property funds association conference 2013 shackled or...
TRANSCRIPT
Property Funds Association
Conference 2013
Shackled or Free
Emerging & Topical Issues In
Investment Valuation
Overview
• AASB 13 - Fair Value
• Impact on Investment Valuation – AASB 140
• Dual Purpose Valuations – “Fair Value” For Financial Reporting and
“Market Value” for borrowing
• Date a valuation is issued versus reporting date and the date that
the bank expects to rely on the valuation.
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• Published September 2011
• Applies to annual reporting periods
beginning on or after 1st January 2013
– (Aus 4.2)
• Applies when another standard
requires or permits Fair Value
Measurement –(5)
• Doesn’t apply to Leasing transaction
(AASB 17) or Value in use for
impairment testing (AASB 136)
• Incorporates IFRS 13 but with local
amendment (Aus)
AASB 13 Fair Value
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• Subtle, but potentially significant
differences to the definition of Fair
Value between standards
• AASB 13 – “The price that would be
received to sell an asset or paid to
transfer a liability in a orderly
transaction between market
participants at the measurement date”
• AASB 140 – “Fair value is the amount
for which an asset could be
exchanged between knowledgeable,
willing parties in an arms length
transaction”
• Contrast both of these with the
“Spencer Market Value test/ definition
AASB 13 Fair Value
(Cont.)
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• Whist the fair value definition itself
remains one paragraph AASB 13
expands on the definition (59 Pages)
• It sets out a single standard
framework for measuring fair value
and notably requires disclosures
about fair value measurement
• It also discusses how fair value is to
be assessed in some 59 pages
• Some of the requirements will require
valuers to rethink the presentation of
their valuation reports so that they
focus on the requirements of AASB
13
AASB 13 (Cont.)
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• Designed to cover all asset classes
and liabilities
• Asset classes may include real and
personal property and also financial
assets, equities, bonds, derivatives
etc
• For any asset class including
investment real estate is a matter of
questioning which parts of the
standard apply to the asset class
• Fair value is a market based
approach
• It discusses a transaction in a
principal market for the asset class
and the most advantageous market
absent a principal market
AASB -13 What are the
requirements?
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• It discusses market participants and
requires assumptions to be adopted
that market participants would use
• It emphasises that Fair Value is the
Price that would be received to sell
asset or transfer a liability
• The price shall not be adjusted for
Transactions costs (Paragraph 25) –
Consider this in the context of how
most DCF valuation are prepared.
• Highest and best use is emphasised
as a fundamental principal for non
financial assets – this gets detailed
attention (Paragraphs 27-33)
AASB -13 What are the
requirements? (Cont)
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• Entities to use appropriate valuation
techniques appropriate to
circumstances and subject to
sufficient data being available
• Valuation techniques to be applied
consistently (Market, Cost or Income
approaches)
• Single or multiple techniques may be
appropriate
• Inputs to valuations techniques to
maximise the use of observable
inputs and minimise use of
unobservable inputs
• To increase consistency three levels
of Fair Value assessment inputs are
required to be considered
AASB -13 What are the
requirements? (Cont)
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• Level 1 Inputs are quoted prices in
active markets for identical assets or
liabilities – most reliable evidence
• Level 2 Inputs are inputs other than
quoted prices included within level 1
that are observable either directly or
indirectly – these include market
corroborated inputs
• Level 3 Inputs are unobservable
inputs that can only be used when
observable inputs are not available
• Where does a typical real estate
transaction fit into the hierarchy?
• Examples at the rear of AASB 13 –
unfortunately limited examples on
investment real estate
AASB -13 What are the
requirements? (Cont)
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• Entities obligated to disclose
information that helps user's of the
valuation to asses fair value
• Valuations (full reports and PDS
summary letters) will have to be
tailored to meet the disclosure
requirements of AASB 13
• Entities (RE’s) are going to have to
familiarise themselves with AASB 13,
how Fair Value is defined and
particular how to instruct valuers
• Valuers are going to have to consider
how they present their reports to best
assist entities satisfy the disclosure
requirements of AASB 13 - API is
busily drafting a Technical Information
Paper on AASB 13 and Valuation for
financial reporting at present
AASB 13 – The wrap up
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• Is Fair Value one and the same thing
as Market Value? Goes to the issue of
dual purpose valuations – Are the
definitions the same? In most cases
yes where the is an active market.
• The date of the valuation has been
raised by the banks as an issue for
them in the use of dual purpose
valuations.
• At issue is:-
• The date the property is inspected by
a valuer (say 1st November 2012);
• The date that the valuer issues the
report (say 5th December 2012);
• The date that the valuation is said to
be based as at (i.e. the financial
reporting date) (say 31st December
2012)
Dual Purpose Valuations
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• The day that the valuation is issued to
a bank or consortia of banks for loan
security or loan covenant support for
a group of assets (Say 1st February
2013)
• Issues – Most valuer’s PI insurance
policies require that valuations can
only be used up to 90 days from the
date of valuation – a logic developed
from mortgage valuation work
• Hence a bank may not be able to rely
on the valuation (although it would
appear that they have not had a
choice)
• All valuation firms are disclaiming
forward dated valuations differently –
they may not be covered by their PI
policies
Dual Purpose Valuations
(Cont.)
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• May also breach the API capped
liability scheme requirements which is
compulsory for valuers
• Potential solutions:-
• Valuation has to stand on the day it is
written based on known
circumstances
• Acknowledge the practicality of RE’s
requiring valuations ahead of a
reporting date of PDS issue date for
say up to 90 days;
• In terms of banks using valuations
post the date of valuation allow a
longer period for use or alternatively
don't restrict the period at all and
leave it to the banks discretion?
• The big 4 banks are seeking a
solution to this
Dual Purpose Valuations
(Cont.)
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• The Australian Valuation Standards
Board (AVSB) is currently looking at
this issue and is engaging with all
stakeholders including:-
• Valuation Firms;
• Banks;
• Users of valuations – RE’s and
corporates;
• APIV – The API’s compulsory capped
liability entity;
• With the intent of seeking comment
from all stakeholders to address the
issue in a practical way that is
reasonable.
• From a users (RE’s) viewpoint the
cost of valuations in the process is
undoubtedly important
Dual Purpose Valuations
(Cont.)
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• Although AASB 13 has been around
since September 2011 it has crept up
given its universal adoption in
Australia for reporting periods
beginning on or after 1st January
2013. There is time to absorb it – but
now is the time to begin preparing
• Assuming annual reporting periods
this puts the first year end at 31st
December 2013
• The IVSC is publishing a number of
TIP’s on this and the AVSB is busily
drafting a TIP for the Australian
circumstance covering all real
property asset classes
Conclusion
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• Apropos the dual valuation and date/
timing issue I would be happy to take
any comments back to the AVSB to
ensure they are considered along with
other stakeholders views.
• Thank You
Conclusion (Cont.)
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