Fair Value RulesPublished on: 2nd June 2016
Luke Barrett, associate partner in our corporate real estate department, considers the impact that could be felt by local authorities following the introduction of fair value rules for company accounts property valuations.
The UK accounting standard has now been replaced by the new Financial Reporting Standard FRS102, which is based on International Financial Reporting Standards (IFRS) rather than the previous UK GAAP accounting standards.
Clearly, as one of the single biggest changes to UK accounting in more than 20 years, it has had an impact on many aspects of local authority accounting - but perhaps none more so than in property valuations.
Impact of FRS102
FRS102 is mandatory for all financial periods starting 1st January 2015, which means all accounts processed since the start of this year are subject to the new standards. It signals a new approach to property valuations for accounting purposes and the impact on large-scale property owners like local authorities could be significant.
The new standards use ‘fair value’ accounting, which is defined in the standards as “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.”
In using fair value, organisations must make a market-based measurement, rather than one which is entity-specific. This means surveyors will use assumptions that market participants would use when pricing the asset under current market conditions, including assumptions about risk. Because it is a market-based measure, the intention to hold an asset is no longer relevant - nor is the argument that “I would not sell at that price”.
For those following the revaluation model, under the previous standards, full revaluations of property used in the business were required at least every five years, with an interim valuation in year three.
Under FRS102, valuations are required at sufficient frequency to ensure that carrying value is not materially different to fair value. This means that for local authorities choosing to revalue their property assets, an annual valuation of some description is likely to be necessary. Annual revaluations of a 20 per cent rolling sample are likely to be required.
When accounting for property assets it is now necessary for the valuer to consider how the asset is used operationally. If the property is surplus or held as an investment then the Fair Value basis applies and the comparable method of valuation is adopted. If the asset is held for operational purposes then the assets are valued on the basis Current Value defined as either Existing Use Value (EUV) or Depreciated Replacement Cost (DRC), depending on whether the property is so specialist that no comparable is available.
Organisations must also disclose the date of the last valuation, whether an external valuer was used and the methods applied in estimating the valuation including stating comparable evidence and the comparable hierarchy level adopted. The depreciated historical cost of the asset as if it had not been revalued will also need to be disclosed.
Clearly it will be crucial for local authorities to work with experienced surveyors, and particularly one which has experience of company accounts valuations.
At the time of the changes, Chris Thorne, valuation spokesman for RICS, said: “We welcome the shift towards fair value accounting which conveys far more useful information than outdated cost figures. However, the new accounting standards have an increased dependence on high quality valuations. There will be a demand for properly qualified and regulated professionals to undertake this work, if fair values are to be relied upon.”
We are aware of companies that would previously inflate the value of assets using the Retail Price Index, but are now forced to stop inaccurate valuations and enlist the services of a specialist surveyor. And now, more than ever, it is important to choose wisely; only those using fair value to the latest standards will meet the requirement of the new Financial Reporting Standard.