AASB 13 Fair Value
Measurement
Confidential
Implications for the not for
profit and public sectors
October 2013
AASB 13 Fair Value Measurement
October 2013
Table of contents
1.
2.
3.
4.
5.
6.
7.
8.
9.
6.1
6.2
6.3
9.1
9.2
9.3
9.4
10.
11.
12.
i
Introduction .................................................................................................................. 1
Background ................................................................................................................... 1
Principal impacts ........................................................................................................... 2
The definition of fair value .............................................................................................. 2
Comparison with IVSC requirements ................................................................................ 3
The concept of highest and best use ................................................................................ 5
Assessment ............................................................................................................. 5
Valuing the highest and best use — alternative use and asset modifications.................... 7
Highest and best use and impairment testing .............................................................. 7
Unit of account and the valuation premise ........................................................................ 8
Assessing whether an appraisal complies with AASB 13 .................................................... 8
Appropriate valuation techniques .................................................................................... 9
Market approach .................................................................................................... 10
Income approach ................................................................................................... 10
Cost approach ....................................................................................................... 11
Other valuation concepts not compatible with fair value under AASB 13 ..................... 11
Applying the fair value hierarchy ................................................................................... 11
Expanded disclosure requirements ................................................................................ 13
Final thoughts ............................................................................................................. 14
Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
1.
Introduction
AASB 13 Fair Value Measurement establishes a single, principles-based framework
for fair value measurement when it is required or permitted by another Australian
Accounting Standard (AAS).
The purpose of this publication is to focus on the implications of AASB 13 for the not for profit
(NFP) and public sectors. It includes a discussion of the critical issues regarding fair value
measurement for non-financial assets held by entities in these sectors and illustrative examples of
the valuation techniques and other considerations that will be required in practice.
Public sector entities will need to pay particular attention to the new standard given the significant
use of fair values in their financial statements.
AASB 13 at a glance:
►
AASB 13 does not change when an entity is required to use fair value. Instead, AASB 13
describes how to measure fair value when it is required or permitted by AAS.
►
The definition of fair value in AASB 13 is consistent with market value as defined in
International Valuation Standards (IVS). But, perhaps confusingly, it differs from the IVS
definition of fair value.
►
AASB 13 includes concepts of highest and best use, valuation premise and requires application
of a fair value hierarchy.
►
Management does need to be aware of the conceptual differences between AASB 13 and IVS or
other valuation guidance to ensure any values used for financial reporting that are obtained
from appraisals, whether external or internal, are consistent with the objective of fair value
measurement in accordance with AASB 13.
►
A challenge for any entity is to produce financial statements with disclosures that are useful for
decision-making. AASB 13 significantly expands disclosure requirements – and the extent and
nature of AASB 13 disclosures will rely heavily on the judgement of management.
►
AASB 13 is effective for annual reporting periods commencing on or after 1 January 2013.
The standard must be applied prospectively from the beginning of the annual period to which it
is initially applied. In the first year of application, disclosures for comparative periods are not
required.
2.
Background
International Financial reporting Standard IFRS 13 Fair Value Measurement was issued by the
International Accounting Standards Board (IASB) in May 2011 and adopted by the Australian
Accounting Standards Board (AASB) in September 2011 as AASB 13 Fair Value Measurement.
The principles in AASB 13 are intended to increase the consistency and comparability of fair value
estimates in financial reporting. The standard applies to all fair value measurements, when fair value
is required or permitted by another AAS, with some limited exceptions. AASB 13 does not change
when an entity is required to use fair value rather how it should be applied. It also sets out detailed
requirements for disclosures related to fair value.
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Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
3.
Principal impacts
For NFP and public sector entities, the adoption of AASB 13 could result in significant changes to
processes and procedures for determining fair value and significantly increase existing disclosures.
Specifically, the cost and time of complying with these expanded qualitative and quantitative
disclosure requirements by NFP and public sector entities are likely to increase. This is especially
the case for public sector entities which are often required to carry their property, plant and
equipment at fair value.
While the requirement to determine fair value by reference to market participants is not new, the
definition of fair value in AASB 13 now clarifies that fair value is a current exit price and the
standard provides a framework for measuring fair value for financial reporting.
The fair value framework set out in AASB 13 contains specific requirements relating to highest and
best use, valuation premise, and the principal (or, in its absence, the most advantageous) market.
This may require NFP and public sector entities and their appraisers to re-evaluate and reconsider
their methods, assumptions, processes and procedures for determining fair value.
It should be noted that the use of the Valuer General as an appraiser, as is common for public sector
entities, or other external appraisers does not reduce management’s ultimate responsibility for the
fair value measurements and related disclosures in the entity’s financial statements. Therefore,
regardless of whether valuations are performed externally or internally, management must
understand the methodologies and assumptions used in the valuations and determine whether the
assumptions are reasonable and consistent with the requirements of AASB 13.
NFP and public sector entities may be affected by AASB 13 in various aspects of their business as
follows:
►
Measuring the fair value of specialised public service assets
►
Changes to valuation methods and their application
►
Understanding valuations provided by valuation agents
►
Compiling and disclosing information on the fair value of assets and liabilities including but not
limited to significant assumptions, adjustments to unobservable inputs and qualitative and
quantitative sensitivity analysis
The principal elements of AASB 13 that may affect NFP and public sector entities are dealt with in
the following sections.
4.
The definition of fair value
In AASB 13, fair value is defined as “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
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date.” While the concepts are generally consistent with previous fair value measurement
requirements, AASB 13’s framework provides additional clarification and application guidance.
However, AASB 13 does not attempt to remove the judgment that is involved in estimating fair
value.
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2
AASB 13 Appendix A
Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
AASB 13’s definition and its guidance in the fair value framework, clarify that:
►
The definition of fair value in AASB 13 is a current exit price, not an entry price.
►
The exit price for an asset or liability is conceptually different from its transaction price (an
entry price). While exit and entry prices may be identical in many situations, the transaction
price is not presumed to represent the fair value of an asset or liability on its initial recognition
as measured in accordance with AASB 13.
►
The exit price objective of a fair value measurement applies regardless of the reporting entity’s
intent and/or ability to sell the asset or transfer the liability at the measurement date.
►
Fair value is the exit price in the principal market (or in the absence of a principal market, the
most advantageous market in which the reporting entity would transact). However, the price in
the exit market should not be adjusted for transaction costs.
►
In addition, fair value is a market-based measurement, not an entity-specific measurement,
and, as such, is determined based on the assumptions that market participants would use in
pricing the asset or liability.
►
The objective of a fair value measurement does not change based on the level of activity in the
exit market or the valuation technique(s) used. That is, fair value remains a market-based exit
price that considers the current market conditions as at the measurement date, even if there
has been a significant decrease in the volume and level of activity for the asset or liability.
How we see it:
On adoption of AASB 13, NFP and public sector entities will need to reconsider their previous fair
value measurement practices in light of these clarifications.
The effect of applying AASB 13 is likely to vary by entity. In some cases, it may only lead to a
refinement of previous practice. However, in other cases, the change may be more significant. For
example, if an entity previously did not consider a market participants assumptions when
determining the fair value when revaluing its property, plant and equipment, adopting AASB 13
could result in a different fair value than it would have previously determined. The exit price
concept may be difficult to apply when no active market exists for an asset or liability which would
be common within NFP and public sector entities.
5.
Comparison with IVSC requirements
In late 2012, the International Valuation Standards Council (IVSC) released an exposure draft for
Valuations of Specialised Public Service Assets (IVSC Specialised Public Service Assets Valuation ED)
to provide guidance on the valuation of public sector assets given the use of different approaches in
practice. The types of assets that are covered by this IVSC project include; buildings, structures,
equipment and land used to provide transport, utilities and social, cultural and recreational services.
The IVSC invited comments on the exposure draft up until 1 March 2013 and are currently
undergoing re-deliberation.
Management needs to be aware that there is a conceptual difference between the definition of fair
value under AASB 13 and under the International Valuation Standards (IVS) which are often used by
valuation agents. Accordingly, any values used for financial reporting that are obtained from
appraisals, whether external or internal, should be consistent with the objective of a fair value
measurement in accordance with AASB 13 (Further detail is provided in Section 8).
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Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
The definition in AASB 13 differs from IVS, which states in its revised IVS Framework:
"Fair value is 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."
And:
"For purposes other than use in financial statements, fair value can be distinguished from market
value. Fair value requires the assessment of the price that is fair between two identified parties
taking into account the respective advantages or disadvantages that each will gain from the
transaction. It is commonly applied in judicial contexts. In contrast, market value requires any
advantages that would not be available to market participants generally to be disregarded. "
How we see it:
The definition of fair value in AASB 13 is consistent with market value as defined by the IVSC. But,
perhaps confusingly, it differs from the IVS definition of fair value. AASB requires any advantages
that would not be available to market participants generally to be disregarded which is different
from the IVSC definition of fair value. Management needs to be aware of this conceptual difference
to ensure any values used for financial reporting that are obtained from appraisals are consistent
with AASB 13.
The IVSC Specialised Public Service Assets Valuation ED introduces the concept of specialised public
service assets which refer to specialised assets held to provide a public service. Such specialised
public service assets may be either cash generating or non-cash generating depending on the
specific facts and circumstances. The valuation considerations under the IVSC guidelines vary
depending on the purpose of the valuation and the definition of fair value or market value being
applied.
The valuation considerations under AASB 13 for all assets must be based on the considerations of a
market participant. Assets held by NFP and public sector entities to provide a service or other
benefit to the general public may often be similar in nature or design to assets held for commercial
objectives. Generally these assets are capable of being valued in the same way as an asset held for
commercial purposes as there is a market with willing buyers available. An asset which may be noncash generating to an NFP or public sector entity may still have a possible commercial use from the
perspective of a market participant.
An example of a non-specialised asset held with a potential commercial use would be a building used
as an administration office of a charitable organisation whereas an example of a specialised public
service asset may be a park or a monument where a commercial benchmark is near impossible to
determine.
It should be noted that the current use is presumed to be its highest and best use (as discussed
below) and as such the entity holding the asset is considered a market participant. Other factors
may suggest a different use by other market participants would maximise the value of the asset.
Market participants for non-cash generating assets are likely to be entities with similar profit (or not
for profit) motives.
The impact of AASB 13 in determining fair value of both types of assets used by NFP and public
sector entities is included in the discussion below.
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Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
6.
The concept of highest and best use
The fair value measurement of a non-financial asset under AASB 13 must reflect the highest and
best use of the asset from a market participant’s perspective.
6.1
Assessment
Under AASB 13 an entity’s current use of an asset is presumed to be its highest and best use, unless
market or other factors suggest that a different use of that asset by market participants would
maximise its value. If such factors exist, management is required to consider all relevant information
in determining whether the highest and best use of an asset is different from its current use at the
2
measurement date. AASB 13 states:
“A fair value measurement of a non-financial asset takes into account a market participant’s ability
to generate economic benefits by using the asset in its highest and best use or by selling it to
another market participant that would use the asset in its highest and best use. The highest and
best use of a non-financial asset takes into account the use of the asset that is physically possible,
legally permissible and financially feasible, as follows:
a.
b.
c.
A use that is physically possible takes into account the physical characteristics of the asset that
market participants would take into account when pricing the asset (e.g. the location or size of
a property).
A use that is legally permissible takes into account any legal restrictions on the use of the asset
that market participants would take into account when pricing the asset (e.g. the zoning
regulations applicable to a property or an obligation to provide a particular service with the
asset).
A use that is financially feasible takes into account whether a use of the asset that is physically
possible and legally permissible generates adequate income or cash flows (taking into account
the costs of converting the asset to that use) to produce an investment return that market
participants would require from an investment in that asset put to that use.”
Many public service assets or assets used by NFP entities may have uses which appear sub-optimal
from a market participant perspective. An example is the use of land as a national park which may
have a higher or more optimal use as a mine. However, AASB 13 makes it clear that determination
of the highest and best use requires only the consideration of uses that are physically possible,
legally permissible and financially feasible. Consequently, although mining in a designated national
park may be physically possible and economically feasible, because there are mineral deposits
present and a market for them, it may not be legally permissible because of the statutory protection
of the natural environment and an obligation to maintain the existing natural state. If it is not legally
permissible, the potential for mining would not be considered when determining the highest and
best use.
On the other hand, a NFP may hold property in a prime location that is being used as a research
facility or administration building, which a market participant may consider would be best used as a
residential development site. To the extent that there are no zoning or other restrictions on the use
of the property, the alternate use of the building as a development site may be considered in the
determination of highest and best use by a market participant. If, however, zoning restrictions do
exist, re-zoning the land for residential development may require approval from the relevant
authority. If that approval is usually given, this alternative use could also be deemed to be legally
permissible.
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AASB 13, paragraphs 27 and 28
Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
In our view, an entity would need to have sufficient evidence to support its assumption about the
potential for an alternative use, particularly in light of AASB 13’s presumption that the highest and
best use is an asset’s current use. In the example above of re-zoning land for residential
development, the entity’s belief that re-zoning was possible (or even likely) is unlikely to be sufficient
evidence that the re-zoning is legally permissible. However, the fact that nearby areas had recently
been re-zoned for residential use may provide additional evidence as to the likelihood that the land
being measured could similarly be re-zoned. If obtaining re-zoning permission is not merely
perfunctory, there may be a significant burden on the entity to prove that market participants would
consider commercial use of the land ‘legally permissible’
Most often entities providing public services are mandated or directed by government or other legal
requirements to continue to provide the services for which the asset is being used. Such restrictions
are likely to validate the sub-optimal use of an asset where they are determined to be a restriction
on the asset that would pass to market participants in a sale.
6.1.1
Restrictions on assets and liabilities
AASB 13 indicates that the effect on fair value of a restriction on the sale or use of an asset will
differ depending on whether the restriction is deemed to be a characteristic of the asset or the
entity holding the asset. A restriction that would transfer with the asset in an assumed sale would
generally be deemed a characteristic of the asset and therefore would likely be considered by
market participants in pricing the asset. Conversely, a restriction that is specific to the entity
holding the asset would not transfer with the asset in an assumed sale and therefore would not be
considered when measuring fair value. Determining whether a restriction is a characteristic of the
asset or of the entity holding the asset may be contractual in some cases. In other cases, this
determination may require judgment based on the specific facts and circumstances.
For example, a donor of land specifies that the land must be used by a sporting association as a
playground in perpetuity. The land is also subject to an easement (a legal right that enables a utility
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to run power lines across the land) .
Upon review of relevant documentation, the association determines that the donor’s restriction
would not transfer to market participants if the association sold the asset (i.e., the restriction on the
use of the land is specific to the association). Furthermore, the association is not restricted from
selling the land. Without the restriction on the use of the land, it could be used as a site for
residential development.
Under these circumstances, the effect of the restriction and the easement on the fair value
measurement of the land is as follows:
a.
b.
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6
Donor restriction on use of land — The donor restriction on the use of the land is specific to
the association and thus would not transfer to market participants. Therefore, the fair
value of the land would be measured based on the higher of its indicated value:
i
As a playground (i.e., the maximum value of the land through its use in combination
with other assets) or
ii
As a residential development (i.e., the fair value of the asset would be maximised
through its use by market participants on a stand-alone basis).
Easement for utility lines — Because the easement for utility lines is a characteristic of the
land, this easement would be transferred to market participants with the land. Therefore,
the fair value of the land would include the effect of the easement, regardless of whether
the land’s valuation premise is as a playground or as a site for residential development.
AASB 13.IE29
Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
6.2
Valuing the highest and best use — alternative use and asset
modifications
When management has determined that the highest and best use of an asset is something other
than its current use, certain valuation matters must be considered. Appraisals that reflect the effect
of a reasonably anticipated change in what is legally permissible should be carefully evaluated. If the
appraised value assumes that a change in use can be obtained, the valuation should reflect market
participant assumptions regarding the cost and profit margin associated with obtaining approval for
the change in use and transforming the asset, in addition to capturing the risk that the approval
might not be granted (i.e., uncertainty regarding the probability and timing of the approval). An
entity should also evaluate inputs used in the valuation of similar assets that do not have similar
uncertainties, for example, uncertainty related to obtaining a permit.
Expectations about future improvements or modifications to be made on an asset to reflect its
highest and best use may be considered in the appraisal, e.g., the renovation of a heritage property
or the conversion of an administration public service office into residential property development,
but only if and when other market participants would also consider making these investments. The
cash flows used should reflect only the cash flows that market participants would take into account
when assessing fair value. This includes both the type of cash flows (e.g., future capital expenditure)
and the estimated amount of cash flows. Only if this hurdle is met would the fair value of the asset
be determined on the basis of the expected future cash flows of the renovated or transformed asset.
However, as noted above, when this is the case, the fair value measurement needs to also capture
the cost and profit margin that market participants would demand for transforming the asset. The
fair value measurement assumes that the asset is sold in its current condition with any renovation or
transformation being performed by the market participants who acquire the asset. Accordingly,
management should evaluate whether transformation costs from the transformation process have
been included in the appraised value and if the inclusion of such amounts is appropriate.
6.3
Highest and best use and impairment testing
The highest and best use concept is not only relevant for assets carried at fair value. It is also
relevant to the impairment testing of assets carried at cost and other non-financial assets held by
public sector or NFP entities when impairment is measured on the basis of fair value less costs of
disposal.
AASB 136 Impairment of Assets (AASB 136) stipulates that impairment arises if the recoverable
amount of an asset is lower than its carrying value. The recoverable amount is determined as the
higher of an asset’s or cash generating unit’s fair value less costs of disposal and its value in use. It is
not necessary to determine both values. If either exceeds an asset’s carrying amount, it is not
considered impaired.
Fair value, measured as part of an impairment test, must be measured in accordance with AASB 13.
Therefore, assumptions must reflect what market participants would use when pricing the asset,
including assumptions about the highest and best use of the asset.
Determining value in use requires an assessment of the future cash inflows and outflows of an asset,
which is clearly problematic for assets held by NFP entities or which do not generate cash flows.
Consequently, AASB 136 includes an exception by permitting NFP entities to determine value in use
based on the depreciated replacement cost of the asset.
Depreciated replacement cost (DRC) is defined in AASB 136 as the current replacement cost less
accumulated depreciation to reflect the already consumed future economic benefits of the asset. It
cannot be assumed that DRC can be applied to other fair value measurements under AASB 13.
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Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
7.
Unit of account and the valuation premise
In valuing non-financial assets under AASB 13, the concepts of unit of account and valuation
premise are distinct, even though both concepts deal with determining the appropriate level of
aggregation (or disaggregation) for assets and liabilities. The unit of account identifies what is being
measured for financial reporting and drives the level of aggregation (or disaggregation) for
presentation and disclosure purposes (e.g., whether categorisation within the fair value hierarchy is
determined at the individual asset level or for a group of assets). Valuation premise is a valuation
concept that addresses how a non-financial asset derives its maximum value to market participants,
either on a stand-alone basis or through its use in combination with other assets and liabilities.
The highest and best use of an asset establishes the valuation premise used to measure the fair
value of an asset. Depending on its highest and best use, the fair value of the non-financial asset
will either be measured based on the value it would derive on a stand-alone basis or in combination
with other assets or other assets and liabilities under the asset’s valuation premise. If the fair value
of an asset for which highest and best use is its use in combination with other assets and/or
liabilities, fair value is determined assuming the asset is sold for use by market participants in
combination with those other complementary assets and/or liabilities. Market participants are
assumed to hold those complementary assets and/or liabilities already. In contrast, the fair value of
an asset that provides maximum value on a stand-alone basis is measured based on the price that
would be received to sell that asset on a stand-alone basis.
To illustrate, the valuation premise of a specialised piece of equipment used in a research facility
may be that its value is derived in combination with another complementary piece of equipment. In
this case the fair value of the specialised piece of equipment would be determined based on a buyer
having access to or being able to obtain the complementary piece of equipment.
AASB 13 contains guidance on the treatment of specialised non-financial assets that may have a
significant value when used together with other assets and little value if considered without the
complementary asset. If considered in isolation, such an asset might be valued at scrap value
(particularly if observable market transactions show no value), but this would not reflect the value
an entity expects to generate. AASB 13 clarifies that, in such a situation, the scrap value of an asset
would be irrelevant since the valuation premise assumes the asset would be used in combination
with other assets. Therefore, the exit price value should reflect the sale to a market participant that
has or can obtain the complementary assets. In effect, the market participant steps into the shoes
of the entity that holds the specialised asset.
8.
Assessing whether an appraisal complies with
AASB 13
An assessment should be undertaken by management of any third party appraisals, including any
appraisals by the Valuer General, to determine that the appraised value is an appropriate measure of
fair value for financial reporting (i.e., the appraisal has been performed in accordance with the
principles of AASB 13). As a result, management may conclude that an adjustment to the valuation
is necessary to comply with AASB 13.
Assessing compliance with AASB 13 would include, but is not limited to, determining whether:
►
8
The appraisal value contemplates that the asset is sold in an orderly transaction as at the
measurement date, taking into consideration current market conditions (i.e., a fair value
measurement inherently assumes that as of the measurement date market participants have
the knowledge and awareness of the asset that would be customary in a market transaction,
despite the fact that in actuality this process may not have yet begun).
Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
►
The principal market (or, in its absence, the most advantageous market) has been appropriately
considered.
►
Appropriate market participants (or characteristics of market participants) have been identified
and the assumptions that market participants would utilise in pricing the asset have been used.
►
Adjustments to valuation input data are (a) based on observable or unobservable inputs, or (b)
significant to the overall fair value measurement.
►
All appropriate valuation approaches and techniques have been used; if multiple valuation
techniques are used, the merits of each valuation technique and the underlying assumptions
embedded in each of the techniques should be considered in evaluating and assessing the
results.
►
Appropriate judgement has been applied in determining the highest and best use; in situations
where the highest and best use is not its current use, whether the expected future cash flows
associated with this use are appropriately adjusted for the cash out flows associated with the
transformation or renovation costs adjusted for a normal profit margin.
►
All relevant disclosures have been provided.
9.
Appropriate valuation techniques
AASB 13 does not prescribe which valuation technique must be used in a particular circumstance.
The valuation technique used to measure fair value should be appropriate for the circumstances,
and one for which sufficient data is available considering highest and best use and the valuation
premise.
In addition, AASB 13 does not prioritise the use of one valuation technique over another or require
the use of only one technique. Instead, the standard establishes a hierarchy for the inputs used in
those valuation techniques, requiring an entity to maximise observable inputs and minimise the use
of unobservable inputs (the fair value hierarchy).
The decision to use more than one valuation technique, or place more weight on one indication of
value over another, depends on the specific facts and circumstances. But, in all cases, a fair value
measurement should maximise the use of observable market inputs. When available, observable
market transactions should be considered in the determination of fair value, unless these
transactions are determined not to be orderly. The objective is to use the valuation technique (or
combination of valuation techniques) that is appropriate in the circumstances and for which there is
sufficient data.
The determination of the valuation technique(s) to be used requires significant judgement and will
be dependent on the specific characteristics of the asset or liability being measured and the
principal (or most advantageous) market in which market participants would transact for the asset
or liability.
AASB 13 recognises three valuation approaches to measure fair value:
►
Market approach: based on market transactions involving identical or similar assets or
liabilities.
►
Income approach: based on future amounts (e.g., cash flows or income and expenses) that are
converted (discounted) to a single present amount.
►
Cost approach: based on the amount required to replace the service potential of an asset.
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Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
9.1
Market approach
Extract from AASB 13
B5. The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and
liabilities, such as a business.
Valuation techniques consistent with the market approach use prices and other market data derived
from observed transactions for the same or similar assets. Assets used by NFP and public sector
entities, which also have a commercial use, are likely to be valued based on observable market
values considering the highest and best use requirements of AASB 13. For example, an office
building used for a public service or as an administration building by a government agency in close
proximity to other offices used for commercial purposes would be competing with commercial users
for that office space within the market. As a result the office building’s fair value could be
determined based on sales of comparable buildings.
On the other hand, specialised assets are rarely, if ever, exchanged between willing sellers and
willing buyers. In the public sector, such assets are normally only transferred between public sector
entities as part of restructure of administrative arrangements or transferred to the private sector as
part of a privatisation. The specialised features, whether they be the design, specification or
location of the asset mean that reliable comparisons can rarely be made with the prices of similar
assets in the market.
9.2
Income approach
Extract from AASB 13
B10. The income approach converts future amounts (eg cash flows or income and expenses) to a
single current (ie discounted) amount. When the income approach is used, the fair value
measurement reflects current market expectations about those future amounts.
B11. Those valuation techniques include, for example, the following:
(a) present value techniques...
(b) option pricing models...
A fair value measurement using the income approach will reflect current market expectations about
future cash flows or income and expenses.
For non-cash generating specialised public service assets, the valuation implication of the asset
being held or operated to provide a public service is that public services often either do not generate
income to the owner of the asset or if they do, that income is subsidised by public funds. As such,
application of an income approach to fair valuation may not be appropriate.
However certain specialised public service assets held by NFP and public service entities may be
operated and compete in a commercial environment (such as certain transport and utilities
infrastructure) and in those cases an income approach to valuation may be an appropriate valuation
approach as the assets are cash generating and a market participant could derive cash-flows from
the asset. The most common method under the income approach for assets held by NFP and public
service entities that generate cash flows is discounted cash flow (DCF).
A government owned business enterprise such as a power station held by a public sector entity
would typically be valued using the DCF approach. However, such an approach values, by default,
the underlying tangible and intangible assets and liabilities used as part of that business enterprise.
The underlying tangible assets such as land, buildings and plant & equipment could be valued using
either the market or cost approach as alternate methods if income is not generated from the asset.
10 Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
9.3
Cost approach
Extract from AASB 13
B8. The cost approach reflects the amount that would be required currently to replace the service
capacity of an asset (often referred to as current replacement cost).
B9. From the perspective of a market participant seller, the price that would be received for the
asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of
comparable utility, adjusted for obsolescence. That is because a market participant buyer would not
pay more for an asset than the amount for which it could replace the service capacity of that asset.
Obsolescence encompasses physical deterioration, functional (technological) obsolescence and
economic (external) obsolescence and is broader than depreciation for financial reporting purposes
(an allocation of historical cost) or tax purposes (using specified service lives). In many cases the
current replacement cost method is used to measure the fair value of tangible assets that are used
in combination with other assets or with other assets and liabilities.
AASB 13 refers to current replacement cost which uses various valuation methods based on cost as
the primary input and should not be confused with actual or historic cost. From the perspective of a
market participant seller, the price that would be received for the asset is based on the cost to a
market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted
for physical deterioration and all forms of obsolescence. This concept is broader than depreciation
for accounting or tax and considers physical deterioration, functional (which is generally internal to
the asset) or economic obsolescence (which is generally external to the asset).
The value of specialised public service assets are often measured using the cost approach. It is
normally used when there is no evidence of comparable assets or no identified income stream
generated by the asset. Examples could include fair valuations of hospitals, roads or libraries.
9.4
Other valuation concepts not compatible with fair value under
AASB 13
The IVSC Specialised Public Service Assets Valuation ED discusses the valuation concepts of
investment value and social services value. Investment value measures the benefits the NFP entity
can derive from an asset whilst social value refers to the potential economic impact of a public
service asset. These valuation concepts may be used by NFP entities for various purposes such as
management reporting and feasibility analysis, although they should not be included in the
determination of fair value under AASB 13. For example, an office space used as a soup kitchen
provides an immense value to the community although this value cannot be considered in the
valuation of the office space in its current use. Investment value would be a measure used by an
entity, such as target return on capital invested or various measures of the benefit the entity can
derive from the service provided. Such valuation techniques are not representative of a market
participant’s perspective and thus would not be used to measure fair value under AASB 13.
10. Applying the fair value hierarchy
When measuring fair value, an entity is required to maximise the use of relevant observable inputs
and minimise the use of unobservable inputs. AASB 13 includes a fair value hierarchy that
prioritises the inputs in a fair value measurement. The inputs used in measuring fair value drive
categorisation of the fair value measurement (as a whole) within the fair value hierarchy. Significant
differences in disclosure requirements apply to fair value measurements categorised within each
level of the hierarchy in order to provide users with insight into the reliability of the fair value
measurement.
11 Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
Table 1: Fair value hierarchy
Level 1
Quoted prices, which are not adjusted, in an active market for identical assets and liabilities
that the entity can access at the measurement date
Level 2
Inputs, other than quoted prices in Level 1, that are observable, either directly or indirectly
Level 3
Unobservable inputs
Regardless of whether the valuation was compiled internally or externally, management should
review and understand the inputs used in the valuation to determine the appropriate classification
of those inputs in the fair value hierarchy.
A quoted price will not be considered to be level 1 unless the market for the asset is active and the
quoted price is for an identical asset to that being valued. In most cases, fair value measurements of
non-financial assets, would be categorised as level 2 or 3 on the basis that it is rare for identical
assets to be actively traded.
Level 2 inputs include quoted prices (in non-active markets or in active markets for similar, but not
identical assets or liabilities), observable inputs other than quoted prices and inputs that are not
directly observable, but are corroborated by observable market data.
However, when an observable input is adjusted to reflect differences between the asset being valued
and the observed transaction, depending on the significance of the adjustment it may cause the
measurement to be categorised as a Level 3 measurement instead of a Level 2 measurement.
Possible examples of fair value measurements categorised within Level 2 might include:
►
A building used by a NFP entity where a sufficient number of comparable buildings (considering
architectural style, property size, location, permissible use) and a sufficient volume of recent
sales transactions prices could be observed
►
Equipment used in a research facility for which comparable equipment is available in the market
and there is a sufficient volume of recent sales transactions for which prices could be observed
Where the valuation is based on unobservable inputs, categorisation will be in level 3 of the fair
value hierarchy. Examples of such assets may include transport and utility infrastructure such as
electricity, gas and ports which could be valued based on the income approach using a discounted
cash flow method. Other examples would be a hospital or prison which could be valued using the
cost approach with appropriate adjustments to reflect the asset’s service potential.
When selecting the most appropriate inputs to a fair value measurement from multiple available
values, those that maximise the use of observable data, rather than unobservable data, must be
selected. Care should, therefore, be taken in using a cost approach to measure fair value without
appropriate consideration of the available observable inputs. Even in a market that is inactive, a NFP
or public sector entity should not presume that the transactions in that market do not represent fair
value or that the market is not orderly. Entities will need to consider the individual facts and
circumstances in making this assessment.
12 Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
11. Expanded disclosure requirements
The IASB significantly expanded the required disclosures related to fair value measurement to
enable users of financial statements to understand the valuation techniques and inputs used to
develop fair value measurements. For each of the disclosure requirements under AASB 13, Table 2
below indicates whether it is currently required under AAS. Although the table below focuses on a
comparison between the disclosure requirements in AASB 116 and AASB 13 and does not consider
any other standards where fair value disclosures may be currently required, it is important to note
that, in most cases where fair value is used or disclosed, the disclosure requirements have been
significantly expanded as compared to current requirements.
Table 2: Disclosure requirements
Disclosures
AASB 116
AASB 13
Fair value at the end of the reporting period


The methods and significant assumptions applied in estimating fair value
Note: The requirements included in AASB 116 have been expanded in AASB 13


Level of the fair value hierarchy within which the fair value measurement in its entirety is
categorised


For Level 2 and Level 3 measurements, valuation technique and the inputs used, and
changes in the valuation technique, if applicable, and the reasons for those changes


For Level 3 measurements, quantitative information regarding the significant unobservable
inputs


Amount of transfers between Level 1 and Level 2, the reasons and related accounting
policies


For Level 3 measurements, reconciliation from the opening balances to the closing balances
(including gains and losses, purchases, sales, issues, settlements, transfers in and out of
Level 3 and reasons and policies for transfer and where all such amounts are recognised)


For Level 3 measurements, the total gains or losses included in profit or loss that are
attributable to the change in unrealised gains or losses relating to those assets and liabilities
held at the reporting date, and a description of where such amounts are recognised


For Level 3 measurements, a description of the valuation processes used by the entity


For Level 3 measurements, a narrative description of the sensitivity of the fair value
measurement to changes in unobservable inputs if a change in those inputs might result in a
significantly different amount and, if applicable, a description of interrelationships between
those inputs and other unobservable inputs and of how they might magnify or mitigate the
effect of changes in the unobservable inputs


If the highest and best use of a non-financial asset differs from its current use, disclose that
fact and the reason for it


Given the specialised nature of many assets used in the NFP and public sector, it is considered that
fair value measurements categorised within level 3 of the hierarchy will be more prevalent and will,
therefore, require disclosure of a sensitivity analysis and a description of the interrelationship
between inputs of the fair value amount measured.
In addition, AASB 13 disclosures are required for each class of assets (and liabilities). AASB 13
requires these classes of assets (and liabilities) be determined based on:
a.
The nature, characteristics and risks of the asset or liability
b.
The level of the fair value hierarchy within which the fair value measurement is categorised
13 Implications for the not for profit and public sectors
AASB 13 Fair Value Measurement
October 2013
The determination of the appropriate class of assets for the purposes of disclosure will require
significant judgment. 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. As such, a class of assets and liabilities may require greater
disaggregation for the purposes of AASB 13 disclosure than the line items presented in the
statement of financial position or in the notes to the financial statements. For example, a public
sector entity may disclose buildings as a single class of asset in its property, plant and equipment
note, however the AASB 13 disclosures may be required for individual properties or groups of
properties if the level of the fair value hierarchy within which their fair value was measured is level 2
for some and level 3 for others.
However, the entity will be required to provide information sufficient to permit reconciliation to the
line items presented in the statement of financial position.
12. Final thoughts
While many of the concepts in AASB 13 are consistent with current practice, certain principles and
disclosure requirements could have a significant impact on NFP and public sector entities. Careful
consideration is required to identify situations in which there may be a significant change to current
practice.
NFP and public sector entities may be affected by AASB 13 in various aspects of their business as
detailed above in determining the fair value of specialised public service assets.
►
Implications of the ‘highest and best use’ concept
►
Measuring the fair value of specialised public service assets
►
Changes to valuation methods and their application
►
Understanding valuations provided by valuation agents
►
Compiling and disclosing information on the fair value of assets and liabilities including but not
limited to significant assumptions, adjustments to unobservable inputs and qualitative and
quantitative sensitivity analysis
Key contacts
National
Michael Wright
Oceania Managing Partner Assurance
Tel: +61 2 8295 6450
Lynda Tomkins
Australian IFRS Leader
Tel: +61 7 3243 3711
Adelaide
Mark Phelps
Tel: +61 8 8417 1660
Brisbane
Mark Hayward
Tel: +61 7 3011 3385
Canberra
James Palmer
Tel: +61 2 6246 1520
Melbourne
Glenn Carmody
Tel: +61 3 9288 8467
14 Implications for the not for profit and public sectors
Sydney
John Robinson
Tel: +61 2 8295 6536
Perth
Greg Meyerowitz
Tel: +61 8 9429 2225
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