Val Guidance Property

8/9/2019 Val Guidance Property

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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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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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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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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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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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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.


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



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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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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



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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



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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).


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

Documents

Val Guidance Property