1. www.apv.net David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value The New standard and guide by CPA Australia

2. www.apv.net Agenda Overview & Process Feedback AASB13 Fair Value

3. www.apv.net David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value Overview Joint project: CPA & AAMCoG Four sections Overview Technical Practical Advice Attachments

4. www.apv.net Objective Provide practical advice and guidance to - – Non-technical people who only need high level understanding – Assist with entire process (not just valuation and accounting) – Technical people (to assist in valuation process) Accountants Valuers Engineers

5. www.apv.net Process Draft 1 issued July 2012 5 months public consultation and feedback Workshops (held nationally) Feedback received (formal and informal) Considered by reference group (AASB, Audit, CPA) Updated Peer Review of guide and feedback (former Treasury and AASB) Launch – International Public Sector Accounting Conference (Feb 2013)

6. www.apv.net Feedback &Discussion CPA Centre of Excellence Accounting firms Professional Bodies (API, AMC, IPWEA, CIPFA, ICEAW) Government Agencies (Australian and overseas - Treasury, Audit Offices, V-Gs) Individuals (including members of AASB & IPSASB)

7. www.apv.net Specific Issues Feedback generally very good and supportive Some complex or contentious issues – Reference group discussion and resolution Some individuals expressed views that were significantly inconsistent with the views of the other participants.

8. www.apv.net Restricted Land Must be calibrated to transaction price Market participants – not entity specific Restriction must be intrinsic to the asset – (can’t ever be removed) Cost approach – base on sales of comparable land

9. www.apv.net Entities adopt incorrect patterns of consumption of future economic benefit Agreement from a range of participants Straight-line cannot be used as a “default” Entity needs to analyse and determine appropriate pattern

10. www.apv.net Criticism of specific approaches It does not criticise any particular approach Nor does it promote any particular approach Highlights – – need to determine appropriate pattern – risks of using erroneous assumptions

11. www.apv.net Relationship between condition and Future Economic Benefit Guide is clear…. There is no one-to-one relationship Need to determine relevant factors and determine method to assess level of remaining service potential and rate of consumption AASB13 requires adjustment to valuation input for condition and comparability

12. www.apv.net Straight-line v Other patterns Real issue for some! (but only in SA) Guide does not promote any particular approach Straight-line is appropriate…. If analysis determines pattern to be constant Other patterns…. If analysis determines so Some who argued “straight-line only” also argued Reducing Balance is more correct !

13. www.apv.net Relationship between depreciation and asset management performance Some debate over term “good asset management” - Wording enhanced But…. The arguments used also agreed that typically would expect good asset management to result in – – higher level of remaining service potential and – rate of depreciation would be lower as a consequence of the useful life being extended

14. www.apv.net Linkage between FV and Depreciation

15. www.apv.net Linkage between Depreciation and Intergenerational Equity Depreciation estimates value of consumed future economic benefit Non-cash accounting measure Nothing to do with Cost to deliver the service Intergenerational Equity (pricing) decisions should be based on cost to deliver the service Therefore…. Nothing to do with depreciation

16. www.apv.net Level of Service v Consumption of Future Economic Benefit Level of service = 4 litres per minute (potable) If 10 people use it for 10 minute each = 400 litres of consumed service potential If 20 people use it for 15 minutes each = 1,200 litres of consumed service potential Rate of consumption changes despite Level of Service remaining the same ! Analogy: amount of water equates to level of remaining future economic benefit

17. www.apv.net Terminology New AASB13 terminology Difference between Asset Accounting and Asset Management terminology

18. www.apv.net KPIs Some criticism of IPWEA/ACELG KPIs Additional added for comparison at Asset Class level

19. www.apv.net References to source material Range of material (government, professional bodies and private sector) Private sector considered just as appropriate as non-private sector Aim is to provide best available guidance Requests for additional material (none supplied) Guide does not promote or recommend any particular approach or material

20. www.apv.net Inconsistency between AMPs and financials IPWEA noted – “Asset management plans are not yet widely in place across the local government sector, and more importantly, data indicates that there is no current relationship between the data in those plans and that reported in annual reports. “ Hence the need to improve valuation and depreciation !

21. www.apv.net Depreciation more than an arithmetic calculation and needs to based on relevant factors Suggested that depreciation did not need to reflect the consumption of future economic benefit….. It just need to be a systematic arithmetic calculation NO…. – Depreciation is to provide an estimate of the expected consumption of the future economic benefit – If not… challenges relevance, reliability and truth and fairness of the financials

22. www.apv.net AASB13 Fair Value Decision Trees available from www.apv.net www.fairvaluepro.com.au

23. www.apv.net IFRS13/AASB13 “Fair Value” Issued late 2011 Applies for 1 Jan 2013 onwards Fair Value consistency across all standards New Definition …. “exit” price New concepts New complex disclosures

24. www.apv.net Fair Value Definition Will be: “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.” Was: “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.”

25. www.apv.net Residual Value Definition Will be: “the amount an entity could receive for the asset currently (at the financial reporting date) if the asset were already as old and worn as it will be when the entity expects to dispose of it.” Was: “is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.”

26. www.apv.net New Concepts Hierarchy of Valuation Input – Level 1 (Quoted Price) – Level 2 (Observable Market Evidence) – Level 3 (Non-observable market evidence) Recurring v Non-Recurring Valuations

27. www.apv.net Change in Process Same outcome for APV valuations Change in terminology

28. www.apv.net New Disclosure Dependent upon whether – Recurring or Non-Recurring valuation – Level of Valuation Input

29. www.apv.net David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value

30. www.apv.net

34. Fair value measurements using significant unobservable inputs (level 3)

35. www.apv.net Description and fair value as at 30 June 2013 Valuation technique(s) Unobservable inputs Range of inputs (probability – weighted average) Relationship of unobservable inputs to fair value Land with restricted use ($3.0m) Cost approach (replacement cost) Price per square metre+/- 20% An over-estimation of 10% would result in a decrease in fair value by $272,000 Isolated residential and specialised buildings ($34.8m) Cost approach (depreciated replacement cost) Relationship between asset consumption rating scale and the level of consumed service potential. +/- 10% A change of 10% would result in an increase/decrease of $3.4m. Commercial buildings in volatile market ($1.0m) Discounted cash flow Long term rental yields in potentially volatile market +/- 30% A reduction of 10% in cash flows/rental yields as a consequence of changes in the market flowing from changes in mining sector operations would result in a decrease of fair value by $100,000. Road network infrastructure ($90.0m) And Water network infrastructure (excluding treatment plants) ($16.0m) Total value $106.0m Cost approach (depreciated replacement cost) Asset Condition +/- 10% A change in the overall assessment of condition would impact the fair value. The impact of such a change is dependent on the inter-relationship with the following unobservable input. Relationship between asset consumption rating scale and the level of consumed service potential. +/- 10% A change of 10% would result in an increase/decrease of $10.6m. Water network infrastructure (treatment plants) ($9.0m) Cost approach (depreciated replacement cost) Relationship between asset consumption rating scale and the level of consumed service potential. +/- 10%A change of 10% would result in an increase/decrease of $0.9m. Level 3: Valuation inputs and relationship to fair value (sensitivity)

36. www.apv.net

37. Draft CPA Guide, Tools & Help APV website (www.apv.net) Fair Value Pro websites (www.fairvaluepro.com.au) Email David@apv.net