Asset Management

Greenfield Valuations

  • 1.  Greenfield Valuations

    Posted 13 February 2018 19:28
    ​Hello Mates,

    I understand that this topic has been discussed many times before on this thread, Taking the view from a rural local government environment in northern Victoria;

    We are currently reviewing our Asset Valuation/Revaluation Policy. As we are required to report on assets based on their greenfield rate, We are finding it difficult to justify specific asset costings without hard evidence.

    The majority of our internal capital projects are based around renewal, With minimal new or upgrade works occurring each year. The most definitive source for greenfield rates we acquire at Council are through bill of quantity sheets from private developments occurring throughout the year which we receive as part of the handover process.

    The sheets are extremely useful in sense, but we are falling over when obtaining costs for less frequently developed infrastructure. A new subdivision can have sufficient amounts of concrete footpaths, asphalt wearing course, 900x600 Side Entry Pits and 300mm Reinforced concrete stormwater mains. Has any organisation found a way of representing less commonly acquired assets values via a greenfield methodology?, How often would you have sufficient evidence to back up acquiring a Gravel Road, Gross Pollutant Trap or Swimming Pool shell for example.

    (BTW I'm avoiding the answer of Rawlinson's at this stage....If we do venture down this path have you find auditors find that solely referencing values from the document is adequate?)

    Thanks mates, Any advice or experiences in this matter is greatly appreciated,

    Thanks



    ------------------------------
    Des Martin
    Asset Analyst
    d.martin@campaspe.vic.gov.au
    Campaspe Shire Council
    ECHUCA VIC
    ------------------------------
    BlogPageSpacerBlank


  • 2.  RE: Greenfield Valuations

    Posted 15 February 2018 18:55
    ​Hi Des

    We also often strike this problem.

    The reality is that you will often not be able to source a reliable evidence based current rate for your particular location.  Often project/procurement information is several years out of date, not available, the item in question is not a representative rate, or not contemporary to the situation.

    We have adopted a priority of method for calculating rates which we identify and document in the valuation report so the auditors and future assessors can have some idea of the confidence in the rate.

    1.  Rates calculated from current or recent project or tenders - note 1
    2.  Current rates sourced from reputable contractors, etc for specific request - note 1
    3.  Rates obtained from older projects or tenders allowing for a CPI factor -note 1
    4.  Rates obtained from contemporary organisations and situations (e.g. neighbouring local governments) possibly with an adjustment factor
    5.  Rates obtained from industry guides, possibly with regional adjustments
    6.  Rates calculated from first principles/construction estimates

    Note 1 - Using sound judgement about project type, scope; discarding inappropriate outlier results from atypical works, and preferably based on a weighted average across multiple projects.

    In most instances these rates are accepted without question and the qualification on source/accuracy is appreciated.  In some instances our open reporting has triggered a healthy dialogue about how the rate is calculated, whether it is appropriate, potential alternate sources of information and possible error.  The key here is that all parties understand the quality of the evidence, we can substantiate the evidence to that stated level and an informed opinion can be made on whether this is sufficient.

    Industry guides (e.g. Rawlinsons) tend not to accurately reflect circumstance, regional issues and inflation factors but if there are no alternatives you have to use them and it is not difficult to compare rates you can reliably derive from project data to the comparable rates in the industry guide in order to evidentially derive a regional adjustment factor.

    It's worth noting that the purpose of the valuation is to provide a statement on the financial position of the Council, not a precise construction estimate for a particular asset.  Therefore the focus is on statistically reliable estimates.  Isolating and separately valuing assets and asset groups for which statistical norms do not apply in a material way is also important.

    I am surprised that you are using Greenfields rates rather than brownfields rates because the Fair Value Accounting is usually interpreted to reflect the true cost of replacement in todays dollars and todays situation.




    BlogPageSpacerBlank


  • 3.  RE: Greenfield Valuations

    Posted 18 February 2018 17:53
    In my personal experience, asset valuation was always the most difficult part of the process. You can do it from bottom-up or top-down and find they give quite different answers. Using a bottom-up approach, using bills of quantity, will usually give a gross underestimate (IMHO) as it takes little account of the other factors which are involved. Top-down is usually more accurate but more difficult to get reliable information on unless you have similar projects which are complete. Either way, the valuations in AM should only ever be a guide.
    BlogPageSpacerBlank


  • 4.  RE: Greenfield Valuations

    Posted 15 February 2018 18:55

    Hi Des,

    I would look to develop a unit rate from either first principles using your own contractors schedule or rates and/or internal rates for labour, materials, equipment etc. Failing that I would then look to using the Rawlinsons. Whatever method you end up using I would include your asset custodians and ensure that they are also in agreement with the rates that you have derived.

    However my main reason for responding is a bit more of a side note leading from your question……..

    I am curious to know for your renewal capital projects (when the assets replaced are like for like) whether the costs of demolishing and removing the original asset are being capitalised (included in the cost of the new asset(s))?

    If those costs are included in the cost of the new asset then it seems a bit ironic to then revalue the assets using Greenfields assumptions without demolition and disposal costs included. If they are not being included then I would have thought they should not be capitalised from the outset?

    I would be interested to hear from other councils if they are including demolition and disposal cost in the new asset(s) cost and then not including those costs when revaluing using Greenfields Assumption?

    Regards,

    John.


    BlogPageSpacerBlank


  • 5.  RE: Greenfield Valuations

    Posted 18 February 2018 17:52
    ​Thanks for your replies Graham and John.

    I was under the impression that in Victoria it was a requirement to value Infrastructure assets using greenfield rates (As per the guidance notes: https://www.localgovernment.vic.gov.au/__data/assets/pdf_file/0020/48611/0706-01FairValueAsset.pdf) Happy to be told if I am misinterpreting this though

    It is quite ironic John, but the costs of demolition and disposal of assets  are being included in our renewal costs. Effectively we are capitalising assets at Brownfield rates whilst revaluing at Greenfields.


    Keen to hear others takes on this matter also.




    ------------------------------
    Des Martin
    Asset Analyst
    d.martin@campaspe.vic.gov.au
    Campaspe Shire Council
    ECHUCA VIC
    ------------------------------

    BlogPageSpacerBlank


  • 6.  RE: Greenfield Valuations

    Posted 20 February 2018 17:39
    It is all part of the games played in the reporting spheres.
    Greenfields helps make the value smaller for ROA calculations and reduces the depreciation, but are really fake values.
    Brownfields is what we need to replace and therefore the average annual annuity of a 25 year renewal program is the real money needed and therefore the true depreciation we need to fund.
    This is what good asset managers need to stress and report on.
    Regards
    BlogPageSpacerBlank


  • 7.  RE: Greenfield Valuations

    Posted 20 February 2018 18:33
    Interesting topic, would be keen to know what definition of value is being discussed? If Fair Value, how do Councils reconcile their choice of greenfield or brownfield site analysis into the following definition of Fair Value?

    ". . .  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."

    In the world of valuation (rather than asset management), brownfield costs only tend to come into play when replacement is within an accepted financial horizon.

    ------------------------------
    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    02 9025 3788
    solutions@liquidpacific.com
    ------------------------------

    BlogPageSpacerBlank


  • 8.  RE: Greenfield Valuations

    Posted 21 February 2018 22:52
    ​Greenfields/Brownfields are interesting concepts, and from my recollection, do not rate a mention in the Accounting Standards for good reason.

    For mine, I would use "Greenfields" when developing a budget for a new asset on a new site. I would use "Brownfields" for all of my Asset Management revaluations for the renewal of those assets, and inclusion in my long term financial plans. I would capitalize that asset created on the new site at its "Greenfields" actual cost of construction, but come the first revaluation, it would be revalued at "Brownfields".

    There will still remain budget issues, that will never change, but it certainly provides a great start for your LTFP.
    BlogPageSpacerBlank


  • 9.  RE: Greenfield Valuations

    Posted 22 February 2018 21:16
    Hi Matt,

    Your comments are well reasoned, however it doesn't shed anymore light on whether the use of fair value, as defined by accounting standards, is the appropriate measure for what you are seeking to determine.

    As you rightly point out, AASB 116 requires entities to initially recognise assets at their cost and then revalue to fair value at the next revaluation date (assuming the entity adopts the revaluation model).

    However, if your requirement is to establish a sinking fund for asset replacement, which I think it is (and if not, then the rest of this narrative won't make sense), you would be right to adopt a brownfields scenario for revaluation. Factoring in the costs of future demolition, disposal and any other allowances for renewal as part of your cost base would make sense as these costs need to be funded into the future

    But, by increasing your cost base and using this for future depreciation, effectively increases your asset value based on a future liability (assuming you adopt the cost approach as a valuation method), which doesn't make sense in a fair value concept. In a fair value calculation, the future costs of renewal (as allocated to brownfileld sites) are deducted from the fair value of the asset as the liability begins to emerge over time (again, within an accepted financial horizon).

    And worth remembering, the majority of land values are based on brownfield sites (i.e. already reflect costs to demolish existing assets).


    ------------------------------
    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    02 9025 3788
    solutions@liquidpacific.com
    ------------------------------

    BlogPageSpacerBlank


  • 10.  RE: Greenfield Valuations

    Posted 25 February 2018 16:09
    Confusion reigns - and I can't help thinking that the official advice and manuals on the subject are part of the problem. If a common sense approach is taken then all is clear:

    The value of greenfield land is that which the market will pay to acquire it, subject to whatever consents are required.

    The value of a brownfield site is the same as for a greenfield site less the cost of remediation. This is often greater than the greenfield value thus giving a negative value for the site.
    BlogPageSpacerBlank