Asset Management

CPA Australia valuation and depreciation guide

  • 1.  CPA Australia valuation and depreciation guide

    Posted 03 December 2013 23:14

    Much, not so subtle promotion has been made of the CPA's publication valuation and depreciation guide in this forum, supposedly a pre-eminent source of information for members who need guidance to valuation. The Australian Property Institute, the industry regulating body for valuers in Australia, was asked by the CPA to review this work during its drafting and was highly critical of its content and the concepts presented therein.

    IPWEA Members should be aware the article is an accounting publication and not the work of valuation professionals or it would seem, endorsed by them.

    -------------------------------------------
    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    www.liquidpacific.com
    -------------------------------------------
    BlogPageSpacerBlank


  • 2.  RE:CPA Australia valuation and depreciation guide

    Posted 04 December 2013 21:45
    IPWEA also made a submission on the draft CPA guidelines with several concerns.

    The Forum should note that there are alternative views and references other than the CPA Guide (authored by David Edgerton), e.g., IPWEA's own Australian Infrastructure Financial Management Guidelines (AIFMG's).

    -------------------------------------------
    Chris Champion
    CEO, IPWEA Australasia
    Sydney NSW

    -------------------------------------------






    BlogPageSpacerBlank


  • 3.  RE:CPA Australia valuation and depreciation guide

    Posted 04 December 2013 22:07
    Interesting statement Martin. Clearly you would prefer to adopt valuation approaches that are not consistent with the guidance provided by  Australia's leading accounting body (CPA Australia).

    The reality of course is that valuers are required to be registered in most jurisdictions under specific legislation. However the legislation typically provides that their area of expertise is limited to either the determination of regulatory or market value assessments of land. This of course is far different from the financial statement valuations of the range of buildings and infrastructure controlled by public sector entities which are not valued at market but at Fair Value under the accounting standards. I would agree that API is the pre-emminent body to be providing guidance on the valuation of freehold land but question whether they would be in a better position than CPA Australia to provide guidance on accounting standards. It would be like accountants trying to tell how engineers how to test the loading capacity of a bridge.

    Just as their are accountants that sepcialise in tax and audit and engineers that specialise in road design and environmental planning there is a difference between valuers who specialise in mortgage finance valuations and financial reporting valuations. Unfortunately I think with the flow on from the GFC that there are many people trying to provide professional services in areas where they might not actually have the necessary skills or expertise. Hence the need for the professional body (CPA Australia) to provide such guidance on a highly specialised and technical field. And if you donlt think this is a complex and techncial area you only eed to see the wide range of questions asked in this forum.

    The reality is that the requirement relating to financial statement valuations are set out under the various (12 +) accounting standards and require extensive knowledge of the various standards, basic on conclusions, illustrative examples and the overlying accounting conceptuial framework. It is worth noting that the definition of what is an asset is currently under debate in the accounting profession. As the valuations are subject to external audit it is also good the have an extensive understanding of the various auditing standards and the way auditors obtain assurance over their assertions.

    You are correct that API and a range of the Valuers-General were asked to particpate in the CPA Australia guide. They provided a range of input and all the input was reviewed and taken on board by the project team. It is important to stress that with any guide there will always be differing opions. Some received from valuers was negative and some was very possitive. However each piece of feedback was assessed by the project team and evaluated against the accounting standards and good practice. This is why CPA Australia provided for an extensive public consultation period and included a range of experts in the process (such as AASB members, big accountign firms, auditors-general, international accounting bodies, etc) as well as having a formal peer review process with a former member of the AASB.The guide has been deliberatley written to provide balance and pragmatism while reinforcing the actual requirements of the accounting standards. 

    Ultimately the requirements for financial statement valuations are governed by the accountign standards and CPA Australia as Australia' leading accounting body is the appropriate body to provide guidance on the interpretation of the accounting standards. Ideally all valuation should be undertaken as a multi-disciplinary approach where the expertise of engineers, accountants and valuers are harnessed to ensure a qulity and cost effective outcome. 

    You may also not be aware that the publication was not just a project of CPA Australia. it was actually a joint publication with the Australian Asset Management Collaborative Group (AAMCoG) which is comprised of a range of peak bodies.

    [IPWEA CEO Note: For clarification, David Edgerton is the author of the CPA Guide. AAMCoG is not representative of IPWEA or some other relevant peak bodies.] 

    -------------------------------------------
    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

    -------------------------------------------






    BlogPageSpacerBlank


  • 4.  RE:CPA Australia valuation and depreciation guide

    Posted 06 December 2013 19:11

    Hi David,

    My comments were made for the benefit of 'the forum' and to highlight that just because the CPA issues a publication, its content does not necessarily reflect the opinions of industry participants or other relevant professional bodies.

    -------------------------------------------
    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    (www.liquidpacific.com)
    -------------------------------------------






    BlogPageSpacerBlank


  • 5.  RE:CPA Australia valuation and depreciation guide

    Posted 08 December 2013 00:41

    Good to know Martin and thanks for the perspective. I imagine that many publications or industry bodies have their detractors or supporters for varied reasons just as this one appears to do. It's up to each of us to assess these things and draw our own conclusions.

    -------------------------------------------
    Rob Didcoe
    Director Facilities and Camps
    Department of Sport and Recreation WA
    Perth

    -------------------------------------------






    BlogPageSpacerBlank


  • 6.  RE:CPA Australia valuation and depreciation guide

    Posted 08 December 2013 05:30
    Back in the 1990s I was working in a South Asian country with a fellow water engineer who was somewhat frustrated with his lot. He was responsible for the water supply to a large area which included a village system which was not working as the pump had failed disastrously. He went through the procurement procedures to replace the pump as quickly as possible as the local politicians were on his back. He had a replacement specified and sourced; he only needed to get the cheque signed to complete the purchase. The Finance Director needed to get confirmation from the Chief Accountant before signing it. The Accountant looked in his books and found that the pump had been installed ten years ago with an asset life of twelve years. He informed the Engineer that he could have the new pump in two years time when the old one was written off.

    You've heard it before but I can't resist repeating it - Some (very well qualified) people know the cost of everything and the value of nothing.

    -------------------------------------------
    Peter Styles
    Kingsbury

    -------------------------------------------






    BlogPageSpacerBlank


  • 7.  RE:CPA Australia valuation and depreciation guide

    Posted 05 December 2013 00:55
    The CPA publication on valuation and depreciation DOES NOT deal with valuation issues per se and DOES NOT claim to do so. 

    The valuation of assets requires input from relevant professionals, which includes, but is not limited to, professional valuers.  There are many people within private and public organisations who are eminently capable of providing asset valuations, reinforcing my experience that professional valuers decline to value certain assets, as they do not have the necessary expertise to do so.  Professionals must know their limits and NOT carry out work that is outside their professional expertise.  Sadly, I have seen reports produced by professional valuers that are clearly wrong, e.g. using linear measures to value certain infrastructure assets when the relevant metric should have been an area measure or not properly adjusting useful lives and residual values when an asset continues to provide service.  Accountants are not free from making  similar errors - e.g. not properly adjusting useful lives and residual values when an asset continues to provide service. 

    Accountants are responsible for providing information which presents a true and fair view of an entity's financial performance and position and asset values form part of the information.  Accounting standards have been created to ensure that there is a consistent approach to the presentation of financial information.  Accounting standards clearly set out how valuations should be dealt with, indicating what may be included in the valuation of an asset, how changes in valuations and accounting estimates related to valuations should be dealt with.  But they are NOT standards on valuation and don't pretend to be.

    Yes, IPWEA members should be aware that the CPA publication on valuation and depreciation is an accounting publication.  Just as accountants should be aware that asset managers, engineers, architects and other professional and technical staff have a much better handle on asset values, asset useful lives and asset residual values than accountants.  It is the accountant's responsibility to 'keep the score' by using the information provided by other competent staff  and consultants (including IPWEA members) to set out the reality of the financial position regarding assets - I stress the reality, not some ideal or target.


    -------------------------------------------
    David Hope
    Principal Consultant
    Skilmar Systems Pty Ltd
    Beaumont SAau

    -------------------------------------------






    BlogPageSpacerBlank


  • 8.  RE:CPA Australia valuation and depreciation guide

    Posted 06 December 2013 19:13

    Hi David,

    Great to hear your input. 

    Still hoping you can supply us with the residual value on building evidence which was sought in prior posts. Having surveyed over 300 councils we are yet to obtain any and as you said you had this evidence gained through your own work experience we'd be keen to get that from you.

     -------------------------------------------
    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    (www.liquidpacific.com)
    -------------------------------------------



    BlogPageSpacerBlank


  • 9.  RE:CPA Australia valuation and depreciation guide

    Posted 08 December 2013 00:41

    The thing about valuation for financial reporting is that it should reflect the reality of the specific entity. The assumptions should be based on the entity's experience and supported by their asset management plans. This is where we usually obtain the evidence. I often wonder what evidence is provided to support critical assumptions like useful life. This is of particular concern if it is a critical assumption and there is no relationship between the level of remaining service potential and its age or theoretical economic life.

    Lke all valuation there is scope for flexibility and proffesional judgement and subsequently there may different approaches to solving the same question. Rather than look and argue over specific assumptions you first need to look at the overall methodology and then consider how the assumptions fit within that framework.

    What s important is whether the result makes sense and reflects a true and fair view. For example if an entity spends $6 million on a new faciity and the valuer says it is not worth anything suggests the underlying methodology might be flawed. With accounting standards substance always rules over form.


    -------------------------------------------
    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

    -------------------------------------------






    BlogPageSpacerBlank


  • 10.  RE:CPA Australia valuation and depreciation guide

    Posted 09 December 2013 00:35
    Valuers have always known that the value of an asset has nothing to do with who owns it but as this is not always apparent to the accounting profession the AASB incorporated it into their own Standards, just to make sure;

    "An entity's intention to hold the asset or to settle or otherwise fulfil the liability is not relevant when measuring fair value because fair value is a market-based measurement, not an entity-specific measurement."

    ------------------------------------------
    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW

    -------------------------------------------






    BlogPageSpacerBlank


  • 11.  RE:CPA Australia valuation and depreciation guide

    Posted 09 December 2013 00:36

    A bit of an R&D perspective on evidence and assumptions ...

    You can interpret facts (e.g. evidence) and come up with conclusions.

    Assumptions are often made when there is an absence of evidence or knowledge.

    It is VERY important to know when and why assumptions have been made.

    Time, or the collection of evidence, can be used to validate assumptions.

    If facts are known up front, you should aim for forecasts (rather than assumptions).

    PS - monitoring, validating, and reviewing your assumptions should be non-negotiable.

    -------------------------------------------
    [Thomas] [Kuen]
    [Manager. Asset Management Research]
    [Melbourne Water]
    [Docklands] [VIC]
    -------------------------------------------






    BlogPageSpacerBlank