David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value Debrief and refresher on AASB13 and what the future holds for valuation

What are your thoughts? What is it about? Have you done it well? Will you need to make improvements next year? What are the key aspects?

What is it about? GFC and Sovereign Debt Crisis Valuation = Subjectivity Need for greater information Greater Risk = Greater Disclosures

Key Aspects of AASB13 NOT about the Asset Focus on HOW the valuations were made IS about the methodology

Asset Classes Probably the biggest issue Totally missed by many ! All disclosures by ‘Asset Class’ ‘Asset Class’ defined by paragraph 94

Asset Classes 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.

In layman’s terms 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

Example (Land) Freehold residential land Freehold development/commercial potential Restricted / non-freehold – Small lot (residential area) – Large lot (residential or commercial area) – Large lot (multi-use area) – Very large lot (forest / natural parkland area) – LUR

Hierarchy (Inputs v Valuation) 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

Example (Buildings) Residential – Open and liquid market – Insufficient market evidence Specialised – Aged building – Historic building – New and major

Infrastructure? Roads? – Sealed Roads – Traffic Signals – Traffic Management Devices Treatment Plants? Bridges? Footpaths?

Valuation Premise Highest and Best use From the perspective of other market participants….. Not entity specific ! For public sector current use is usually the highest and best use.

Example (Restricted Land) Process Characteristics ? Is there a principal market? Market Participants? Valuation Premise? Valuation Technique? Cemetery Potential acquisition Golf Course Developers $19.0m Golf course $19.5m Council $20.0m Cemetery Sell balance to Golf Club Highest & Best Use …. Cemetery No market….. Cost Approach Cost to Replace …. $20m

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

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

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?

How well did we go in 2014?

Landfills Now under increasing focus Significant liabilities – May not have been previously recognised – Many ‘new’ requirements = increased liabilities Engineered cells = complex valuation Land component = Registered Valuer Complexity with depreciation and discounting Different Asset Management Strategies = Different Valuation and depreciation outcomes

The Future of Valuation 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 Efficiencies through technology – Fair Value Pro CPA Australia Guide (AASB standards)

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