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TREASURY:1016649V1
Valuation Guidance forProperty, Plant and Equipment,
Including Specialised Items inthe Health and Education
Sectors
2007
Prepared by
Wareham Cameron & Co Ltd,
Rider Levett Bucknall &The Treasury
First Published 2002
Previously Revised 2003
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Table of Contents
Introduction..........................................................................................................................1
Background..........................................................................................................................2
Crown accounting policies ...................................................................................................3
Section 1: Financial reporting and valuation standards ......................................................5
Section 2: Asset classification and valuation methodology...............................................14
Section 3: Valuations in the health and education sectors specific considerations........27
Section 4: Instructing and liaising with valuers..................................................................36
Appendix A: Specific guidance for assessing the replacement cost of health andeducation buildings ............................................................................................................38
Appendix B: Worked example of a depreciated replacement cost calculation..................60
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
INCLUDING SPECIALISED ITEMS IN THE HEALTH AND EDUCATION SECTORS 1
Introduction
These guidelines have been prepared by Treasury to assist public sector reporting entities and
their valuers (and particularly those within the health and education sectors) to comply with the
valuation requirements of the New Zealand Equivalent to International Accounting Standard 16:
Property Plant and Equipment(NZ IAS 16) and Crown accounting policies in relation to NZ IAS 16.
They are also intended to help achieve consistency in such valuations. These guidelines
predominantly focus on specialised items of property, plant and equipment (which are the majorityof assets in the health and education sectors). These comprise assets that are not regularly
bought and sold in the market.
The format of these guidelines is as follows:
Background Outlines the purpose of this guidance.
Crown accounting policies Details Crown accounting policies for the revaluation of items of
property, plant and equipment in the health and education sectors.
Section 1:Financial reporting and
valuation standards
Details the valuation requirements of NZ IAS 16 and the PropertyInstitute of New Zealands (PINZ) valuation standards as contained in
the fifth edition of Professional Practice (which now adopt International
Valuation Standards issued by the International Valuation Standards
Committee (IVSC)).
Section 2:
Asset class if ication and
valuation methodologies
Overviews asset classification and the valuation methodologies that are
appropriate for property, plant and equipment, explaining the depreciated
replacement cost approach in detail. This section and Section 1 outline
generic (i.e. non-sector specific) requirements and the guidance they
contain applies to all items of property, plant and equipment.
Section 3:
Valuations in the health and
education sectors
Considers specific issues and requirements relevant to the health and
education sectors, with a focus on specialised property and the
application of the depreciated replacement cost approach to valuation.
This section also provides indicative parameters for the values/costs
and useful lives of items of property, plant and equipment commonly
found in the health and education sectors.
Section 4:
Instruction and liaising with
valuers
Provides guidance for engaging and liaising with valuers and identifies
audit requirements.
Appendices
Appendix A Provides specific guidance for the assessment of the replacement
cost of buildings in the health and education sectors.
Appendix B Provides a worked example of a depreciated replacement cost calculation.
Section 1 outlines the requirements of Financial Reporting and Valuation Standards. Financial
Reporting Standards are mandatory. Valuation Standards and Applications as set out in PINZ
Professional Practice are mandatory for PINZ members. Care has been taken in writing these
guidelines to ensure they accurately reflect the requirements of Financial Reporting and ValuationStandards. However, if there is a conflict between these guidelines and the Financial Reporting
and Valuation Standards, then the provisions of the standards shall prevail.
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
2 INCLUDING SPECIALISED ITEMS IN THE HEALTH AND EDUCATION SECTORS
The application of the Depreciated Replacement Cost methodology discussed in Section 2 is
recommended practice. It is acknowledged that there may be variations depending on the
judgement of the valuer.
The indicative parameters for costs and lives contained in Section 3 (and Appendix A) are considered
to be reflective of the market at the time the costing guidelines were prepared (as at 1 May 2007).
Indexing may be required to reflect price changes to the applicable valuation date. Furthermore, the
parameters represent yard-sticks and specific asset, market and/or owner circumstances may lead tothe adoption of assumptions outside of the parameters contained in the guidance.
It is the responsibility of the valuer to exercise professional judgement in his/her valuation
assessment. The methodology adopted by the valuer together with any material departures from
the guidance should be fully reasoned and explained.
Health and education asset values are generally inextricably linked to entity operations.
Consequently, valuers and the management of these organisations need to work closely in
discussing key assumptions for the valuation. Such information exchanges and interaction should
occur throughout the valuation process.
For public sector reporting entities, further information on these valuation guidelines or the
valuation process should be directed in the first instance to your Vote Analyst. Alternatively,
enquiries may be directed to Treasurys Accounting Policy Team.
Background
Public sector entities follow generally accepted accounting practice, which means that, in the first
instance, they apply New Zealand financial reporting standards, which from 2007 are
predominantly made up of New Zealand International Financial Reporting Standards (NZ IFRS). In
the absence of a New Zealand financial reporting standard for a transaction or event, public sectorentities should use professional judgement, as guided by NZ IAS 8: Accounting Policies, Changed
in Accounting Estimates and Errors (paragraphs 7 to 12), to determine which of the available
sources of authoritative support to apply.
It is the responsibility of public sector entities to develop appropriate accounting policies for
reporting purposes. Guidance on the factors to consider when developing such policies is
provided in Treasury Instructions.
The Government will comply with the requirements of NZ IAS 16 in its financial statements for the
periods beginning or after 1 July 2007. All entities preparing financial information for the financial
statements of Government from that period onwards will be required to ensure that the informationthey provide complies with NZ IAS 16 and Crown accounting policies in relation to NZ IAS 16.
Treasury considers that there should be consistency in the valuation of specialised items of
property, plant and equipment, such as those held by public sector entities in the health and
education sectors, and that such consistency, and lower transaction costs, is likely to be achieved
if detailed valuation guidance is provided. For those reasons, Treasury has commissioned this
guidance on the valuation requirements of NZ IAS 16. This revised 2007 edition updates previous
guidance based on FRS-3 Accounting for Property, Plant and Equipment. The original guidelines
were produced with stakeholder input to ensure that stakeholders information needs were met and
that the guidance produced was fully utilised.
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
INCLUDING SPECIALISED ITEMS IN THE HEALTH AND EDUCATION SECTORS 3
Crown accounting policies
Current Crown accounting policies are provided in Treasury Instructions. It is the responsibility of
all entities preparing financial information for the Crown financial statements to ensure that they
provide such information in accordance with current Crown accounting policies, as detailed in
Treasury Instructions.
At the time of release of this guidance, Crown accounting policies in relation to items of property,plant and equipment are as per the table below:
Class of PPE Accounting policy
Land & Buildings Land and buildings are recorded at fair value less impairment losses and, for buildings, less
depreciation accumulated since the assets were last revalued.
Valuations undertaken in accordance with standards issued by the Property Institute of
New Zealand are used where available.
Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998 may be
used if they have been confirmed as appropriate by an independent valuer.When revaluing buildings, there must be componentisation to the level required to ensure
adequate representation of the material components of the buildings. At a minimum, this
requires componentisation to three levels - structure, building services and fit-out.
Specialist Military
Equipment
Specialist military equipment is recorded at fair value (which is determined using
depreciated replacement cost) less depreciation and impairment losses accumulated since
the assets were last revalued.
Valuations are obtained through specialist assessment by New Zealand Defence Force
advisers, and the bases of these valuations are confirmed as appropriate by an
independent valuer.
State Highways State highways are recorded at fair value (which is determined using depreciated
replacement cost) less depreciation and impairment losses accumulated since the assets
were last revalued. Land associated with the state highways is valued using an opportunity
cost based on adjacent use, as an approximation to fair value.
Aircraft Aircraft (excluding Specialised Military Equipment) are recorded at fair value less
depreciation and impairment losses accumulated since the assets were last revalued.
Electricity Distribution Electricity distribution network assets are recorded at cost, less accumulated depreciation
and accumulated impairment losses.
Electricity Generation Electricity generation assets are recorded at fair value less depreciation and impairment
losses accumulated since the assets were last revalued.
Other PPE Other property, plant and equipment, which include motor vehicles and office equipment,
are recorded at cost less accumulated depreciation and accumulated impairment losses.
Specified cultural and
heritage assets
Specified cultural and heritage assets comprise national parks, conservation areas and
related recreational facilities, as well as National Archives holdings and the collections of
the National Library, Parliamentary Library and Te Papa. Such physical assets are
recorded at fair value less subsequent impairment losses and, for non-land assets, less
subsequent accumulated depreciation.
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
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Section 1: Financial reporting and valuation standards
This section details the requirements for valuations of property, plant and equipment in accordance
with NZ IAS: Property, Plant and Equipment (NZ IAS 16) and relevant Property Institute of New
Zealand (PINZ) standards, applications and guidelines. Where additional explanation is required
readers are referred to NZ IAS 16 or the relevant PINZ material within Professional Practice.
Financial reporting standards:NZ IAS 16: Property, Plant and Equipment
NZ IAS 16: Property, Plant and Equipmentrequires that an item of property, plant and equipment
that qualifies for recognition as an asset shall initially be measured at its cost. Cost is deemed to
be at fair value where it is acquired at no cost or nominal value (NZ IAS 16.15 and NZ IAS
16.15.1). After initial recognition, a reporting entity shall choose either the cost model or the
revaluation model as its accounting policy, and shall apply that policy to an entire class of property,
plant and equipment. (NZ IAS 16 para. 29)
Under the revaluation model, after recognition as an asset, an item of property, plant andequipment whose fair value can be measured reliably shall be carried at a revalued amount, being
its fair value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity
to ensure that the carrying amount does not differ materially from that which would be determined
using fair value at the balance sheet date. (NZ IAS 16 para. 31)
Valuations shall be conducted either:
a by an experienced valuer, or
b where the entity employs a person sufficiently experienced to conduct a valuation, by thatperson, so long as the valuation has been subject to review by an independent valuer. (NZ IAS
16 para. 35.1-3)
For plant and equipment, where there is an active market or readily available price indices that
establish the items fair value with reasonable reliability1, the valuation need not be conducted or
reviewed by an independent valuer or experienced employee. (NZ IAS 16 para 35.3)
If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued. (NZ IAS 16 para 36)
NZ IAS 16 also provides the following definitions and guidance:
Fair value
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arms length transaction. (NZ IAS 16 para 6).
The fair value of land and buildings is usually determined from market-based evidence by appraisal
that is normally undertaken by professionally qualified valuers. The fair value of items of plant and
equipment is usually their market value determined by appraisal. (NZ IAS 16 para 32)
1 Such a valuation is not applicable where depreciated replacement cost is the most appropriate basis for
determination of the fair value of an item of plant and equipment
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
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If there is no market-based evidence of fair value because of the specialised nature of the item of
property, plant and equipment and the item is rarely sold, except as part of a continuing business,
an entity may need to estimate fair value using an income or a depreciated replacement cost
approach. (NZ IAS 16 para 33)
Depreciated replacement cost
Depreciated replacement cost is a method of valuation that is based on an estimate of:
a in the case of property:
i the fair value of land; plus
ii the current gross replacement costs of improvements less allowances for physical
deterioration, and optimisation for obsolescence and relevant surplus capacity,
b in the case of plant and equipment owned by public benefit entities, the current gross
replacement cost less allowances for physical deterioration, and optimisation for obsolescence
and relevant surplus capacity. (NZ IAS 16 para.33.1)
Revaluation frequency2
The frequency of revaluations depends upon the changes in fair values of the items of property,
plant and equipment being revalued. When the fair value of a revalued asset differs materially from
its carrying amount, a further revaluation is required. Some items of property, plant and equipment
experience significant and volatile changes in fair value, thus necessitating annual revaluation.
Such frequent revaluations are unnecessary for items of property, plant and equipment with only
insignificant changes in fair value. Instead, it may be necessary to revalue the item only every
three or five years. (NZ IAS 16 para 34)
Independent valuer
The fair value of property, plant and equipment is determined or reviewed by an independent
valuer who holds a recognised and relevant professional qualification and who has recent
experience in the location and category of the property plant and equipment being valued. (NZ IAS
16 para 35.2).
Disclosure is required in respect of each valuation conducted:
the name of each valuer
a statement in respect of each valuer as to whether they are an employee of the entity or
whether they are contracted as an independent valuer
the total fair value of property plant and equipment valued by that valuer
where the valuation has been conducted by an employee of the entity the name of the
independent valuer who reviewed the valuation, and
the date(s) of such valuations (NZ IAS 16 para 77.2).
2 Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crowns financial statements.
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
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In addition, valuers are referred to IVS 3 Valuation Reporting and IVA 1 Valuation for Financial
Reporting within PINZ Professional Practice for a detailed commentary on reporting and disclosure
requirements.
Where an independent valuer has not been used because there is an active market or readily
available price indices that establish the fair value of an item of plant or equipment with reasonable
reliability, this fact shall be disclosed. (NZ IAS 16 para 77.3)
Componentisation3
NZ IAS 16 does not prescribe the unit of measure for recognition, i.e. what constitutes an item of
property, plant and equipment. Thus, judgement is required in applying the recognition criteria to
an entitys specific circumstances (NZ IAS 16.9)
However, NZ IAS 16 does require each part of an item of property, plant and equipment with a cost
that is significant in relation to the total cost of the item to be depreciated separately. Thus an entity
allocates the amount initially recognised in respect of an item of property, plant and equipment to its
significant parts and depreciates separately each such part. NZ IAS 16 notes for example, that it may
be appropriate to depreciate separately the airframe and engines of an aircraft (NZ IAS 16.43-44).
The implication of this is that where the reporting entity does have an item of property, plant and
equipment that is accounted for at a component level, any revaluation will need to be valued at a
similar component level.
Borrowing costs4
At the time of writing this guidance, an amended NZ IAS 23 is imminent, with applicability for
periods beginning on or after 1 January 2009. Under this amended NZ IAS 23, borrowing costs
that are directly attributable to the acquisition, construction or production of an asset thatnecessarily takes a substantial period of time to get ready for its intended use or sale, will be
capitalised as part of the cost of that asset (NZ IAS 23 para 8) and the current benchmark
treatment to expense borrowing costs will be removed.
Accordingly, borrowing costs should also be allowed for in revaluations where a cost based
approach (depreciated replacement cost) is adopted. (NZ IAS 16 para 33.14)
Under the transitional provisions associated with the 2007 amendment to NZ IAS 23, an entity is
not required to comply with the requirement to capitalise borrowing costs until periods beginning on
or after 1 January 2009, and is permitted to expense all its borrowing costs. The Crown will utilise
these transitional provisions (see Crown Accounting Policies) however Crown entities that directlyincur borrowing costs may capitalise those relevant borrowing costs earlier. If such an option is
taken the information on borrowing costs capitalised, both in the year to date, and incorporated into
depreciated replacement cost valuations must be separately disclosed.
3 Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crowns financial statements.4 Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crowns financial statements.
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
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The Financial Reporting Standards Board (FRSB) has considered the issue as to whether a public
sector capital charge is a borrowing cost. As a consequence of these deliberations the FRSB (in
its report to the Accounting Standards Review Board on NZ IAS 32 dated Oct 2004):
noted that public sector capital charges represent a charge on the net assets employed by
public sector entities, and do not relate to any financial instrument, either debt or equity, and
that making an interpretation that they did would be inappropriate
noted that the capital charge is designed to ensure that the costs of capital are included in thecosts of services and to require that they be reported elsewhere would effectively thwart their
purpose, and
agreed not to include additional guidance for public benefit entities.
Accordingly, the capital charge should not be considered a borrowing cost eligible for
capitalisation.
Optimisation
NZ IAS 16 (paras. 33.4 to 33.11) contains specific guidelines regarding the degree of optimisation
that should be applied when using the depreciated replacement cost approach. This is further
discussed in Section 2 of this guidance.
Valuation standards:IVA 1: Valuation for Financial Reporting
PINZ Professional Practice has seen a continued move towards International Valuation Standards
with the fifth edition (effective 1 March 2007) incorporating all IVSC Standards, Applications and
Guidance Notes. IVA 1 and NZVGN 1 provide guidance to valuers when preparing asset
valuations for financial reporting purposes for both NZ IAS 16, NZ IAS 40:Investment Property(NZ IAS 40) and NZ IAS 5: Non-current Assets Held for Sale and Discontinued Operations (NZ
IFRS 5). IVA 1 and NZVGN 1 apply the principles developed in the IVSs to the requirements of
the IASs/IFRSs.
While plant and equipment is revalued in accordance with NZ IAS 16, property may fall under NZ
IAS 16 or NZ IAS 40.
Property to be accounted for (and revalued) under NZ IAS 16 is generally defined as property held
for use in the production or supply of goods or services or for administration purposes or sale in the
ordinary course of business.
Additional examples of property that fall under the provisions of NZ IAS 16 include property held for
the future use as owner-occupied property, property held for the future development and
subsequent use as an owner-occupied property, property occupied by employees and property
that is being constructed or developed for future use as an investment property.
Property to be accounted for (and revalued) under NZ IAS 40 is property held to earn rentals or for
capital appreciation or both. (NZ IAS 40 para 5)
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VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,
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In respect of public benefit entities, property may be held to meet service delivery objectives rather
than to earn rental or for capital appreciation. In such situations the property will not meet the
definition of an investment property and will be accounted for under NZ IAS 16, for example:
a property held for strategic purposes. and
b property held to provide a social service, including those which generate cash inflows where the
rental revenue is incidental to the purpose for holding the property. (NZ IAS 40 para 9.1).
Public benefit entities are defined as: reporting entities whose primary objective is to provide goods
or services for community or social benefit and where any equity has been provided with a view to
supporting that primary objective rather than for a financial return to equity holders. (NZ IAS 16,
para NZ 6.1)
Some properties comprise a portion that is held to earn rentals or for capital appreciation and
another portion that is held for the use in the production or supply of goods or services or for
administration purposes. If these proportions can be sold separately, an entity accounts for the
proportions separately. If the proportions could not be sold separately, the property is an
investment property (i.e. falls under the provisions of NZ IAS 40) only if an insignificant portion isheld for use in the production or supply of goods and services or for administration purposes. (NZ
IAS 40 para 10)
Non-current Assets Held for Sale and Discontinued Operationsare assets for which the carrying
amount will be recovered principally through a sale transaction rather than through continuing use.
For this to be the case, the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable.
The flow chart on the following page provides guidance on the classification of property assets
between NZ IAS 16 and NZ IAS 40 for financial reporting and valuation basis purposes. The focusof these guidelines is the revaluation of assets in accordance with NZ IAS 16 and in particular,
valuation where reliable market evidence of the value of a property does not exist and valuation
using depreciated replacement cost is required.
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Asset classif ication framework for valuation purposes
Property Asset
Is the property surplus to the entity's
requirements or held for sale in the ordinary
course of business?Yes
No
Market Value lessDisposal Costs
Market Value
DepreciatedReplacement Cost
Market Value
NZ IFRS 5
Is a significant portion of t he
property owner occupied or
intended to be used for theproduction or supply of goods or
services or for administrationpurposes as opposed to being held
to earn rentals or for capital
appreciation?
No Yes
Yes
Is their reliable market-
based evidence of theproperty being valued?
NZ IAS 40 NZ IAS 16
Fair Value
No
Yes
Fair ValueFair Value LessDisposal Costs
No
Public Benefit Entities
Is the property held to meetservice delivery objectives
rather than to earn rental or
capital appreciation?
Is the property available
for immediate sale in its
present condition and is
the sale highly pr obable?
Yes
No
Sales Comparison /Income Approach
Property Asset
Is the property surplus to the entity's
requirements or held for sale in the ordinary
course of business?Yes
No
Market Value lessDisposal Costs
Market Value
DepreciatedReplacement Cost
Market Value
NZ IFRS 5
Is a significant portion of t he
property owner occupied or
intended to be used for theproduction or supply of goods or
services or for administrationpurposes as opposed to being held
to earn rentals or for capital
appreciation?
No Yes
Yes
Is their reliable market-
based evidence of theproperty being valued?
NZ IAS 40 NZ IAS 16
Fair Value
No
Yes
Fair ValueFair Value LessDisposal Costs
No
Public Benefit Entities
Is the property held to meetservice delivery objectives
rather than to earn rental or
capital appreciation?
Is the property available
for immediate sale in its
present condition and is
the sale highly pr obable?
Yes
No
Sales Comparison /Income Approach
IVA 1 and NZVGN 1 also provides the following definitions and guidance:
Market value
The term fair value, used in NZ IAS 16 and NZ IAS 40, is generally synonymous with the term
market value as defined in International Valuation Standard 1: Market Value Basis of Valuation
(IVS 1) and adopted in IVA 1. Market value is the estimated amount for which a property shouldexchange on the date of valuation between a willing buyer and a willing seller in an arms length
transaction after proper marketing wherein the parties had each acted knowledgeably, prudently,
and without compulsion. (IVS 1 para 3.1)
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Where the market/fair value5 of a property, plant and equipment asset is not able to be reliably
valued using market-based evidence for the same or a similar asset, depreciated replacement cost
is to be used to estimate fair value.
Specialised assets / depreciated replacement cost approach
Items of property, plant and equipment that are not able to be reliably valued using market-based
evidence for the same or a similar asset are referred to as being specialised. Specialised assetsare those that are rarely if ever sold on the open market, except by way of a sale of the business of
which they are a part, due to their uniqueness, which may arise from the specialised nature and
design of the buildings, their configuration, size or location or other factors.
Key characteristics of specialised assets are that they:
Are useful to a limited number of uses or users
Rarely, if ever, sell on the open market, except as part of the business entity
Are generally specialised structures, and
Earn revenue that has not been derived from an open market and for which market based
evidence does not exist.
In general, specialised asset are those that, due to some specialised physical or geographical
factor, offer very little utility for any purpose other than that for which they were originally designed.
Apport ionment of value / componentisation
In undertaking valuations generally, valuers will frequently be required to undertake an
apportionment of reported property values, allocating value separately to the land element (non-depreciable) and the buildings (depreciable). Valuers should, as far as possible, continue to apply
market concepts. While it is acknowledged that buildings cannot be separated from the land that
they occupy, valuers should recognise that the purpose of carrying out the apportionment is to
establish a basis for measuring the consumption in the financial statements. For non-specialised
property, the land value should be established and deducted from the total (fair value) to arrive at
the depreciable amount for the buildings. In the case of specialised property, the total fair value
will be the sum of the land value and the depreciated replacement cost of the improvements (and
therefore no separate apportionment to land value is required).
The componentisation requirements of NZ IAS 16 will require the valuer to undertake further
valuation apportionments of non-land assets where instructed by the reporting entity6. Valuers
may also be requested to explicitly advise on appropriate useful lives over which asset
components should be depreciated for accounting purposes. These requirements may require the
valuer to seek the professional assistance of specialist valuers (such as plant valuers) or other
experts such as engineers or quantity surveyors, where the valuer does not have the necessary
expertise. (IVA 1, section 6.2.2 and NZVGN 1 para 6.5)
5 From here on, the terms fair and market value are used interchangeably, meaning the same thing for the purposes
of valuations for financial reporting.6 Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crowns financial statements.
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For the purposes of componentisation, the costs attributed to the components should be based on
an apportionment of the overall replacement costs (or value) where the latter can be reliably
sourced from the market (i.e. a top-down, as opposed to a bottom-up, approach). The reason for
this is that the top-down approach will more accurately reflect the market replacement cost/value,
as aggregating the replacement costs/values of individual parts from a bottom-up approach will
usually produce an inflated overall figure7.
The degree of componentisation for valuation purposes will largely reflect the way the asset isaccounted for by the reporting entity. Accordingly, valuers should discuss the required level of
componentisation with the reporting entity.
Borrowing costs8
Where the reporting entity adopts the alternative treatment allowed in NZ IAS 23: Borrowing Costs
(NZ IAS 23), of capitalising borrowing costs, the amount of borrowing costs that would be
embodied in the fair value of the asset is included as a component of DRC. The amount to be
included as a component of DRC is determined on the basis of the average debt-to-equity ratio
and average cost of debt applicable to entities undertaking the same activities as the entity
reporting. (NZ IAS 16 para NZ 33.14)
Owner-occupied property
Where the primary approach to valuation of owner-occupied properties for financial reporting
purposes is capitalisation or discounting of future rental income, the valuer shall assume that a
notional lease is in place on market terms and conditions reflecting the current use. This approach
assumes that the owner-occupier is using the property for its highest and best use. If it is not, then
the property would need to be valued having regard to its highest and best use. (NZVGN 1 para
6.5)
Report disc losures
IVS 3, section 5.0 stipulates that the valuers written report shall disclose the following information:
Clearly and accurately provide the conclusions of the valuation in a manner that is not
misleading
Identify the client, intended use of the valuation and relevant dates (i.e. the date at which the
valuation estimate applies, the date of the report and the date of inspection)
Specify the basis of the valuation, including the type and definition of value
Identify and describe the property rights or interests to be valued, physical and legal
characteristics of the property and classes of property included in the valuation
Describe the scope / extent of the work used to develop the valuation
Specify all assumptions and limiting conditions upon which the value conclusion is contingent
7 For certain assets, such as infrastructure, where there are no overall replacement costs/values, a bottom-up
approach will be the only option.8 Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crowns financial statements.
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Identify special, unusual, or extraordinary assumptions and address the probability that such
conditions will occur
Include a description of the information and data examined, the market analysis performed, the
valuation approaches and procedures followed and the reasoning that supports the analysis,
opinions and conclusions in the report
Contain a clause prohibiting the publication of the report in whole or part, or any referencethereto, or to the valuation figures contained therein, or to the names and professional affiliation
of the Valuers, and
Include a Compliance Statement that the valuation has been performed in accordance with
IVSs, disclose any departure from the specific requirements of IVSs and provide an explanation
for such departure.
The Compliance Statement contained in the Valuers report shall also confirm that:
The statements of fact presented in the report are correct to the best of the Valuers knowledge
The analysis and conclusions are limited only by the reported assumptions and conditions
The Valuer has no (or if so, a specified) interest in the subject property
The Valuers fee is not contingent upon any aspect of the report
The valuation was performed in accordance with an ethical code and performance standards
The Valuer has satisfied professional education requirements
The Valuer has experience in the location and category of the property being valued
The Valuer has (or has not) made a personal inspection of the property, and
No one, except those specified in the report has provided professional assistance in preparing
the report.
For the purposes of valuations prepared in accordance with this document, it is also recommended
that the basis of depreciation (in a depreciated replacement cost valuation) be stated.
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Section 2: Asset classif ication and valuation methodology
This section overviews the asset classification and standard valuation methodologies that are
appropriate for property, plant and equipment, and explains the depreciated replacement cost
methodology in detail.
Asset classif ication
The classification of an asset is central to the selection of the most applicable financial reporting
standard to account for that asset for financial reporting purposes (as detailed in Section 1 of this
guidance). In turn, the valuation methodology to be adopted is dependent on whether the asset
can be valued by reference to market based evidence (i.e. whether the asset is regarded as non-
specialised). Where the value of the asset is not able to be determined using market based
evidence, the asset is regarded as specialised.
Assets to be accounted for under NZ IAS 40 are those that are held primarily to earn rental or for
capital appreciation or both. These assets trade in the market place and accordingly are valued by
reference to the active market or to market based evidence.
Assets that are to be valued under NZ IAS 16 will usually represent operational assets. These are
assets that are:
integral to the supply of the entitys output, or
being held or developed by an entity to be integral to the supply of the entitys output in the
future.
The valuer (possibly in conjunction with the reporting entity) will usually determine whether these
assets are specialised, non-specialised or a mixture.
Valuation methodologies
There are three main approaches to determining market value:
Sales comparison approach (comparable sales method, direct market comparison)
Income (capitalisation) approach (including discounted cashflow analysis), and
Cost approach (depreciated replacement cost).
The first two approaches apply to non-specialised assets, while the latter applies to specialised assets.
In some circumstances a cost approach is also applied to non-specialised properties as a check.
There will be circumstances where an asset that is regarded as non-specialised forms part of a
larger specialised asset or group of specialised assets. Examples would likely include:
Student or staff housing/flats/apartments within a hospital or university campus
A university registry or administration building
A carpark within the campus of a hospital or tertiary education institution.
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In the case of a specialised network or campus comprising numerous assets it is recommended
that there is a rebuttable assumption that all the assets are specialised i.e. the campus or network
is considered holistically rather than at an individual asset level. The reason for this approach is
that in most cases the assets are closely inter-related and their values are directly linked to the
operations of the entity.
A specialised assumption can be rebutted if there is reliable market evidence for any individual
asset, it is legally and physically possible to separate, and separation would not affect the integrity ofthe network or campus and therefore it could be economically rationale to separate. It will generally
be the valuers judgement as to whether market based techniques (rather than depreciated
replacement cost) should be applied to individual assets. This decision should also reflect:
The availability of market based evidence that enables the value of the asset to be reliably
determined
Evidence that there is/would be demand for the asset in its current use in the absence of the
specific entity operations (if no such demand would exist, then the asset is inextricably inter-
related with the other specialised assets and to value the asset using market based techniques
may over-state the value as an individual asset), and
The materiality of the particular asset in the context of the overall value of property assets.
Cost based valuation methodologies
Cost based valuation approaches use the cost of reproducing the asset, or the modern equivalent
of the asset, as an estimate of the assets fair value. The rationale for this is that if the asset:
is able to be reproduced
provides the utility or service expected of the cost, and
is in its highest and best use
then potential buyers will pay a cost-related price, which is equivalent to the cost of reproducing the
asset themselves.
Cost-based valuation approaches include:
Reproduction cost, and
Depreciated replacement cost.
Reproduction cost
The reproduction cost of an asset is the cost of reproducing that asset with exactly the same
appearance and character, and using the same materials, where available, or where these could
be specially manufactured. Reproduction cost is most applicable when valuing assets of a special
character that are intended to be retained in their present form (for example, a heritage building).
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A property that is described as a heritage asset has some cultural, environmental or historical
significance. Heritage assets include historical buildings and monuments, archaeological sites,
conservation areas and nature reserves and works of art. Heritage assets often display the following
characteristics (although these characteristics are not necessarily limited to heritage assets):
Their economic benefit in cultural, educational and historic terms is unlikely to be fully reflected
in a financial value purely based on market price9
Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by
sale
They are often irreplaceable and their economic benefit may increase over time, even if their
physical condition deteriorates, and
It may be difficult to estimate their useful lives, which in some cases could be several hundred
years.
In the case of property, where there are prohibitions or severe restrictions on either demolition or
alteration of the building, reproduction cost (as opposed to replacement cost, which is detailed inthe next section) should be used.
Depreciated replacement cost
Depreciated replacement cost (DRC) measures the minimum cost of replacing or replicating the
service potential embodied in the assets with modern equivalent assets in the most efficient way
practicable, given the service requirements, the age and condition of the existing assets and
replacement in the normal course of the business.
Replacement cost is the cost of replacing an existing asset with a substantially identical new
modern equivalent asset. When calculating depreciated replacement cost, NZ IAS 16 requires thatphysical deterioration be taken into account and that optimisation for obsolescence and relevant
surplus capacity occur.
The underlying principle is that DRC, through the optimisation process, recognises:
that an entity may have more assets than it needs, and/or
that some of those assets may be over-engineered or technically obsolescent.
The DRC methodology comprises the following broad steps:
1) Develop/review asset registers
2) Develop standard replacement costs (including components, where applicable)
3) Optimise and calculate optimised replacement cost (ORC)
4) Assess useful lives
5) Determine depreciation and calculate DRC
6) Assess land value.
9 Rare and collectible works of art would be an exception.
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Each of these steps is explained in the following sections:
1) Develop / review asset registers
The asset register compiled by the reporting entity should itemise all items of property, plant and
equipment and provide general data on the entitys assets (especially the material items),
including:
Land and title/ownership information
Age/remaining lives for land improvements and plant and equipment
Quantities, size or capacity
Construction details
Condition and performance information
Costing information (original cost and major refurbishment details and costings, whereavailable)
Component information (where applicable).
The valuer will need to be satisfied as to the accuracy of the data used in the valuation. The extent
of data review will be at the judgement of the valuer.
Plant and equipment is deemed to include assets owned by the reporting entity that are utilised in
the every-day activities of the reporting entity. Generally, these assets are not of a fixed nature
and are able to be moved around for operational purposes. Building services assets that may be
considered to be plant and equipment, such as lifts and building services, are considered integral(and fixed) and are therefore accounted for as a component of the building.
2) Develop standard replacement costs
Under NZ IAS 16, an item of property, plant and equipment shall initially be recognised at its cost,
which includes costs directly attributable to bringing the item to working condition for its intended
use. (NZ IAS 16 para 16) Similarly, such costs should be allowed for in replacement costs adopted
for valuation purposes.
Building replacement/construction costs are based on market rates or evidence, which would
typically be estimated from:
Recent construction cost contracts for new buildings or extensions completed by the reporting
entity
The valuers knowledge of construction costs of other buildings considered similar
Costing databases/information such as Rawlinsons New Zealand Construction Handbook, and
Specialist costing advice from professionals such as quantity surveyors.
In addition to construction costs there should be allowances for other site works, professional fees,borrowing costs (where applicable) and resource consent costs.
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As previously mentioned, in the case of heritage property, where there are prohibitions or severe
restrictions on either demolition or alteration of the building, reproduction costs should be used.
These would be assessed on a case-by-case basis, as uniform rates will typically not apply to
heritage buildings.
Plant and equipment is to be assessed by reference to available suppliers, agents and manufacturers
data, in addition to costing information that is able to be provided from the reporting entity.
Specific comments in relation to certain costs are:
Borrowing costs:10
Where the reporting entity has a policy of capitalising borrowing costs under
the provisions of NZ IAS 23: - Borrowing Costs(NZ IAS 23), interest costs incurred during the
period of construction are to be included in the assessment of replacement (or reproduction)
cost. Under NZ IAS 16, the amount to be included as a component of depreciated replacement
cost is determined on the basis of the average debt to equity ratio and average cost of debt
applicable to entities undertaking the same activities as the entity reporting. (NZ IAS 16 para.
33.14). Therefore borrowing costs are calculated at a rate that reflects the standard interest
rates obtainable by a notional or hypothetical owner (i.e. an owner of similar assets), not at rates
that are specific to the actual owner of the asset.
Resource consents: Many specialised properties require initial and ongoing resource consents.
These consents often involve considerable time and expense to ensure compliance with the
required public consultation processes. Generally, resource consent costs would form part of
the fair value of a major specialised asset and, in circumstances where the consents have a
finite life, would normally be accounted for as a separate component.
Componentisation11
For the purposes of componentisation, it is considered that buildings should be divided into the
following main components:
Building structure and external envelope
Building services, and
Fitout.
These are considered to represent the main components of buildings that have different useful lives or
provide benefits to the entity in different patterns, thus requiring different depreciation rates/methods.
NZ IAS 16 notes that each item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item shall be depreciated separately. (NZ IAS 16 para. 43).
While it is considered that the three building components identified above should form the basis for
component valuations, the actual level of componentisation will need to reflect the specific assets,
materiality and the approach adopted/deemed necessary by the reporting entity. This will be a
matter to be discussed between the valuer and the reporting entity and may lead to fewer or
additional component levels (including sub-components, such as, for example, air-conditioning and
lifts within building services).
10 Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crowns financial statements.11
Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted whenproviding information for inclusion in the Crowns financial statements.
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The degree of componentisation for plant and equipment will need to be assessed on a case-by-
case basis.
3) Optimise and calculate optimised replacement cost
Possible degrees of optimisation are shown in the following diagram:
Reproduction of existing
assets
Surplus assets eliminated Obsolescence eliminated Over-design eliminated Site reconfiguration Changed location
Degree of Optimisation
DRCV
aluation
Low High
A FEDCB
Extent of
Optimisation under
IAS 16
A commentary as to the degrees of optimisation follows:
i Reproduction of existing asset: The reproduction of an asset to its existing form and standard
represents zero optimisation. It is applicable to assets such as historic/heritage buildings.
ii Surplus assets eliminated: Identifies those assets that are not necessary for the production of
the goods and/or services produced by the entity. Where such assets are separable, they will
be held either for sale, investment or development and should be valued accordingly. (refer
also to NZ IAS 16 para NZ 33.6)
iii Obsolescence eliminated: Obsolescence may arise from factors such as outmoded design and
functionality of an asset or changed code requirements preventing reconstruction of an asset inits current form. In determining depreciated replacement cost, optimisation for obsolescence is
made by reducing the reproduction cost of the specific asset held to the cost of a modern
equivalent asset that provides equivalent service potential. (refer also to NZ IAS 16 para NZ
33.5)
iv Over-design eliminated: Over-design may arise where there is no longer a demand for the
capacity offered by the asset. Under NZ IAS 16, optimisation for this is applied only to surplus
capacity that is not currently required and for which there is no reasonable prospect of it being
required while the asset is utilised in its current form. Optimisation is not applied to surplus
capacity that, while rarely or never used, is necessary for stand-by or safety purposes. (refer
also to NZ IAS 16 para NZ 33.6)
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v Site reconfiguration: Optimisation through site reconfiguration is applicable to non-land assets
only and applies where the existing configuration of non-land assets on a site is considered
operationally inefficient. Site reconfiguration will be acceptable optimisation only to the extent
that operational inefficiencies require an allowance for physical deterioration or for
obsolescence and over-design outside of that already encompassed in the optimisation
process.
vi Changed location (or greenfields): Attempts to value the replacement cost of assets based onthe most cost-effective, or optimal, set of assets to achieve the required level of service
potential. Greenfields optimisation therefore assumes the capacity to design and build an
entirely new optimal network of assets for the entity, regardless of the historical constraints that
may have applied.
A key element of the optimisation process is the extent of optimisation. Most depreciated
replacement cost valuations utilise incremental optimisation, which allows progressive or
incremental optimisation to the extent that such incremental growth occurs in the normal course of
business. Under-utilised assets are replaced and redundant assets are removed, but the historical
configuration of the campus of assets is broadly retained. The concept is often referred to as
brownfields, in contrast to greenfields.
The incremental (or brownfields) DRC approach recognises that there is always some degree of
sub-optimality and allowance for future growth in future demand. It also reflects the historical
development of the existing business, the time lag in asset planning and construction, the very long
lives of the assets and the replacement of asset components, in the normal course of business. As
campuses or systems expand and change, a degree of sub-optimality at any point of time is
inevitable and is part of the total cost of output.
Greenfields optimisation attempts to value the replacement cost of assets based on what is the
most cost-effective, or optimal, set of assets to achieve the required level of service potential (in
terms of capacity, service quality and useful life). Greenfields optimisation therefore assumes thecapacity to design and build an entirely new optimal campus of assets for the entity, regardless of
the historical constraints that may have applied.
In practice, a greenfields replacement cannot occur in the normal course of business (except in
rare circumstances). Furthermore, a greenfields replacement is rarely feasible, given the
constraints imposed by the existing assets and customer access.
For the purposes of NZ IAS 16, depreciated replacement cost is the fair value of the land plus the
current gross replacement cost of improvements, less an allowance for physical deterioration and
optimisation for obsolescence and relevant surplus capacity. The depreciated replacement cost for
plant and equipment is the same as for land improvements. This will usually include bars A to D,as discussed above.
The DRC approach assumes no improvement in the assets performance or service. Therefore the
DRC value of the existing assets, although based on modern equivalent assets, does not reflect
higher service and quality standards or a greater capacity than is presently the case.
Optimisation is subject to the following principles and constraints:
It should satisfy the current levels of service supplied. As a general rule, an asset providing
more than the required level of service (after allowing for predicted growth) should be optimised
downwards.
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The allowance for growth should be supported by asset management plans. Optimisation
cannot increase the value of the asset and in no case should the optimised capacity exceed the
current system capacity. An under-capacity system should be accepted as the optimised
system.
Optimisation should only be done on a bottom-up approach at asset level. General
assumptions about oversizing or obsolescence cannot be made at a campus or network level
and applied top-down to all individual assets (unless it can be demonstrated by the reportingentity that the latter approach is used in practice to determine optimal asset
capacity/configurations).
It should consider minimum safety and technical standards or design philosophies.
4) Assess useful lives
The following life estimates are required to determine DRC:
useful life
asset age
remaining useful life.
NZ IAS 16 para 6 defines useful life as being either:
a the period over which an asset is expected to be available for use by an entity, or
b the number of production or similar units expected to be obtained from the asset by an entity.
NZ IAS 16 para. 56) states that the following factors need to be considered in determining theuseful life of an item of property, plant and equipment:
a expected usage of the asset. Usage is assessed by reference to the assets expected capacity
or physical output
b expected physical wear and tear , which depends on operational factors such as the number of
shifts for which the asset is to be used, the repair and maintenance programme, and the care
and maintenance of the machinery while idle
c technical or commercial obsolescence arising from changes or improvements in production, or
from a change in the market demand for the product or service output of the asset
d legal or similar limits on the use of the asset, such as the expiry dates of related leases.
Other key principles in determining an assets useful life are:
a The remaining useful life, which can be assessed by either:
Assessing the expected useful life and deducting the asset age, or
Assessing the remaining life of the asset using condition and economic information (this is
considered the more robust option but is often limited by the availability of condition data).
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b The useful life used must be the minimum of:
The physical life, which is the period of time until the asset ceases to provide the required
level of service (or be the lowest cost alternative to do so) because of physical deterioration
of the asset, and
The economic life, which is the life until the asset ceases to be the lowest cost alternative to
satisfy a particular level of service due to any other factors.
c Determination of the assets useful life is a matter of judgement based on the experience of the
entity / valuer with similar assets.
d Useful lives are assessed for existing assets while replacement costs are calculated for modern
equivalent assets (or reproduced assets in the case of heritage items).
e Useful lives must be assessed for groups of assets with similar lives.
f Assets not currently being used to provide services (such as those held for standby services)
will still have a useful economic life.
g In estimating the useful life, ongoing maintenance is expected to occur throughout the life of the
asset.
An assets physical life is the maximum possible useful life. However, there are factors, other than
physical deterioration, that may cause the asset to be replaced at an earlier date. Such factors
might include:
Demand either increasing or decreasing, which may drive replacement/upgrade programmes or
decommissioning prior to the end of the assets physical capability to provide the service.
Legislative, regulatory and environment changes, which can often affect operational practices
and therefore asset lives.
Technological redundancy, which should be considered as an economic factor only if the entity
has a formal replacement programme for the technologically redundant assets.
The fact that operational and maintenance costs typically increase with age, which may result in
the cost of keeping the asset in operation becoming higher than the cost of replacement. A
cost-benefit analysis may demonstrate that the replacement is justified prior to reaching the
physical life.
Valuers and reporting entities may also have regard to information on expected lives issued byindividual asset manufacturers, the New Zealand Inland Revenue Department or other similar
authoritative sources.
Physical lives, whether assessed as a useful life or remaining physical life as at the date of
valuation (and useful life representing the actual age plus the estimated remaining physical life),
should be adopted unless there are economic factors which suggest with reasonable certainty that
the life is something less.
Where an asset has undergone major refurbishment works, the actual age of the asset will usually
need to be revised at the completion date of the works. This is particularly applicable in the case of
heritage buildings, which will often undergo major refurbishment near the end of their physical life.
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The approach to lives set out above applies for all items of property, plant and equipment,
including, where applicable, components within assets.
5) Determine depreciation and calculate DRC
For valuation purposes, depreciation is calculated on the depreciable portion of an asset (its
optimised replacement cost less the estimated residual value).
Residual value
The residual value is the estimated net amount that will be received when the asset is removed
from service. NZ IAS 16 para. 6 defines residual value as 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.
Buildings are generally regarded to have a nil residual value.12
Where it is considered that a
building residual value is appropriate, the valuer is to disclose the reasoning and assumptions.
Residual values for plant and equipment are to be based on:
the experience of the valuer obtained whilst valuing similar assets, and
the experience of the reporting entity in terms of the level of net costs achieved when disposing
of such assets,
and will usually be expressed as a percentage of ORC.
When undertaking valuations of property, plant and equipment which have restoration, dismantling
or removal obligations associated with them (essentially a negative residual value), the valuer must
request guidance from the entity from whom valuation instructions are received about how suchobligations are to be dealt with in the valuation. In all such circumstances, the valuation report is to
disclose how such obligations have been treated.
Depreciation
The way in which depreciation is allocated over the life of the asset (for accounting or valuation
purposes) shall reflect the pattern in which the assets future economic benefits are expected to be
consumed by the entity. (NZ IAS 16 para. 60)
In property valuation, elements of depreciation may be classified as:
Physical deterioration
Functional obsolescence, or
Economic obsolescence.
12 Where it is shown that a building will likely have some alternative use at the end of the useful life for its current
activities, then this should be recognised by estimating a residual value.
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Physical deterioration in improvements is a result of wear and tear over the years, combined with a
lack of necessary maintenance. Functional obsolescence is caused by advances in technology
that create new assets capable of more efficient delivery of goods and services. Modern
production methods may render previously existing assets fully or partially obsolete in terms of
current cost equivalents. Economic obsolescence is the result of external influences affecting the
value of the subject asset. External factors may include changes in the economy, which affect the
demand for goods and services.
Key principles to consider in establishing the depreciation rates are:
How the asset is consumed is it due to the passing of time or usage (at the aggregate or
component level, whichever is applicable).
The depreciation pattern is proportional to the predominant factor that impacts on the length of
time that the asset can continue to provide the service.
The pattern of the physical deterioration of an asset is not an appropriate technique to represent
the depreciation of the asset, as the physical deterioration will not necessarily represent the
pattern of consumption of economic benefits.
The chosen method is to be consistently applied from period to period unless there is a change
in the expected pattern of consumption of economic benefits from that item.
When the pattern of economic consumption does not materially differ from straight line, or
where the pattern cannot be reasonably determined and demonstrated, straight line
depreciation is recommended as a reasonable basis for approximating the consumption of
economic benefits.
The depreciation methods considered most relevant for valuation purposes are:
Straight line:
Annual depreciation = deprec iab le amount/est imated useful l ife
This method allocates the depreciable amount as a function of time, which produces a constant
expense charge. The major assumption associated with this method is that the assets economic
usefulness (decline in service potential) is the same each year.
For valuation purposes, this is the usual approach adopted for property assets.
Reducing balance (or diminishing value):
Annual depreciation = carry ing amount (opening) x depreciation rate
This method uses a constant depreciation rate and applies it to the carrying amount (the original
cost less accumulated depreciation) of the asset at the beginning of the period. The amount of
depreciation charge will be higher in the initial periods and reduce over the periods. Once the
assets carrying amount reaches the residual value, depreciation will stop.
This method is sometimes applied to plant and equipment, as many of these types of assets tend
to depreciate more quickly in their earlier years. However, in the case of specialised plant and
equipment, straight line depreciation is generally considered to more appropriately reflect the
consumption of economic benefits embodied in the asset (unless the production unit method, as
detailed below, is more applicable).
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Production unit method:
Annual depreciation = deprec iab le amount x (product ion this year/total es timated product ion or activi ty)
This method assumes that depreciation is a function of use or productivity instead of a function
of time elapsed. The life of the asset is considered in terms of output provided or the number of
hours worked (input measure). Where the loss of service potential is a function of activity or
productivity, the production method will provide a good match of costs and revenues.
This approach will be suitable for items of plant and equipment that have lives that are a function of
their productivity. A pre-condition to its application is that production can be accurately measured.
For DRC valuation purposes, depreciation is the portion of depreciable amount (optimised
replacement cost residual value) applicable to the period, based on the consumption of service
potential/economic benefits as at the date of valuation. The DRC valuation calculations for the
above mentioned depreciation methods are:
Straight line:
DRC = (depreciable amount x (remaining useful life/useful life)) + residual value
Reducing balance (or diminishing value):
DRC = optimised replacement cost x (1-rate)^age
Rate is the rate of annual valuation depreciation applicable and is calculated according to the
formula:
(1-residual value percentage)^(1/useful life)
Production unit method:
DRC = (depreciable amount) x (production du ring remaining useful life/production over useful lif e) + residual
value
The above calculations are applicable to assets considered at both the aggregate and component
level.
NZ IAS 16 requires the residual value, useful life and depreciation method applied to items of
property, plant and equipment to be reviewed at least at each financial year-end, and to be
changed if there is a significant change from previous expectations. (NZ IAS 16 para. 51)
When an item of property, plant and equipment is revalued, any accumulated depreciation at the
date of the revaluation is treated in one of the following ways:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount. This method is
often used when an asset is revalued by means of applying an index to determine its
depreciated replacement cost.
(b) eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This method is often used for buildings.
The amount of the adjustment arising on the restatement or elimination of accumulated depreciation
forms part of the increase or decrease in the carrying amount of the asset. (NZ IAS 16 para 35)
These requirements have an impact on revaluation and therefore the valuer and reporting entity
should discuss these assumptions.
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6) Assess land value
Under NZ IAS 16, the fair value of land is always its market value even when applying the DRC
approach to the property. Implicit within the definition of market value is the concept of highest and
best use. This is the most probable use of an asset which is physically possible, appropriately
justified, legally permissible, financially feasible, and which results in the highest value of the asset
being valued. The existing use of the land may or may not, represent the highest and best use. It is
therefore the responsibility of the valuer to consider different uses and corresponding land values inestimating highest and best use and market value. Where there is no evidence of market land
values for the existing use of the land, alternative highest and best land uses need to be considered.
For land, reliable market-based evidence is considered to be market evidence of land in a similar
or alternative use, which is located adjacent (or in close proximity) to the land asset being valued.
In addition to third party transactions, arms-length purchases or sales by the reporting entity will
provide relevant market evidence. Adjustments for physical characteristics such as size, shape,
contour etc. will typically need to be addressed by the valuer.
Optimisation is not applied in determining the value of the land component for the purposes of the
DRC approach. This is a specific requirement under NZ IAS 16 para. NZ 33.11.
Where land is designated or zoned specifically for the activities of the entity, the valuer may be
required to consider the likely alternative uses for the land and the prospects of the designation
being uplifted or the land being rezoned.
In the case of land that is comprised in multiple titles, the value will generally be assessed as the
sum or aggregate of the individual title values. Where the value of the land as an amalgamated
parcel is greater than the sum of the individual parcels, then the higher value should be adopted.
Aspects of land valuation specific to the education and health sectors are discussed in the
following Section 3, under the heading of Land value.
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Section 3: Valuations in the health and education sectors specificconsiderations
This section backgrounds valuations in the public sector and provides additional sector specific
guidance for valuing specialised items of property, plant and equipment in the health and education
sectors. This information is supplementary to the more detailed (but generic) guidance provided in
Section 2 of this guidance.
Background
Assets in the public sector comprise conventional property, plant and equipment types as well as
different asset types, including heritage/conservation assets, infrastructure assets, public utility
plants, recreational assets and public buildings.
In the public sector, the concept of service potential usually takes the place of free market
cashflows and the test of adequate profitability applied in the private sector. Service potential is
measured as the level of productive capacity that would have to be replaced if the entity wasdeprived of the asset. In the public sector, continued service potential is expressed in quantifiable
physical terms such as remaining useful life and remaining productive capacity. The directors or
managers of the asset generally undertake the test of adequate service potential, which
determines whether the asset meets the requirements set for its productive capacity.
Public sector asset valuation employs many of the same procedures and approaches as valuation
of private sector assets. Valuations of public sector assets for which market evidence exists
employ most (if not all) of the same procedures and approaches as valuation of private sector
assets. Many classes of public sector assets are, however, of particularly specialised character
and there is insufficient market evidence upon which to base an assessment of their value. The
degree to which market based evidence exists, and the purpose of a public sector asset valuation,will determine the methodology applied.
The balance of this section focuses on property, plant and equipment in the health and education
sectors and in particular, the application of depreciated replacement cost (DRC) methodology. The
entities concerned are:
District Health Boards
Tertiary education institutions (universities, polytechnics, colleges of education and wananga),
and
Ministry of Education (schools).
Nature of assets / classification
Items of property, plant and equipment in the health and education sectors are generally regarded
as being of a specialised nature. They also, for the most part, comprise assets held in a campus
type environment.
Land and buildings comprise the bulk of the value of property, plant and equipment within the
health and education sectors. Plant and equipment is also significant, with scientific and other
specialty equipment being particularly significant for tertiary education institutions.
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Libraries and special collections (such as art, permanently retained library collections and
antiquities) are classified as Other Assets in the Crown financial statements. It is noted that
these assets can represent a significant asset class in the education sector, particularly for tertiary
education institutions.
Typical assets within the health and education sectors comprise:
Health EducationLand usually large holdings beneath campuses andalso that accommodating standalone buildings
Land usually large holdings beneath campuses andalso that accommodating standalone buildings
Buildings comprising functions such as:13
In-patient care
Specialist in-patient care
Diagnostic and treatment
Specialist procedure areas
Ambulatory care
Administration
Support services
Staff amenities and training
Maintenance facilities
Residential accommodation (staff or student)
Basement areas
Buildings comprising functions such as:
Classrooms
Laboratories
Libraries
Specialty teaching (e.g. health or hospitality clinics)
Lecture theatres
Administration (including student recreation)
Gymnasiums
Maintenance sheds
Relocatable classrooms
Practical trade tuition
Residential accommodation (staff or student)
Basement areas
Other site works such as:
Sewer and stormwater drainage
Site services (electrical, water, fire)
Emergency electric generators
Parking areas
Roadways/footpaths Fencing
Landscaping
Covered walkways
Other site works such as:
Sewer and stormwater drainage
Site services (electrical, water, fire)
Emergency electric generators
Parking areas
Roadways/footpaths Fencing
Landscaping
Covered walkways
Playing fields
Farm areas
Plant and equipment such as:
Specialist medical equipment
Medical furniture and fittings
Computers/information systems/software
Catering/kitchen equipment Vehicles
General engineering and maintenance equipment
General furniture, effects and fittings
Libraries and special collections
Plant and equipment such as:
Teaching furniture and equipment
Administration equipment
Computers/information systems/software
Specialist equipment (such as catering, industrial orscientific)
Vehicles
Accommodation equipment
Libraries
Special collections
Valuation methodology
The majority of the above assets will be valued on a DRC basis as they comprise specialised
assets for which market based evidence is insufficient. Certain assets are, however, likely to be
able to be valued using market based approaches. Examples would include:
13 More detailed descriptions are contained in Appendix A of these guidelines.
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Property:
land
residential accommodation (staff or student)
carparks (at grade (i.e. at ground level only), or buildings)
administration buildings (i.e. an office)
retail blocks/units
Plant and equipment:
motor vehicles
computers (standalone)
catering/kitchen equipment
certain (generic/general) furniture and fittings
special collections.
In respect of property, as discussed in Section 2, for a health or education campus it is
recommended that there is a rebuttable assumption that all the assets are specialised i.e. the
campus or network is considered holistically rather than at an individual asset level. The reason
for this approach is that in most cases the assets are closely inter-related and their values are
directly linked to the operations of the entity.
A specialised assumption can be rebutted if there is reliable market evidence for any individualasset, it is legally and physically possible to separate, and separation would not affect the integrity
of the network or campus and therefore it could be economically rationale to separate.
It will generally be the valuers judgement as to whether market based techniques (rather than
DRC) should be applied to individual assets. This decision should also reflect:
The availability of market based evidence that enables the value of the asset to be reliably
determined
Evidence that there is/would be demand for the asset in its current use in the absence of the
health/education operations (i.e. demand for the asset is not dependent on the presence of thehospital/tertiary education institution/school), and
The materiality of the particular asset in the context of the overall value of property assets. For
example, a block of retail shops within the main building of a hospital or tertiary education
institution may simply be valued with the building using DRC on the grounds of materiality. In
such instances, judgement is required by the valuer and the reporting entity.
Assets that, in the valuers judgement, are able to be valued based on market evidence, should be
excluded from the DRC assessment of the other items of property, plant and equipment. The non-
specialised assets would, however, ultimately be aggregated with the specialised assets for the
purposes of reporting the value of the class of assets.
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Where there is actual income information for a non-specialised asset, in considering this data for
valuation purposes the valuer may be required to make adjustments where owner-occupied space
(as opposed to third party lease arrangements) is not reflective of market rates. Consistent with
the valuation of owner-occupied properties for financial reporting purposes where capitalisation or
discounting of future rental income is adopted, the valuer should assume that a notional lease is in
place on market terms and conditions reflecting the current use (assuming the entity is using the
property in its highest and best use).
Within the plant and equipment category, special collections include works of art, permanently
retained library collections and antiquities. Permanently retained library collections contain books
and other material deemed to have cultural, aesthetic or historical value and for which the entity
commits sufficient resources to pe