Use of site valuation for financial reporting purposes
To provide local governments with guidance concerning the use of the Department of Environment and Resource Management’s (DERM) site valuations for financial reporting purposes.
The Bulletin has been produced in response to questions raised during the recent Tropical Illustrative Financial Statements Workshops for 2010-11.
During May and June 2011, the Tropical Illustrative Financial Statements were released and a series of workshops were conducted throughout the State. At those workshops a number of local governments posed the following questions:
- Can DERM’s site value for land be used for financial reporting purposes?
- Does the fact that DERM’s land valuations have increased so much this year mean that a comprehensive revaluation of the land needs to be undertaken?
Can DERM’s site value for land be used for financial reporting purposes?
Land is recorded at either fair value or cost, for financial reporting purposes, in accordance with AASB 116 Property, Plant and Equipment. Where land is held at fair value, revaluations must be made with sufficient regularity to ensure that its carrying value does not differ materially from fair value.
Accounting standard AASB 116 defines fair value as the ‘amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.’
DERM’s site value is made for statutory purposes. Pursuant to section 6(1) of the Land Valuation Act 2010, the value of land under a valuation is its value for-
- any liability under the Land Tax Act 2010 for land tax relating to the land; and
- the making and levying of rates; and
- the calculation of rent under the Land Act 1994 for a Land Act tenure but only to the extent that Act provides for the value to be so used.
These are not performed specifically for accounting purposes under AASB 116 and as such may not be suitable for this purpose.
Before using a site value for financial reporting purposes, local governments need to assess the basis for the valuation (including the specific assumptions used) and ensure that the valuation genuinely represents ‘fair value’ in accordance with the requirements of AASB 116. In particular the following issues, which may affect suitability of the site value for financial reporting, should be considered:
- Both the site value and unimproved value under the Land Valuation Act may include allowances and concessions which would impact upon the valuation and therefore cause those values to be different from the ‘fair value’ of the land. These allowances and concessions may be factored into the valuation to disregard any enhancements to the land site.
- Under section 19 of the Land Valuation Act, if land is improved, its site value is its expected realisation under a bona-fide sale assuming all non-site improvements for the land had not been made. Non-site improvements to land, means work done, or material used, on the land other than site improvements. The work done or material used is a non-site improvement whether or not it adds value to the land.
- While valuations for all land in a local government area will now be made on an annual basis, there is provision for the Valuer-General not to undertake a valuation if it is not possible to do so because of unusual circumstances. Another exception to the annual requirement is where the Valuer-General may decide not to make a valuation after considering a market survey report for the area and the results of consultation with the local government for the area, and appropriate local groups and industry groups. Therefore, if the Valuer-General does not undertake a valuation of land in a local government area, the preceding valuation will continue in effect. This may or may not reflect fair value if there is a high degree of volatility in the fair value of the land in that specific local government area.
Site Improvements that are included in the site value are restricted to:
(a) clearing vegetation on the land
(b) picking up and removing stones
(c) improving soil fertility or soil structure
(d) if the land was contaminated land as defined under Environmental Protection Act 1994 – works to manage or remedy the contamination
(e) restoring, rehabilitating or improving its surface by filling, grading or levelling, not being irrigation or conservation works
(f) reclamation by draining or filling, including retaining walls and other works for the reclamation
(g) underground drainage
(h) any other works done to the land necessary to improve or prepare it for development.
If a local government is satisfied that the site valuation for a particular parcel of land represents its ‘fair value’ in accordance with the requirements of AASB 116, then that value may be used for financial reporting purposes. However, it will be necessary to document how the local government considered the abovementioned issues, including the local government’s assessment of the methodology and the key assumptions used by the valuer, and retain that documentation for audit.
Does the fact that DERM’s land valuations have increased so much this year mean that a comprehensive revaluation of the land needs to be undertaken?
Since the basis for DERM’s land valuations have changed from unimproved capital value to site value, an increase does not necessarily mean that the fair value of the asset has also increased.
Local governments should follow the normal process for ascertaining whether the asset’s carrying value is materially different from fair value. If the land’s site value is considered to be fair value (as detailed above) then this may indicate that a revaluation is required.
Relevant accounting standards
The following accounting standards are relevant to this bulletin:
AASB 116 Property Plant and Equipment
The latest versions of these accounting standards are available from the Australian Accounting Standards Board.