TelferYoung Limited
ASSET VALUATIONS - INTERNATIONAL FINANCIAL REPORTING STANDARDS
13 March 2007
New Zealand has joined the global accounting community. New international standards for financial reporting were adopted in Europe and Australia in 2005. The New Zealand Accounting Standards Review Board require reporting entities to comply with the International Financial Reporting Standards (IFRS), for reporting periods commencing on or after 1 January 2007.
Entities have had the option to adopt the new standards over the last two years and a number have taken advantage of this opportunity to adopt IFRS in preparation for the mandatory change.
IFRS provides two models for the recognition of assets in the balance sheets - a 'cost model' and a 'fair value model'. The cost model measures the asset at cost less accumulated depreciation. Where the fair value model is applied a current revaluation of the asset is required. Fair value is defined as -
- 'Fair value - the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arms length transaction.'
This is similar to the familiar market value definition under the International Valuation Standards (IVS).
- 'Market value - the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had acted knowledgably, prudently, and without compulsion.'
In most situations fair value and market value are identical. There will be some situations where fair value differs as the fair value definition does not refer to the greater market.
There are two principal New Zealand Accounting Standards to apply from 1 January 2007.
- NZ IAS 16 - Property, Plant and Equipment
- NZ IAS 40 - Investment Property
The classification of assets determines which standard applies. NZ IAS 16 requires non current property and plant assets held for the production or supply of goods or services to be recognised initially in the balance sheet at cost and thereafter carried in accordance with either the cost model or fair value model. The fair value model requires regular valuation. The fair value of land and buildings is usually determined from market based evidence by valuation that is normally undertaken by professionally qualified valuers. If there is no market based evidence of fair value because of the specialised nature of the asset and the asset is rarely sold, except as part of a continuing business, an entity may estimate fair value using an income or depreciated replacement cost valuation methodology.
Investment property is defined as property held to earn rentals or for capital appreciation or both. NZ IAS 40 requires the property to be revalued at fair value except under special circumstances. An entity is permitted to use the cost model for investment properties only where the fair value of the property is not reliably determinable on a continuing basis.
Valuations are to be completed by either -
- An independent valuer; or
- An internal valuer being a person of sufficient experience to conduct the valuation, as long as the valuation has been subject to review by an independent valuer.
Where the fair value of property, plant and equipment is determined or reviewed by an independent valuer, that valuer must hold recognised and relevant professional qualifications and have recent experience in the location and category of the asset being valued. However plant and equipment may be valued by the entity where there is an active market or ready available price indices to reliably establish the fair value of the plant and equipment.
There are special rules applying to Public Benefit Entities. Public Benefit Entities are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders. Where the fair value is not able to be reliably determined using market based evidence, the Public Benefit Entity may use depreciated replacement cost as a method of valuation. Land is included at fair value representing the value determined from market based evidence. The improvements and plant and equipment are valued by deducting an allowance for physical deterioration and optimisation for obsolescence and relevant surplus capacity from the current gross replacement cost.
Special rules also apply for the valuation of leased assets. Of interest to a number of provincial entities, accounting practitioners and valuers will be the requirement for biological assets including agricultural produce and forestry to be recorded at fair value.
The International Financial Reporting Standards therefore underpin the need for the valuation of assets on market based evidence where fair value is adopted as the model for reporting. Where market based evidence is not available because of the specialised nature the application of an income or depreciated replacement cost approach to the valuation of the assets is permitted. The choice of the approach is not dictated by the type of asset but by the presence or absence of market evidence.
TelferYoung Valuers hold the necessary experience and expertise to assist entities and financial advisors in providing valuations compliant with the New Zealand International Accounting Standards. Our companies have been involved in providing compliant valuations over the past two years during the transition period. We welcome your inquiry.
Ian McKeage
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.