Template Board Report
Five yearly asset revaluation methodology for not-for-profit water corporations
Background
· The first completed valuation for all Victorian water entities was undertaken as at 30 June 2011 and the results of the valuation were recognised in financial statements at that reporting date. Initial infrastructure asset valuation reports, provided by the independent valuer, included consumption based depreciation; however the methodology was rejected by the water entities and also not supported by the Victorian Auditor General’s Office (VAGO).
· The final infrastructure asset valuation was revised and provided on a Depreciated Replacement Cost (DRC) basis, which was supported by VAGO.
· In accordance with Financial Reporting Directive (FRD)103F a formal valuation must be completed every five years. The current valuation for all Victorian water entities is underway and will be recognised in financial statements as at 30 June 2016.
· The VicWater Financial Issues Steering Committee, (comprising Finance Managers from Melbourne Water, Barwon Water, Yarra Valley Water, Goulburn-Murray Water, Lower Murray Water, Wannon Water, South East Water, Gippsland Water and Southern Rural Water) took a proactive approach to minimise any issues with the 2016 valuation by coordinating stakeholders and providing guidance on the valuation methodology.
Key issues
Creation of the Revaluation Working Group
· VicWater assembled an Asset Revaluation Working Group for the duration of the valuation. The Working Group includes: Valuer General Victoria, VAGO, Dept. of Treasury and Finance (DTF), Dept. of Environment, Land, Water and Planning (DELWP), VicWater and three water corporations (Barwon Water, Southern Rural Water and Goulburn-Murray Water).
· The Working Group has met approximately every two months from September 2014.
· The Working Group identified the need to develop water infrastructure asset valuation methodology and develop a data template for use in the 2016 Victorian water industry asset revaluation. The purpose of the methodology is to provide guidance to the valuer and consider how the FRD 103F and the Australian Accounting Standards (particularly AASB 13, 116 and 136) applies to not for profit water corporations, including the fair value measurement guidance and the fair value hierarchy.
Valuation methodology document
· VicWater coordinated a competitive tender for the project. Ernst and Young (EY) was selected as the preferred tenderer. EY prepared a discussion paper in November 2014, a draft valuation methodology in January and a Data Template in April 2015. The attached valuation methodology has gone through various iterations following comments from water corporations, VGV, VAGO, DELWP and DTF.
· The purpose of the valuation methodology is to provide guidance on undertaking the valuation and describe how the fair value hierarchy applies to not-for-profit water industry assets (see attached the extract from FRD 103F Appendix D under subheading “Fair Value Hierarchy”).
· The paper discusses the various valuation methodologies and ultimately recommends DRC be used to assess the Fair Value of specialized non-current physical assets for not-for-profit water entities during the 2016 water industry revaluation.
· At a high level, the appropriateness of each approach is considered thus:
o The DRC approach may be appropriate for highly specialized assets where there is no active market for the assets.
o The income (Depreciated Cash Flow) approach may be appropriate where cash generating units can be identified and costs separated, or for profit-generating entities.
o The market approach is appropriate where an active market exists for the assets.
· The valuation methodology considers DRC appropriate for not-for-profit water corporations because:
o FRD103F Appendix E indicative expectation is that DRC is used for regional water infrastructure assets (see attached the highlighted extract from FRD 103F Appendix E).
o Regional water businesses have community service obligations and therefore do not operate with profit as an objective.
o Business objective reflected in NFP financial reporting designation
o Infrastructure assets are highly specialised assets
o No active and liquid market for highly specialised assets
Each water corporation Board must consider the valuation methodology in their own context
· The valuation guidance is prima facie consistent with FRD 103F Appendix E (see the highlighted section within the attached extract), where it lists “Indicative Expectations of Fair Value Measurement”, stating that regional (i.e. not for profit) water infrastructure would “likely be valued” using a DRC approach.
· Nevertheless, VAGO has strongly recommended each water corporation Board separately consider the requirements of the FRD 103F and the fair value hierarchy in making their own determination to use the DRC approach.
· This “determinations” could take the form of a board paper that includes the information herein and the attachments and records a decision to apply DRC after considering the requirements of the FRD 103F