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There is no requirement under the Accounting Standards to have an external valuation for assets held at fair value, however it is usual practice for councils to obtain an independent comprehensive valuation on a periodic basis performed either by council or external valuers.  Where external valuers are being used for 30 June 2020 reporting periods, we expect to see greater comments in their reports surrounding significant uncertainties in their valuations.

Some of the challenges in assessing fair value during the current conditions are:

  • Lack of market transactions providing indications on current values
  • Given the uncertainties, transactions occurring pre-COVID-19 are no longer relevant
  • Physical inspections of assets may not be able to occur due to restrictions.
  • Whether the changed environment has resulted in any infrastructure, property, plant and equipment having excess capacity based on revised expectations of future demand – this may cause an obsolescence adjustment.
  • Relevant contingent factors - assessments regarding future events and assumptions that may not have been key in the past, but may now be critical and highly sensitive to a variety of changes and variables.

Assets valued using the income approach

For assets that are valued using income approach with discounted cash flows (e.g. airports, investment property, caravan parks, leisure centres) – there are additional risks for cash flows and discount rates (if used in the valuation technique) which are difficult to quantify including:

  • Whether tenants will be able to continue to pay existing rent – significant number of rent deferrals and reductions
  • Interpretation of rental terms may mean that some tenants have ceased payments as they believe contracts are no longer enforceable
  • Impact of ongoing travel restrictions or attitudes once restrictions are lifted
  • COVID-19 impact on major customers / users of the services
  • Future rental levels are uncertain
  • Future vacancy levels as changes to working practices are made.

The current uncertainty around future events means we are yet to know the full impact on entities. If any council assets are measured using a discounted cash flow approach, cash flows will need to be based on a number of probability weighted scenarios, including a significant adverse downside.

Assets valued using the cost approach

Where assets are valued using the cost approach, the impact is likely to be less significant, as the key inputs to this approach are cost, condition and remaining useful life. There is unlikely to be significant changes to these inputs. There may be some short-term impacts due to shortages of materials or specialist labour however, the cost approach should reflect typical and sustainable market conditions and therefore, short-term fluctuations should be adjusted by valuers.

Assessment of valuation report

Councils and auditors need to read the valuers report and understand and challenge the judgements, estimates and assumptions made by valuers in providing their assessment of fair value (regardless of whether an external or internal valuation has been performed). The following should be considered in assessing the valuation report:

  • the valuation approach taken by the valuer
  • the level of uncertainty in the valuation
  • how the key challenges arising from the current circumstances have been dealt with in the valuation
  • any exclusions, caveats or qualifications to the valuation
  • the valuer’s discussion of significant uncertainties or risks to the valuation and
  • whether the valuation is in compliance with AASB 13 Fair Value Measurement.

There are concerns that some valuers may be more inclined to provide a valuation range rather than a single value. For financial reporting purposes, a range is not acceptable and councils should ensure this concern is covered in preliminary discussions with whomever is performing the valuation.  If the valuer chooses to provide a range of values it is expected they also use professional judgement to select a figure within the range for Council to use in their financial statements.

Fair value cannot be reliably determined

If Council, after engaging a valuer, concludes that fair value cannot be reliably determined, then it is important to engage with the auditor as soon as possible and explain the valuer’s rationale.

Where fair value cannot be determined, significant disclosures are required in the financial statement and there may be some impact on the auditor’s report. Additionally, significant uncertainties, exclusions and caveats in a valuation report may also warrant mention in the auditor’s report.