David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value Asset Valuation and Depreciation Implications of Recent Changes in Standards

Agenda Key Requirements Key changes to standards and concepts Implications Risks of not getting it right Potential Solutions

Key Requirements Major assets valued at ‘Fair Value’ All assets to be ‘depreciated’ Key Accounting Standards – – AASB13 Fair Value Measurement – AASB116 Property Plant & Equipment – AASB136 Impairment – AASB5 Assets Held for Sale – AASB140 Investment Property

Fair Value One of combination of – – Market Approach – Income Approach – Cost Approach ‘Highest and Best’ Use From perspective of ‘market participant’

NOTE AASB13 – new definition and concept Old ‘DRC” replaced with new ‘CRC’ Differences are subtle but significant Many systems and approaches still applying ‘old concept’

Depreciation Must ‘componentise’ Must depreciate ‘Depreciable Amount’ over the ‘Useful Life’ – Refer – Australian Interpretation 1030 AASB116 Approaches using WDV / RUL may get incorrect result !!!

CPA Australia’s eGuide 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 Or Extensive Project Team Peer Review Julie Sinclair (SA Treasury) Covers high level, technical and practical issues

AAAB May 2015 Decisions CRC v DRC – (AASB13 and AASB136 amendments) Residual Value

DRC v CRC Change in concept of Fair Value (AASB13) DRC no longer consistent with new definition of Fair Value DRC – accounting approach CRC – market approach Need to determine value based on what ‘market particpants’ would take into account

What is relevant? Design and specification Condition Future maintenance/renewal requirements Obsolescence Valuation has nothing to do with the calculation of Depreciation Expense

Residual Value: Background Asset Management approach linked remaining level of service potential (value) to rate of consumption of the service potential (depreciation) With regular renewal, some value transfers forward, and therefore approach assumes not depreciated (RV) AASB asked whether should change definition of RV Problem – AASBs only duplication of IFRS (issues by IASB) – AASB interpreted

AASB Response Technical response to technical question Definition of RV based on ‘proceed upon sale or disposal’ As not ‘disposed’ cannot be RV Therefore RV of infrastructure type assets normally nil or insignificant

However……. Many did not listen to entire decision X

However……. Many did not listen to entire decision

Residual Value Decision Residual Value definition and disposal Additional level of componentisation (SL & LL) SL & LL – ‘not physically identifiable’ (express as %) Each part to be depreciated OK to use ‘blended’ approaches Depreciation to be based on ‘Depreciable Amount’ Valuation Depreciation different to Financial Reporting Depreciation (i.e. valuation and depreciation are NOT linked)

For example: 20m dredged channel Fair Value ADAD Replacement Cost Long Short ValuationDepreciation

AASB ‘Appropriate Componentisation

Valuation based on what market participants would pay (not directly linked to depreciation expense)

Each part to be depreciated over their useful life

AASB13 disclosures AASB13 Asset Class different to AASB116 Asset Class

Disclosures 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 Temporary Relief (but only for specialised valued using cost approach)

Implications for old approaches If ‘Fair Value’ based on ‘Depreciation Expense’ rather than what ‘market participants would pay’ then conceptually incorrect A change in ‘depreciation assumptions’ do not necessarily translate into change in ‘Fair Value’ For example if FV based on age & RUL then probably need to sort out methodology

Depreciation: If Current Assume Zero RV Does not mean your depreciation expense is correct ! Most likely over-stated Need to consider whether you need to split between short-life and long-life components

Depreciation: If Currently Adopt RVs … Need to reassess split between short-life and long-life parts Need to reassess short UL Need to depreciate the long-life part (not previously depreciated) Long-Life UL may be greater than service life of the greater asset Consider materiality

Asset Registers Do you ‘double your components’ and then break relationship with Asset Management System? Do you keep existing components and use ‘blended approach’?

Risks of not getting it right Fair Value – Incorrect methodology /wrong concept – Potential qualification Depreciation – Unless revisited all assumptions and methodology it is more likely than not that results are incorrect – Impacts financials and sustainability measures

Potential Solutions Methodology Valuation Strategy

Methodology DRC or CRC? – More than just a name !!!! Depreciation – Understand typical ‘asset management’ treatments – Determine short-life and long-life assumptions – Determine typical min and max periods between interventions (Short UL) – Estimate Long-Term Useful Life Consider renewal treatments and obsolescence

Valuation Strategy External v Internal Resources ? – Expertise and experience – Accounting Standards – Capability Alternatives – Professional Valuers (what about data?) – In-House (what about expertise and capability?) – Mixture of both (balance cost and risk) – Use of technology ?

Questions David Edgerton FCPA Web: Mob: Work:(07)