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Asset Valuations for Government
What are assets? What are non-current physical assets? What is the structure for the recognition of non-current physical assets? Why are asset valuations important? What is the major role of public sector managers in the asset valuation process? What are the skills expected of public sector asset managers? What are asset values and how are asset values measured? What is cost? What is fair value? What is a revaluation? How is fair value determined? What is the principal test to be undertaken to determine fair value of an asset? What are the valuation bases that need to be applied to derive fair value? How often does an asset valuation need to be undertaken? What can you expect from VGV after the valuation is complete? Would it be possible to use asset valuations for disposal purposes? Insurance Valuations Under the Victorian Managed Insurance Authority Act 1996 (VMIA) What are insurance valuations? Reinstatement with new value Methods of measurement What is the legal requirement to undertake insurance valuations? General Information How much do Government asset valuations cost? Why should Departments & Agencies use Valuer-General Victoria (VGV) to have their assets valued? Who should you contact to go about getting your Department's asset portfolio valued? Websites of Interest
Fair Value Decision Tree FRD103C Methodology for the Valuation of Cemeteries for Financial Reporting Purposes Guidance Note: Fair Value Asset Valuation Methodologies for Victorian Local Governments Financial Reporting Valuations under the Financial Management Act 1994 (FMA) What are assets? In the Budget and Financial Management (BFM) website within the Victorian Department of Treasury and Finance (DTF) section of the Victorian Government intranet, assets are defined as “future economic benefits (resources) controlled by an entity as a result of past transactions or other past events”. What are non-current physical assets? Non-current physical assets are represented by the accounting term “Property, Plant and Equipment”. Paragraph 6 of the Australian Accounting Standard AASB116 "Property, Plant and Equipment" defines property plant and equipment as follows: “Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and (b) are expected to be used during more than one period” According to the BFM website definition, non-current assets are “all assets other than current assets. They are usually held for use rather than exchange, and provide an economic benefit for periods greater than one year. Examples include land, plant and equipment, motor vehicles, heritage assets and buildings.” The following classifications have been adopted by the DTF for the purpose of reporting on a Victorian Whole of Government basis:
The following Nature based sub classes fall within each of the above Purpose Groups:
The above list is published as an appendix to the Financial Reporting Direction FRD103C – Non-Current Physical Assets, published in February 2008 by the DTF. Top What is the structure for the recognition of non-current physical assets? The BMF Guidance 25, published by BFM website on the DTF intranet, states that a non-current physical asset should only be recognised in the financial statements of a public sector entity if it meets all of the following six criteria:
Top Why are asset valuations important? State Government Departments and Agencies own and control large and varied portfolios of assets worth billions of dollars. The implementation of accrual financial management reporting, as part of the accountability provisions set out in the Financial Management Act 1994, requires that all assets controlled by government be recognised and valued. The valuation of assets establishes a framework for the correct identification and recognition of non-current physical assets for accurate valuations and reporting. Information on the nature and a value of the assets is also necessary to:
What is the major role of public sector managers in the asset valuation process? Victorian State Government Departments, Agencies and Statutory Bodies own and control large and varied portfolios of assets worth billions of dollars. Managing the State’s resources efficiently, effectively and successfully to achieve the intended outcomes of the government's strategic policy objectives, and community expectations, is a major role for the Victorian public sector mangers. What are the skills expected of public sector asset managers? The managers require a good understanding of the assets owned and controlled by their entity. One of the major roles of the manager is to identify the assets for which they are accountable for reporting. In order to appreciate the importance of the correct valuation of entity’s assets it is necessary for the public sector managers to know the value of assets they manage. This type of information is fundamental to maximising efficiency in the use of the State’s resources. Top What are asset values and how are asset values measured? The valuation of non-current physical assets undertaken for financial reporting purposes is generally referred to by property professionals as an “asset valuation”. “Asset Value” is the value of real property or plant, equipment or any other moveable asset to a Government Entity at a given period of time. AASB116 "Property, Plant and Equipment", requires assets to be valued at Fair Value or cost. The following requirements are outlined in Financial Reporting Direction FRD103C – Non-Current Physical Assets, published by the Victorian DTF: Measurement Subsequent to Initial Recognition
What is cost? Cost is defined in AASB116 as “the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Australian Accounting Standards, for example, AASB2 Share-based Payment”. Top What is Fair Value? The Fair Value of an asset is the best estimate of the price reasonably obtainable in the market at the reporting date in keeping with the Fair Value definition. Fair Value is defined in paragraph 6 of the Australian Accounting Standard Board’s Standard AASB116 , “Property, Plant and Equipment” as “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.” Top What is a revaluation? A revaluation is the act of recognising a reassessment of the value or carrying amount of a non-current physical asset at a particular date for a reporting period. A revaluation process takes account of changes in the values of assets over time due to such things as technological changes and inflation. The revaluation process assists in ensuring that non-current physical assets are appropriately valued in the Statement of Financial position. After the initial recognition of non-current physical assets at the time when the Agency first obtains control of the asset, certain classes of non-current physical assets shall be revalued using the Fair Value basis. Top How is Fair Value determined? The Fair Value definition is based on the assumption that the entity is a going concern without any intention or need to liquidate to curtail materially the scale of its operations or to undertake a transaction on adverse terms. It is also assumed that the asset is exchanged after an adequate period of marketing to obtain its most advantageous price. The Fair Value of an asset is determined by reference to its highest and best use, ie the use of the asset that is physically possible, legally permissible, financially feasible, and which results in the highest value. Opportunities that are not available to the entity are not taken into account. Market evidence from comparable asset sales are used to assist in determining the assets fair value. What is the principal test to be undertaken to determine Fair Value of an asset? The principal test in determining Fair Value of an asset is whether there is an active and liquid market available for that asset. Top What are the valuation bases that need to be applied to derive Fair Value? The following valuation bases apply to derive a Fair Value of an entity for financial reporting purposes: Surplus/External to requirements: Fair Value = Market Value The underlying definition of Fair Value is the presumption that the entity is a going concern without any intention or need to liquidate to curtail materially the scale of its operations or to undertake a transaction on adverse terms. If an asset becomes surplus to the entity’s requirements and is to be sold external to the going concern, the Market-Selling Price is the Fair Value of the asset. The value is measured at highest and best use of feasible alternatives. Quoted Market Price in an active and liquid market (Market Price) If a Quoted Market Price for an asset in an active and liquid market is available, that price represents the best evidence of the asset's Fair Value. Land, buildings in planned development areas/projects, leased infrastructure systems or plant, equipment and vehicles (both owned and leased) may have a Quoted Market Price in an active and liquid market. Market evidence available for same or similar assets: Comparable Sales (Market Evidence) When there is no Quoted Market Price for the asset or an active and liquid market is not available, the Fair Value of that asset is estimated by reference to the best available market evidence of the price for the same or similar asset. The evidence includes Market Selling Prices for assets that are similar in use, type and condition. The most recent transaction prices for the same or similar asset provided that there has not been a significant change in economic circumstances between the transaction date and the reporting date. Generally, comparable sales evidence for the same or similar assets can be obtained for land, non-specialised buildings, used motor vehicles and some forms of plant and equipment. Comparable Rentals (Market Evidence) For land and buildings, Fair Values can also be determined from observable current market rentals. Valuers need to carry out investigations available in the market place to obtain comparable evidence. The values can be determined by using Present Value (PV) calculations based on the researched market rentals and using Discounted Cash Flow analysis (DCF). The valuers will select an appropriate discount rate and describe the selection criteria in their summary of the valuation. In order to calculate the Fair Value of Crown land leased on long terms, the lease details should be taken into account to produce a PV of the rental streams and the PV of the reversion of the estimated land value. The addition of these figures will give, in effect, a Lessors Interest in the land. This will be the Fair Value to the Crown for the purposes of financial reporting as per AASB116 . These figures will be cross-checked or reality checked against market place evidence to ensure the resultant values are comparative to the marketplace. Fair Value is measured having regard to the highest and best use for an asset. However, where there are sociopolitical restrictions such that the asset has no feasible alternative use in the near future, the asset is to be valued at fair value for its existing use. Specialised assets: Assets held by the entity to meet Community Service Obligations (CSO) The Fair Value of land and buildings is usually determined from market-based evidence (paragraph 32 of AASB116 ). In some circumstances, the Market Buying Price and Market Selling Price of an asset differ materially due to different market conditions. In other circumstances the Fair Value of the asset is not able to be determined from market-based evidence as there is no market evidence of the asset’s Market Selling Price. If there is no market-based evidence of Fair Value because of the specialised nature of the item of property, plant and equipment and the item is rarely sold except as a part of a continuing business, an entity may need to assess Fair Value using Depreciated Replacement Cost (DRC) or the income approach (Discounted Cash Flows). (FRD103C) For assets held by Not For Profit (NFP) entities
Depreciated Replacement Cost (DRC) – FRD103C Depreciated replacement cost (DRC) is the current replacement cost of an asset less, where applicable, accumulated depreciation calculated on the basis of such cost to reflect age already consumed or expired future economic benefits of the asset (AASB 136). Fair Value will include:
The difference between the hypothetical unencumbered market valuation of the asset (valued without restrictions) and the value ascribed to the asset in its current use (restricted by government controls) is termed the amount of Community Service Obligation (CSO). This is an amount forgone by the community due to the purpose or current use of the asset in the government’s control. The CSO will vary depending on the level of restriction placed on the use of the land. Guidance of Depreciation of Building Components Where guidance or assistance is required, Valuer-General Victoria may be contacted for advice, assistance and consultation related to componentisation in the context of valuation policy and determining asset useful lives. Componentisation is by definition confined to depreciable assets. This guidance is particularly applicable to depreciable assets of the nature of buildings, but where appropriate could be applied to other non-current physical assets. Componentisation is only recognised and relevant where it will have a material impact and is cost effective. Any component of an asset must lend itself to feasible separate identification within a complex or principal asset. Componentisation is only required where the elements have materially different estimated useful lives. Buildings should only be disaggregated into components where the different depreciation, resulting from useful lives of the components, will have a material impact on the entity’s financial results or position. The degree to which an entity applies componentisation will differ between entities depending on the entity’s size and nature. Standard components of an improved asset could include: 1 Structure/shell/building fabric – includes the substructure, columns, floor, upper floors, staircases, roof, external walls, and windows; 2 Site engineering services and central plant – includes roads, footpaths, paved areas, boundary walls, fencing, gates, outbuildings, covered ways, landscaping improvements, external stormwater drainage, external sewer drainage, external water supply, external gas, external fire protection, external electricity, external communications and external special services; 3 Fit out – includes external doors, internal walls, ceilings, fitments, sanitary fixtures and special equipment. (Note: The fit out may be leased and so not owned by the reporting entity. In such circumstances, the fit out will not form a component of the building for depreciations purposes); 4 Trunk reticulated building systems – includes lifts, escalators, walkways, other (cranes, hoists etc), centralised energy and other. Top Legislation and Policy concerning Financial Reporting Valuations? All valuations performed for financial reporting purposes must be undertaken in accordance with relevant Acts, API Guidance Notes, Accounting Standards, DTF Bulletins and Policy Guidelines. These include:
How often does an asset valuation need to be undertaken? According to paragraph 34 of AASB116, the frequency of revaluation depends upon the changes in Fair Values of the items of property, plant and equipment being revalued. When the Fair Value of a revalued asset differs materially from the carrying amount, a further revaluation is required. Some items of property, plant and equipment experience significant and volatile changes in Fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in Fair Value. Instead, it may be necessary to revalue the item only every three or five years. The FRD103C outlines the following timeframe for undertaking valuations: Revaluation Cycles:
* Note: This cycle is to repeat every five years, so the 'Public Administration' purpose group will next be revalued in the year commencing 1 July 2011. Top What can you expect from VGV after the valuation is complete? The services provided by VGV includes the following:
The answer is NO. The asset valuations are Fair Values made for financial reporting, management and analysis purposes under the Financial Management Act 1994. These should not be construed as Current Market Valuations made under Valuation of Land Act 1960. Top Insurance Valuations Under the Victorian Managed Insurance Authority Act 1996. What are insurance valuations? The cost of replacing or reproducing assets that could be destroyed or damaged in the event of loss needs, to be shown in the valuation for risk management and Insurance Purposes. Land is excluded as it technically can not be destroyed or damaged. However, consideration must be given to potential hazards and the cost of reinstating or otherwise stabilising the land. Reinstatement with New Value This value will be determined as at the date of valuation to allow for replacement by similar property, in a condition equal to but not better, nor more extensive, than its condition when new. Methods of Measurement The following are the possible scenarios (with the exception of Land Assets) available for restitution and consequent valuation of improvements.
What is the legal requirement to undertake insurance valuations? The Victorian Managed Insurance Authority (VMIA) has been established by Government to provide efficient and economical insurance protection to Departments and participating bodies as defined by the Victorian Managed Insurance Authority Act 1996. Under Sections 23 and 24 of the Act, each Department and participating body must:
General Information How much do government asset valuations cost? Generally not as expensive as market value valuations for sale or purchase. VGV provide very competitive fees in line with the market as valuers are chosen through a competitive quotation process. The overall fee will include a nominal amount as VGV’s project management fee. Top Why should Departments & Agencies use Valuer-General Victoria (VGV) to have their assets valued? 1. Valuation Expertise In terms of the level of expertise required in undertaking asset valuations,FRD103C states that entities should consider the use of independent professionally qualified valuers in performing revaluations. However, the use of internal expertise should also be considered when appropriate. Internal expertise must be appropriately qualified and have suitable experience and knowledge together with access to appropriate reference data. Professionally qualified valuers should be Certified Practicing Valuers recognised by the Australian Property Institute (API) and should be on the State Government Panel of valuers administered by Valuer-General Victoria (VGV). VGV is the State Government's independent valuation agency which provides valuation services to the whole of the Victorian Public Sector. Departmental Knowledge VGV provides valuation expertise in the tendering and supervision of Government Asset valuations. This includes full knowledge of Department of Treasury and Finance and Auditor-General asset valuation requirements. VGV assists with the tendering and briefing processes and reviews the data held by Departments for the effective and comprehensive delivery of asset valuations. From the panel of private sector valuers, VGV manages projects and trains valuers for specific departmental valuation tasks, ensuring compliance with and application of government asset valuation policy and standards. Competitive fees This service is provided for an administration fee which is offset by a reduction in the cost of VGV asset valuation tendering procedures. The supervision and monitoring of progress and outcomes by the VGV is an added bonus of VGV’s best value tendering process, as it reduces the use of Departmental resources and the risk of non-compliance with Auditor-General requirements. VGV has the expertise to manage the asset valuation process on behalf of Departmental Accounting and Property people who may not necessarily have the required valuation knowledge and resources to monitor the quality and compliance requirements necessary in the provision of asset valuations for financial reporting. Refer to www.land.vic.gov.au/valuation for more information about VGV and financial reporting valuations (FRD103C, Appendix A) 2. VGV provides project management of:
4. VGV is quality assured and certified to IS0 9001:2000 standards 5. Manages a qualified panel of expert valuers who form part of the VGV team to provide an inherent protection to government. 6. Panel member valuers and staff valuers are Certified Practicing Valuer members of the Australian Property Institute. 7. VGV adopt valuation standards and practices to maintain uniformity in approach and reporting throughout Victoria. 8. Valuations are made within agreed time frames to meet specific client requirements. 9. Offers comprehensive, competitive prices for independent valuation services by choosing the best valuer from the panel of experts to suit the client’s requirements. 10. To provide advice, assistance and consultation relating to componentisation (Appendix B, FRD103C) 11. Valuations should be completed by March of the year required (FRD103C Revaluations – Accounting Treatment). Top Who should you contact to go about getting your Department’s asset portfolio valued? Client Departments & Agencies are invited to discuss their specific requirements with the members of the Asset Valuation Group. For further details on how we may be of assistance, please contact the following: Policy Framework & Direction Mr Graeme Balfour Deputy Valuer-General (Government Valuations) Telephone: (03) 8636 2585 Facsimile: (03) 8636 2596 Email: graeme.balfour@dse.vic.gov.au Policy Delivery & Project Management Mr Denis Riordan Senior Valuer – Client Valuations Telephone: (03) 8636 2513 Facsimile: (03) 8636 2596 Email: denis.riordan@dse.vic.gov.au Mr Ratna Ratnavadivel Senior Valuer – Asset Valuations Telephone: (03) 8636 2511 Facsimile: (03) 8636 2596 Email: ratna.ratnavadivel@dse.vic.gov.au Top Websites of Interest
Documents of Interest  Visio-Valuers General Fair Value Decision Tree 2005 (PDF - 18 Kb) Amount of Value (PDF - 48 Kb)Guidance Note: Fair Value Asset Valuation Methodologies for Victorian Local Governments FRD 103C For more information on FRD 103C, please contact Mr Ratna Ratnavadivel, Senior Valuer – Asset Valuations, Valuer-General Victoria, telephone: (03) 8636 2511. Methodology for the Valuation of Cemeteries for Financial Reporting Purposes Following a report by the Auditor General and in association with the Accounting Policy Working group for Cemetery Trusts, Valuer-General Victoria (VGV) was asked to develop a standardised approach to the valuation of Victorian Cemeteries for Financial Reporting purposes. The attached guidance note provides an approved standard methodology for valuers to use for the valuation of the real estate components of Victorian cemeteries.
This document was last reviewed on 11/12/2008.
© 2007 by the State of Victoria
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