Real Estate Institute of Zimbabwe Real Estate Valuations in relation to International Financial Reporting Standards (IFRS) 19 August 2016

Agenda Introduction Types of real estate on balance sheet IFRS fair value requirements for real estate Determining fair value: Overarching principles IFRS 13 principles applicable to real estate Comparison of IFRS and IVS Communication of valuation results Disclosures in financial statements Valuation challenges and shortcomings

Introduction Accountants are not valuation experts Valuations for different purposes Focus is on valuation for financial reporting IFRS requires different valuations (fair value, net realizable value, liquidation value, and value in use) Fair value is the most common valuation required by IFRS IFRS 13 is the standard that gives guidance on fair value. Similarities between IVS and IFRS 13 as well as some conceptual differences . Impact of the differences depend on the real estate property, the valuation technique and the facts and circumstances. Fair valuation involves estimation and judgment

Real estate on a Company’s statement of financial position (Balance Sheet ): Management Assertions. Statement of financial position as at 8 July 2016 (Extract) Non current assets $ Investment property xxxxx Property, plant and equipment xxxxx Current assets Property inventory xxxxx Assertions Existence Rights Valuation/measurement Disclosure

Webcast title 4/21/2018 Real estate valuations for financial reporting: When is fair value required ? Investment property measured at fair value (IAS40) Investment property measured at cost, fair value is required to be disclosed (IAS 40). Land and buildings at fair value (IAS 16). Land and buildings classified as held for sale(IFRS 5) . Land and buildings acquired in a business combinations (IFRS 3) Impairment testing recoverable amount based on fair value less cost of disposal (IAS 36) NB – Inventory property is not measured at fair value but at the lower of cost and net- realizable value (NRV)(IAS 2). NRV is not fair value.

Webcast title 4/21/2018 Determining fair value for financial reporting : Overarching principles Need for management, valuers and auditors to work together. Use of internal versus external independent valuer . Ethics and independence of professional valuer Rotation of valuer : balance between consistence and achieving independence and objectivity. Review of valuation results by management Management responsibility for the valuation results.

Webcast title 4/21/2018 Real Estate Valuation : IFRS 13 Principles Definition of fair value (IFRS vs IVS). 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 (IFRS 13). The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties (IVS). Market value – is the estimated amount for which an asset or liability should be exchanged on the valuation date between a willing buyer and willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably and without compulsion(IVS). Fact that fair value is an exit price and not an entry price, though entry and exit prices may be the same in certain situations. Fact that the transaction has to be orderly – asset should have been exposed to the market for a reasonable period of time to allow for all normal marketing activities before the measurement date , as a result it must not be a forced or distressed sale . However a decline in the volume of transactions does not make transactions not to be orderly as is the current situation in our market. Fair value is a market measurements and not an entity specific measurement and it is considered from the perspective of a market participant seller and market participant buyer taking into account the assumptions that market participants would use when pricing the asset or liability. Fact that transaction costs are not considered unless there are a characteristic of the asset being measured that market participants will take into account when pricing the market.

Real Estate Valuation : IFRS 13 Principles Webcast title 4/21/2018 Real Estate Valuation : IFRS 13 Principles Principal /most advantageous market Highest and best use Legally possible Physically possible Financially feasible Valuation premise and unit of account Principal market – is the market with the greatest volume and level of activity for the asset – say for Real estate- principal market likely to be the location in which the real estate property is located. Most advantageous market – is the market that maximizes the amount that would be received to sale the asset Highest and best use Valuation premise /Unit of account Determines the level of aggregation or disaggregation Unit of account determined by the applicable standard that require fair value measurement

Real Estate Valuation : IFRS 13 Principles Fair value Hierarchy for Real Estate Webcast title 4/21/2018 Level Characteristics Examples of inputs for Real Estate Level 1 Quoted prices (not adjusted) in an active market for identical assets. Not likely to be any Level 2 Inputs other than quoted market prices in Level 1 that are observable directly or indirectly. Price per square metre for similar properties. Property yields derived from latest transactions. Observable market rent per square meter for similar properties. Level 3 Unobservable inputs Cash flow forecasts using entity own data Adjusted yields Significantly adjusted rent per square metre , price per square metre, yields Replacement cost

Real Estate Valuation : IFRS 13 Principles Valuation techniques Webcast title 4/21/2018 Real Estate Valuation : IFRS 13 Principles Valuation techniques Types of valuation techniques Market approach Income approach Cost approach Core principle of a valuation technique appropriate in the circumstances sufficient data available maximize relevant observable inputs, minimize unobservable inputs Use of multiple valuation techniques Applied consistently, change if it results in a measurement that is equally or more representative of fair value.

Webcast title 4/21/2018 Real Estate Valuation: IFRS 13 Principles Valuation techniques– Depreciated replacement cost Used where no evidence of transaction prices, e.g. for specialized properties like industrial buildings. Gross replacement cost versus depreciated replacement cost. Depreciation charge to appropriately reflect physical deterioration, functional and technological obsolescence. Can be used if; entry and exit market is the same. highest and best use for the asset is current use. Need to consider if a market participant would buy an asset at the determined fair value. Unlikely to be used for investment property.

Real Estate valuations for financial reporting: IVS versus IFRS Most concepts similar but some conceptual differences. Definition of fair value in IFRS different to that in IVS Valuation techniques are similar, but IFRS focus on valuation inputs and IFRS only discuss valuation techniques in the context of fair value. IVS do not discuss the fair value hierarchy, for IFRS 13 fair value hierarchy informs and is informed valuation technique. Important for valuation experts to understand IFRS 13 requirements. Concepts of principal or most advantageous market, highest and best use, valuation premise need to be considered. IFRS 13 requires detailed disclosures in financial statements. In the event of conflict, IFRS prevails.

Communication of valuation results Webcast title 4/21/2018 Communication of valuation results Valuation reports to be provided on time before finalisation of financial statements Only a single fair value number ; often management not sure which number to use for financial reporting purposes Explain valuation results to clients Explain valuation results to auditors where applicable. Valuation report to state clearly the purpose of valuation (financial reporting, insurance , security e.t.c.) Valuation reports to provide disclosures required by IFRS.

Disclosures in financial statements (IAS1.25, IFRS 13.91-99) Webcast title 4/21/2018 Disclosures in financial statements (IAS1.25, IFRS 13.91-99) Disclosure of estimation uncertainty and quantitative sensitivity (IAS1.25,IAS1.29) Classification of fair value measurement on fair value hierarchy. Classification on fair value hierarchy informs the rest of the fair value disclosures Valuation process Valuation techniques and key unobservable inputs Narrative sensitivity Reasons for change in valuation technique and impact. Reasons why current use is not highest and best use.

Webcast title 4/21/2018 Valuation for financial reporting : challenges and shortcomings in Zimbabwe Illiquidity and lack of market information Cost cutting and impact on the valuation Economic challenges and risk of manipulation Ethics, independence , objectivity and diligence of the valuer. Clients only interested in the valuation outcome Lack of internal skills to objectively challenge valuation results. Frequency of valuations