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The New standard and guide by CPA Australia

The New standard and guide by CPA Australia. Agenda. Overview & Process Feedback AASB13 Fair Value. Overview. Joint project: CPA & AAMCoG Four sections Overview Technical Practical Advice Attachments. Objective. Provide practical advice and guidance to -

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The New standard and guide by CPA Australia

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  1. The New standard and guide by CPA Australia

  2. Agenda • Overview & Process • Feedback • AASB13 Fair Value

  3. Overview Joint project: CPA & AAMCoG Four sections Overview Technical Practical Advice Attachments

  4. Objective • Provide practical advice and guidance to - • Non-technical people who only need high level understanding • Assist with entire process (not just valuation and accounting) • Technical people (to assist in valuation process) • Accountants • Valuers • Engineers

  5. Process • Draft 1 issued July 2012 • 5 months public consultation and feedback • Workshops (held nationally) • Feedback received (formal and informal) • Considered by reference group (AASB, Audit, CPA) • Updated • Peer Review of guide and feedback (former Treasury and AASB) • Launch – International Public Sector Accounting Conference (Feb 2013)

  6. Feedback &Discussion • CPA Centre of Excellence • Accounting firms • Professional Bodies (API, AMC, IPWEA, CIPFA, ICEAW) • Government Agencies (Australian and overseas - Treasury, Audit Offices, V-Gs) • Individuals (including members of AASB & IPSASB)

  7. Specific Issues • Feedback generally very good and supportive • Some complex or contentious issues • Reference group discussion and resolution • Some individuals expressed views that were significantly inconsistent with the views of the other participants.

  8. Restricted Land • Must be calibrated to transaction price • Market participants – not entity specific • Restriction must be intrinsic to the asset • (can’t ever be removed) • Cost approach – base on sales of comparable land

  9. Entities adopt incorrect patterns of consumption of future economic benefit • Agreement from a range of participants • Straight-line cannot be used as a “default” • Entity needs to analyse and determine appropriate pattern

  10. Criticism of specific approaches • It does not criticise any particular approach • Nor does it promote any particular approach • Highlights – • need to determine appropriate pattern • risks of using erroneous assumptions

  11. Relationship between condition and Future Economic Benefit • Guide is clear…. There is no one-to-one relationship • Need to determine relevant factors and determine method to assess level of remaining service potential and rate of consumption • AASB13 requires adjustment to valuation input for condition and comparability

  12. Straight-line v Other patterns • Real issue for some! (but only in SA) • Guide does not promote any particular approach • Straight-line is appropriate…. If analysis determines pattern to be constant • Other patterns…. If analysis determines so • Some who argued “straight-line only” also argued Reducing Balance is more correct !

  13. Relationship between depreciation and asset management performance • Some debate over term “good asset management” - Wording enhanced • But…. The arguments used also agreed that typically would expect good asset management to result in – • higher level of remaining service potential and • rate of depreciation would be lower as a consequence of the useful life being extended

  14. Linkage between FV and Depreciation

  15. Linkage between Depreciation and Intergenerational Equity • Depreciation estimates value of consumed future economic benefit • Non-cash accounting measure • Nothing to do with Cost to deliver the service • Intergenerational Equity (pricing) decisions should be based on cost to deliver the service • Therefore…. Nothing to do with depreciation

  16. Level of Service v Consumption of Future Economic Benefit • Level of service = 4 litres per minute (potable) • If 10 people use it for 10 minute each = 400 litres of consumed service potential • If 20 people use it for 15 minutes each = 1,200 litres of consumed service potential • Rate of consumption changes despite Level of Service remaining the same ! Analogy: amount of water equates to level of remaining future economic benefit

  17. Terminology • New AASB13 terminology • Difference between Asset Accounting and Asset Management terminology

  18. KPIs • Some criticism of IPWEA/ACELG KPIs • Additional added for comparison at Asset Class level

  19. References to source material • Range of material (government, professional bodies and private sector) • Private sector considered just as appropriate as non-private sector • Aim is to provide best available guidance • Requests for additional material (none supplied) • Guide does not promote or recommend any particular approach or material

  20. Inconsistency between AMPs and financials • IPWEA noted – “Asset management plans are not yet widely in place across the local government sector, and more importantly, data indicates that there is no current relationship between the data in those plans and that reported in annual reports. “ • Hence the need to improve valuation and depreciation !

  21. Depreciation more than an arithmetic calculation and needs to based on relevant factors • Suggested that depreciation did not need to reflect the consumption of future economic benefit….. It just need to be a systematic arithmetic calculation • NO…. • Depreciation is to provide an estimate of the expected consumption of the future economic benefit • If not… challenges relevance, reliability and truth and fairness of the financials

  22. AASB13 Fair Value Decision Trees available from www.apv.net www.fairvaluepro.com.au

  23. Issued late 2011 Applies for 1 Jan 2013 onwards Fair Value consistency across all standards New Definition …. “exit” price New concepts New complex disclosures IFRS13/AASB13 “Fair Value”

  24. Fair Value Definition Was: “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.” Will be: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

  25. Residual Value Definition Was: “is 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.” Will be: “the amount an entity could receive for the asset currently (at the financial reporting date) if the asset were already as old and worn as it will be when the entity expects to dispose of it.”

  26. Hierarchy of Valuation Input Level 1 (Quoted Price) Level 2 (Observable Market Evidence) Level 3 (Non-observable market evidence) Recurring v Non-Recurring Valuations New Concepts

  27. Same outcome for APV valuations Change in terminology Change in Process

  28. Dependent upon whether Recurring or Non-Recurring valuation Level of Valuation Input New Disclosure

  29. Fair value measurements using significant unobservable inputs (level 3)

  30. Level 3: Valuation inputs and relationship to fair value (sensitivity)

  31. APV website (www.apv.net) Fair Value Pro websites (www.fairvaluepro.com.au) Email David@apv.net Draft CPA Guide, Tools & Help

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