• Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
378
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
12
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Valuer-General Victoria Guidance Note – Methodology for the valuation of Victorian cemeteries for financial reporting purposes March 2007
  • 2. Valuer-General Victoria Guidance Note – Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 In accordance with AASB 116 and Department and Treasury and Finance (DTF) guidelines 103B, the valuation of land for financial reporting purposes must have regard to its highest and best use (HBU). This means adopting a HBU that is legal and feasible. Land needs to be valued at fair value and measured having regard to the HBU when and only where there exists possible and feasible alternative uses in the existing natural, legal, financial and socio-political environment and the alternative uses are feasible within the near future. Where there are natural, legal, financial or socio-political restrictions on the use and disposal of land, and there is no feasible alternative use in the near future, the land should be valued at fair (market) value for its existing use. That is, opportunities that are not available to the entity are not taken into account. Allowances need to be made in the valuation of the land for the restricted nature of the land. Once the restrictions in use are put in place the asset is said to provide a community service obligation (CSO). The CSO is represented by the difference between the hypothetical value of the land as if it was to be used for its HBU compared to the value of the land in its current restricted use. Valuer-General Victoria (VGV) has investigated articles and papers on the valuation of cemeteries from overseas and interstate. The research shows little in terms of methodology from Europe and interstate but American information shows that cemeteries are valued using a variety of methods depending on their public or private status. The basic methods used in America include the direct comparison approach using sales evidence from analysed comparable sales. This is compared to the capitalisation approach whereby net income is capitalised at an appropriate rate of return. The cost method (called depreciated replacement cost in Australia) is also used to value the improvements, especially where there are few if any sales to go on. In many cases valuations are arrived at by using a mixture of these methods. In most cases the various components of the cemetery are categorised or grouped depending on their use. The most common categories are as follows: • sold plots and developed lands • passively held land – not yet used for cemetery purposes • the building sites for mausoleums, columbaria, outdoor crypts • the remainder of the improvement sites Land under the control of cemetery trusts throughout Victoria usually consist of parcels in various stages of development for interment purposes or for uses associated with the running of the cemetery complex overall. Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 1
  • 3. The zoning and use of the various categories will have an impact on the value of the land to be ascribed for financial reporting purposes. However, considering the complexity of assessing the various components and the materiality of the end result, in splitting up the values in accordance with the use of the land it has been decided to keep the methodology of valuation of cemetery assets as simple as possible. The following guidance is provided to make the valuation of the real estate for Victorian cemeteries for financial reporting purposes as consistent as possible. Land that has been purchased for future cemetery purposes While it is understood that land purchased for cemetery purposes is generally reserved for that purpose there may be instances where land could be still zoned for other than cemetery purposes, i.e. zoned as purchased and not yet restricted by a zone/reservation for its future use. The land is basically still zoned for ‘tradable’ purposes. The land has not yet been zoned for ‘cemetery purposes’ and interments have not commenced. This land should be valued at its full market potential, i.e. a fair value for the HBU of the land, taking into account the usual planning issues. The value will reflect the HBU of the land which could be for a purpose other than cemetery use. If the property was purchased within the last 12 months but has not yet had a change in zoning then the purchase cost may suffice for the fair value for that particular year. Land reserved or zoned and used for cemetery purposes This could be land that has previously been used for interments and has now been completely filled. It could also be land that is set aside for future interments including pre-purchases, or land that is currently used for interments. As this land is serving its CSO for a long period of time and cannot ostensibly be used for other purposes it should be valued at a discount of 95 per cent from its unencumbered HBU value on an ‘englobo’ basis. For example: the dollar amount per hectare ‘englobo’ less 95 per cent equals the encumbered fair value of the land. The high discount rate reflects the extreme restriction placed on the land in that it does not allow the land to be used for a HBU than the CSO for a very long period of time. Land used for buildings and infrastructure associated with cemetery use In each cemetery there will be a portion of the land set aside for buildings for administration and maintenance purposes. There will be land under the buildings and a small curtilage around them. There will also be land under the roads and car parks. Land in this category may be considered to have less restriction on it compared to land used for interments. However, because this land is usually within the same restrictive zoning/reservation as the interment land, the discount of 95 per cent from its unencumbered HBU value on an ‘englobo’ basis can be used. Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 2
  • 4. Infrastructure assets and buildings, mausoleums, crypts, etc Infrastructure assets will include the roads, kerbs, channels, dams, irrigation layouts, car parks, paths, fences, gates, etc that provide access throughout the cemetery but are not set aside for interments. Buildings will include administration, workshops, mausoleums, crypts, chapels, etc. The infrastructure and building assets should be valued on a depreciated replacement cost (DRC) basis. There is a view that mausoleums are more likely to be treated by accountants and cemetery trusts as part of the cost of inventory, along with wall niches and any other structures used for interment. Consequently they would be held at cost and not be subject to valuation. However, if they have been treated as property, plant and equipment in the past, and will be transferred to inventory for the first time, cemetery trusts may need to know the DRC of such structures so they can strike a deemed cost for transition. They might also want to know the current replacement cost just to inform them of the likely cost if they wanted to build more mausoleums. For these reasons valuers should be requested to include mausoleums in the DRC schedule. ‘Englobo’ value of land using an underlying zone Valuers are encouraged to adopt an underlying land value of the cemetery area based on recent and comparable ‘englobo’ land sales. The sales should be those of similar area and location but because it is very unlikely that they will be zoned/reserved for cemetery use they should be sales of land that are zoned for an alternative HBU. If the majority of land surrounding the cemetery is used for residential or industrial purposes, then ‘englobo’ sales for the alternative HBU purposes should be identified and used for comparison. The question should be asked, “If the subject land was not used for cemetery purposes, what would it be used for?” The resultant answer should reflect a use that is capable of success either politically, socially, economically or physically. For example the underlying HBU must be based on a feasible and legal ability of success, even if it never happens. Once a value is ascribed for the land based on an ‘englobo’ basis, discounts can be made to reflect the restriction in zoning/reservation and use. Why discount cemetery lands by 95 per cent? The circumstances behind the City of Brighton v Road Construction Authority Victoria (1985) and the Blacktown City Council v Roads and Traffic Authority of NSW (2006) cases were quite different. However both these judgments reinforced to valuers the idea that land used for and restricted for community purpose has a ‘restricted’ or lower level of value than land not so restricted. The decision as to how much ‘discount’ to apply to restricted land centres around the probabilities of the relevant statutory restrictions on the land being removed. The level of discount will depend on the potential difficulty of removing the restriction. Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 3
  • 5. The court cases give guidance to valuers of the level of discount to apply but there is no prescriptive amount or schedule of discounts. Valuers are expected to apply levels of value that are relative to the use and restriction of the land and the discount will also vary depending on the particular circumstance. Cemetery land is generally acknowledged as being significantly restricted in its use due to it not being available for any other use for a considerable time. On the acquisition of any land purchased or acquired by a cemetery trust or the Minister under Division 2 of the Cemeteries and Crematoria Act 2003, the land is deemed to be permanently reserved for cemetery and crematoria purposes. The probability of removing the reservation restriction is therefore very low. VGV has concluded that the statutory restrictions placed on cemetery land should be reflected in the levels of value applied for financial reporting purposes. In view of the principle that there would be no absolute guarantee that a reservation could not be removed, it is felt that it would be impossible to discount the land by 100 per cent. Therefore some value amount must be applicable to the land reserved for cemetery purposes. Under all the circumstances mentioned above, a level of 5 per cent of the unencumbered (underlying) HBU value is regarded by VGV as representing a suitable level for the fair value of the restricted land for financial reporting purposes. The community is therefore forgoing a level of 95 per cent of underlying value to restrict the use of the land under a permanent reservation for cemetery and crematoria purposes. Example Land 10 ha @ $800,000 / ha = $8,000,000 Unencumbered (unrestricted) land value based on ‘englobo’ sales Allowance for restrictions in use, cemetery reservation 95% $7,600,000 ----------------- Difference (Fair value of the land for financial reporting) $ 400,000 Added value of improvements (DRC method) $1,600,000 ----------------- Fair value of cemetery for financial reporting purposes $2,000,000 Notional CSO component $7,600,000 Valuers should be encouraged to provide this CSO figure to reporting entities as the CSO number reflects the amount the community has to forgo in terms of generally ‘unreported’ value to supply the service potential of the asset. Assignment of land areas for balance sheet In the 2006-2007 financial year the larger cemetery trusts will be valuing their real estate as property, plant and equipment in accordance with the methodology in this guidance note. However for future financial reporting arrangements cemetery trusts may need to assign various parts of the cemetery land to various parts of the balance sheet. Such as – Administrative land (10%) to property, plant and equipment (land) Unused interment land (50%) to inventory (still to be decided) Land already used for interment (40%) to past cost of sales Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 4
  • 6. On a direct proportional basis, knowing the area of land set aside for the various functions of the cemetery will allow cemetery trusts to proportion the values in the balance sheet, based on area and valuation amounts. While valuers attending at an inspection will be able to confirm approximate areas of land in the categories, it is suggested that a reasonable approximation of the various areas can be gained by the use of aerial photographs and GIS mapping systems. It is recommended that if a split up of the various areas is required, cemetery trusts should discuss this aspect with the VGV asset valuations team prior to valuers being appointed. VGV can assist Cemetery Trusts with quotations and advice for providing valuations of property, plant and equipment for financial reporting valuations. If Cemetery Trusts decide to arrange their own valuations they are reminded that they must use valuers who are members of the Valuation Services Panel administered by VGV. Graeme Balfour Deputy Valuer-General (Government Valuations) Valuer General- Victoria 15 / 570 Bourke Street Melbourne, Vic, 3000 T: 03 8636 2585 E: graeme.balfour@dse.vic.gov.au References: − AASB 116 − DTF Financial Reporting Directions 103B, February 2007 − API Professional Practice Valuation Guidelines (5th Ed), 2006 − California State Board of Equalisation, Assessor’s Handbook, section 516 − The Appraisal Journal, October 1980 − Court case - Blacktown City council v Roads and Traffic Authority of NSW, 2006. − Court case – City of Brighton v Road Construction authority, July 1985 − Discussions with Andrew Greaves, Auditor Generals Office, Vic. 2006. − Highest and Best use v public use, Fair & Equitable, Appraisal Journal, Jan 2007 − Valuer-General Victoria website - www.land.vic.gov/valuation Attachments: 1. Suggested Information to be provided by valuers in their valuation reports for financial reporting purposes. 2. Example of DRC schedule for valuers. Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 5
  • 7. Attachment 1 Suggested information to be provided by valuers in their Valuation reports for financial reporting purposes The full report should contain the (minimum) following information: − Executive summary − Introduction − Instructions – nature of instructions and purpose of valuation − Basis of valuations − Definition of value − Applicable regulatory framework − Legal description − Tenure of assets and classification of rights valued − Land details − Improvements − Identification of the assets and their locations, as well as the date and extent of the inspections − Methodology − Valuation approach − Valuation amount − Valuation date − Relevant Financial Year that valuation applies to − Special assumptions and/or limiting conditions − Appendices (locality map, title information, zoning map, valuation schedules and photographs) − Schedule of values (refer to example schedule of DRC values) The following additional information should also be provided by valuers in order to complete their valuation assessments - − confirmation of any sites which have historical significance, and − details of contaminated sites if any The estimates for financial reporting should be made in conformity with: − Australian Accounting Standards Board AASB 116, ‘“Property Plant & Equipment’ − Australian Accounting Standards Board AASB 136. ‘Impairment of Assets’ − Victorian Government Policy – FRD 103B Non Current Physical Assets, issued by Department of Treasury and Finance in February 2007 − International Valuation Applications IVA1 ‘Valuation for Financial Reporting’ issued in the API & PINZ Professional Practice 2006 Fifth Edition − API Valuation Guidance notes AVGNI ‘Valuations for use in Australian Financial Reports’ issued in the API & PINZ Professional Practice 2006 Fifth Edition − Any special instructions or guidelines provided by Valuer-General Victoria Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 6
  • 8. VALUER GENERAL VICTORIA Name of Valuation Firm YEAR OF VALUATION: 2007 BUILDING DETAILS DEPRECIATION VALUES NAME/DESCRIPTION YEAR SIZE CURR STOREYS REPLACEMENT REPLACEMENT STATUS LIFE ANNUAL TOTAL DEPRECIATED ADOPTED GFA BUILT M2 AGE COST $/M2 COST CORE/NC (yrs) RATE RATE ($) ($) Administration buildings 1980 200 27 1 $700 $140,000 CORE 80 1.25% 33.75% $92,750 $93,000 Workshop 1980 100 27 1 $400 $40,000 CORE 50 2.00% 54.00% $18,400 $18,000 Public toilets 1980 50 27 1 $50 $2,500 CORE 80 1.25% 33.75% $1,656 $1,600 Machinery shed 1980 70 27 1 $60 $4,200 CORE 80 1.25% 33.75% $2,783 $2,800 Chapel 1980 300 27 1 $1,000 $300,000 CORE 55 1.82% 49.09% $152,727 $153,000 Mausoleum 1980 600 27 1 $1,000 $600,000 CORE 55 1.82% 49.09% $305,455 $305,000 Columbarium 1980 500 27 1 $600 $300,000 CORE 55 1.82% 49.09% $152,727 $153,000 Crypts 1980 400 27 1 $500 $200,000 CORE 55 1.82% 49.09% $101,818 $102,000 Roads, footpaths, kerb and channels, etc 1980 27 1 $400,000 CORE 55 1.82% 49.09% $203,636 $204,000 Irrigation set up 1980 27 1 $20,000 CORE 55 1.82% 49.09% $10,182 $10,000 Dams 1980 27 1 $40,000 CORE 55 1.82% 49.09% $20,364 $20,000 Landscaping 1980 27 1 $10,000 CORE 55 1.82% 49.09% $5,091 $5,000 Other improvements 1980 27 1 $5,000 CORE 55 1.82% 49.09% $2,545 $2,500 Total depreciated building value $1,069,900 Total depreciated site improvements value 50 $20,000 80 1.25% 62.50% $7,500 $7,500 TOTAL DEPRECIATED VALUE $1,077,400 Value of land (Englobo - unrestricted) 10 ha $400,000 $4,000,000 Discounted by 95% $200,000 Value of land for financial reporting $200,000 Total fair value of real estate for financial reporting $1,277,400 Community service obligation (CSO) estimate $5,077,400 less $1,277,400 $3,800,000 Valuer-General Victoria Guidance Note- Methodology for valuation of Victorian cemeteries for financial reporting purposes – March 2007 Page 7