft CPA Guide, Tools & Help
APV website
(www.apv.net)
Fair Value Pro websites
(www.fairvaluepro.com.au)
Email
[email protected]
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