- FINANCIAL REPORTING
- TAX CONSOLIDATION
- PRE-ACQUISITION DESKTOPS
- POST-ACQUISITION PURCHASE PRICE APPORTIONMENT
- PUBLIC & PRIVATE BUSINESS PROSPECTUS VALUATIONS
- RISK MANAGEMENT – INSURANCE VALUATIONS
- STATE DUTIES
- VICTORIA RATING
- TRANSFER PRICING
- LEASING AND FINANCE
- LITIGATION EXPERT EVIDENCE
- FIXED ASSET REGISTER VERIFICATION
FINANCIAL REPORTING VALUATIONS
- AASB 3 BUSINESS COMBINATIONS
- AASB 5 NON-CURRENT ASSETS HELD FOR SALE
- AASB 116 PROPERTY, PLANT & EQUIPMENT
The Australian Accounting Standards Board state that “AASB 116 Property, Plant & Equipment” is the Standard that must be applied in accounting for property, plant and equipment. The Standard states:
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them.
AASB116 STATES THE PRINCIPLE PROCESS IN ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT IS:
- the recognition of the assets,
- the determination of their carrying amounts,
- the depreciation charges,
- Impairment losses to be recognised in relation to them.
- To undertake the valuation on the basis of Fair Value,
- Adoptone of the valuation approaches nominated (see dot points in next paragraph),
- To ensure that if, an item of plant and equipment is revalued, then the entire class of plant and equipment to which it belongs is revalued,
- To determine whether an item of plant and equipment is impaired, based on applying AASB 136 Impairment of Assets,
- To revalue the assets annually on or after 1st January 2018,
- To also have knowledge of AASB 5, 13, 102, 117, 136, 1048 and 1057
FOR AASB116 THE MEASUREMENT OF FAIR VALUE, IS NOMINATED IN AASB13, AS BEING DETERMINED USING ONE, OR MORE, OF FOLLOWING THREE VALUATION APPROACHES:
- Market Approach,
- Cost Approach (which is depreciated replacement cost)
- Income Approach.
As previously indicated under the section entitled Taxation Valuations the process and approach to valuing Property, Plant and Equipment, for determining Fair Value, is essentially the same as that required by the ATO for determining Market Value. There can be a number of differences in reporting the valuation.
If Mitchell Munn undertakes a valuation it will be based on an independent approach, that complies with worldwide valuation standards. We will inspect each individual high value asset and determine all the issues affecting its value, undertake research and report. In our view, qualified specialist valuers are employed by a client to provide an accurate valuation through an independent approach.
A plant and equipment valuation prepared for Tax Consolidation purposes is the most likely valuation undertaken by Mitchell Munn to be reviewed by the Australian Taxation Office (ATO). Other valuations undertaken for Tax or Financial Reporting Purposes may also be scrutinised by the ATO.
The Australian Taxation Office (ATO) has produced a document entitled “Market valuation for tax purposes”. It provides a guide to taxpayers and their advisers, including valuers, as to the valuation principles and processes required by the ATO. Valuations undertaken by Mitchell Munn comply with these ATO Guidelines.
THE GUIDELINES NOMINATE THE PROCESS THAT SHOULD BE ADOPTED IN VALUING PLANT AND EQUIPMENT,AS COMPRISING:
- Determination of the price,
- Establishment of value.
THE GUIDELINES ALSO NOMINATE THE APPROACHES TO VALUATION THAT ARE RECOGNISED BY THE ATO. THEY COMPRISE:
- Direct Sales or Market Comparison,
- Depreciated Replacement Cost,
- Income-based approaches.
The ATO guidelines also state that the accounting standard AASB 116, regarding the valuation of Property, Plant and Equipment,on the basis of Fair Value, when compared to the ATO basis of Market Value, are essentially the same as each other. From a valuation perspective this is a very important statement.
Unfortunately, the process of asset identification adopted by experienced plant & equipment valuers,in comparison to some accounting organisations, appears to be different.There is an increasing trend in major accounting firms for the identification of the assets requiring valuation to be based on the records in the client’s existing fixed asset register. The valuers at Mitchell Munn have been undertaking the verification of fixed asset registers since 1989. We know that fixed asset registers are rarely perfect. In fact, they are frequently materially inaccurate and therefore unrepresentative of the assets comprising the business. In our opinion the only way to determine the assets comprising the majority of businesses is to inspect and independently detail the actual plant and equipment requiring valuation.
Due to Mitchell Munn comprising experienced plant and equipment valuers we have the industry knowledge required to undertake the independent inspection and identification of the actual assets comprising the business. We describe each individual high value asset to comply with the ATO process guidelines. We review its condition, its output, its technology compared to the current modern equivalent replacement asset and finally we determine its age and remaining life. We review all the assets individually and collectively. From our perspective this is the process requested by the ATO and acknowledged by Mitchell Munn as meeting the professional and independent approach required by the professional bodies which represent valuers and the standards that they must observe in undertaking any valuation.
Our valuers have provided tax consolidation valuations for many of Australia’s largest businesses. These businesses often have fixed assets located in all states throughout Australia. At MitchellMunnwe do not operate on a state by state basis. Our approach is for a team of valuers to work together, going state to state to ensure one collective single valuation approach which results in consistent advice being produced for all our clients. We regard one approach, compared to five or more state by state individual approaches, being robust and defendable.
There are rare occasions where we will undertake a desktop valuation, utilising a client’s fixed asset register. Before taking an instruction on this basis Mitchell Munn highlight to our client that the result derived from this approach is only as good as the information in the fixed asset register. We indicate to our client that our experience is that 50% of fixed asset registers are materially inaccurate. There have been occasions where, after reviewing the fixed asset register data, we have determined that we cannot provide meaningful advice and have suggested to our prospective client that a desktop would be a waste of money.
Mitchell Munn limit the use of the desktop approach to assets under construction (for safety reasons), where it is not commercially reasonable to visit every site (such as equipment hire companies with assets spread between their depots and client sites throughout Australia) and finally when a prospective business acquirer needs an indication of value, as part of finalising their bid.
POST-ACQUISITION PURCHASE PRICE APPORTIONMENT
PURCHASE PRICE ALLOCATION
Purchase Price Allocation is when a company (the acquirer) has purchased another company (the target) and allocates the purchase price into various assets and liabilities.
Mitchell Munn provide plant and equipment valuation advice for purchase price allocation based on AASB 116-Property, Plant & Equipment. AASB 116 valuations will normally have been undertaken as part of complying with other Financial Reporting Standards, such as AASB 3-Business Combinations.
PUBLIC & PRIVATE BUSINESS PROSPECTUS VALUATIONS
A financial prospectus is a disclosure document provided by a company to potential buyers of a business. A financial prospectus may be prepared for a limited group of prospective buyers, or as a Public offering.
An initial public offering (IPO) Prospectus must meet a detailed level of disclosure as required by the Australian Stock Exchange (ASX). This has resulted in the valuers from Mitchell Munn preparing plant and equipment valuations for the IPO. In addition, the Directors of the company selling the business to the Public will normally require Mitchell Munn to undertake a review of the content of their fixed asset register, to ensure it represents the actual assets that have been valued and which will be transferred to the new Public company.
Where a financial prospectus is compiled as part of offering a business for sale to other businesses, it is normally presented through a virtual data room containing all financial information. It is possible that Mitchell Munn will be requested to provide a plant and equipment valuation for inclusion in the data room. However, it is more likely Mitchell Munn will be contacted by prospective purchasers to determine the value of the plant & equipment on acquisition.
Mitchell Munn will provide a prospectus valuation based on AASB 116-Property, Plant & Equipment, which can be used subsequently to comply with AASB 3-Business Combinations.
RISK MANAGEMENT – INSURANCE VALUATIONS
In simple terms the purpose of having insurance is to put the insured back in the position they were in prior to a partial or total loss occurring.
That outcome will only be achieved if following a loss, the assets comprising the location are found to be fully insured. If, for example, it is found to be underinsured by 50%, then in a partial loss situation, the insured will only receive 50% of the total cost to replace the assets destroyed in the loss. Alternatively, if the business location had incurred a total loss, then it would receive its total sum insured. However, that amount would only meet half of the cost to replace the buildings and plant and equipment. The insured would be required to fund the shortfall. In many cases the shortfall cannot be funded and the business ceases trading. This claim adjustment is normally referred to as co-insurance or average. The insured is viewed to have shared the loss with the underwriter due to their sum insured being inadequate. Some insurance policies have less strict co-insurance clauses than indicated.
We are concerned that many insurance valuations undertaken by other valuers are based solely on Replacement with New Cost. Replacement with New Cost is the total cost of replacing all the applicable buildings, plant & equipment and stock, at the date of valuation. For plant & equipment purchased from overseas it is based on the exchange rates at the date of valuation. What Replacement with New Cost does not cover is the cost associated with inflationary costs, or currency fluctuation, post the valuation date.
We recommend to all our clients we prepare the valuation on the basis of Reinstatement Cost. This requires us to indicate a timeline to rebuild all the buildings and plant & equipment. We then indicate the additional costs that will be incurred, starting from preparing the site, through to the commissioning of the buildings and plant & equipment. Each individual additional cost is identified and costed, so that it can be discussed with the client’s insurance broker to ensure it complies with the wording of their insurance policy.
The difference between replacement with new cost and reinstatement cost, for a small business, comprising buildings and plant & equipment, in low inflationary times, involving the replacement of overseas assets, could be around 17%. If the replacement with new cost was as low as $9,000,000, then the insured, depending on the terms of the insurance policy, may have to personally fund another $1,530,000. That can be a significant amount of money to a small business. For major asset locations, we have seen the difference between replacement with new cost and reinstatement cost being in excess of 50%.
LAND RICH OR BUSINESS STAMP DUTY
The acquisition of land, or a business, will normally result in State stamp duty being applicable. A valuation undertaken by Mitchell Munn, following the acquisition of a business, for tax consolidation and/or financial reporting purposes, can be customised to accurately meet each State’s specific legislation. The key issue can be one of timing. Most States require their stamp duty payment in a timeframe which may or may not be achievable through undertaking a traditional portfolio valuation approach. Mitchell Munn can assist any client faced with this problem. We will prepare an initial valuation of the plant and equipment assets to meet each State’s timing requirements. On finalising the post-acquisition tax and financial reporting plant and equipment valuations, we will also help our client finalise their State stamp duty payment responsibilities.
The approach to determining rating values in Victoria is historically based on UK legislation which has progressively evolved through local court decisions. It requires the valuer to value the land, including any fixtures that form part of the land. From a domestic perspective that means land and buildings. For major Victorian businesses, that rely on significant plant & equipment for manufacturing their products, it can involve the inclusion of some, or all, of their plant and equipment. This can result in their rateable value not being about the land and building value, but about the inclusion of their plant and equipment.
The inclusion of plant & equipment in the Capital Improved Value raises two significant issues regarding the qualifications of the valuers undertaking the valuation on behalf of the rating authority. Firstly, the issue as to what is a fixture, compared to what is not a fixture, is something land and building valuers are not qualified to determine. It is a legal issue not a valuation issue. Secondly, it would be very unusual for the valuer undertaking the rating valuation of the plant & equipment, deemed to be a fixture, to be an experienced, or qualified, Certified Practising Plant and Machinery Valuer.
Mitchell Munn has helped many manufacturing organisations in Victoria review the Capital Improved Value of their land for rating purposes. We believe it is correct to state, that in each past review the Capital Improved Value was found to be overstated. We wish to help other Victorian manufacturers find out what is a fair Capital Improved Value, for each rateable location, comprising their business.
Valuations for transfer pricing purposes are required by the ATO to be undertaken “by applying an arm’s length principle”. The ATO nominate several traditional methods for determining a market value. All methods need to be reviewed by the valuer to determine which is appropriate. However, we would normally anticipate that the market value will be determined utilising a comparable uncontrolled price methodology (CUP) for assets being physically transferred from one location to another location overseas. The market value will be based on:
• the assets not being installed but sold ex-situ,
• the extent to which the assets being transferred will be fully or partially utilised, reconfigured or transferred as spares,
• a review of what an informed purchaser would pay in the destination country for the benefit of owning the assets being valued.
LEASING AND FINANCE VALUATIONS
We provide leasing and finance valuations, on agreed bases of value, to individual leasing and finance organisations. Our most significant leasing valuation was in respect to a Private Equity company selling mobile equipment, trucks and motor vehicles belonging to a significant national business, to a major leasing organisation.
LITIGATION EXPERT EVIDENCE
We believe that successful testimony is based upon our valuer knowing the assets that comprise a specific industry, understanding the requirements of the Court, showing a commitment to high ethical and professional standards, through clear and concise communication of well researched defendable valuations.
On receiving instructions Mitchell Munn will appoint a valuer with in excess of 35 years valuation experience. In submitting our fee proposal, we will indicate our relevant credentials for the industry requiring valuation. We acknowledge that our valuations will be prepared as an expert witness to the Court, not as an advocate for the person paying our fees. Where both sides appoint an expert valuer we commit to liaising with the other valuer in a professional manner, in an attempt to determine a final agreed valuation. In instances where this is not achievable we will attempt to communicate to the Court the reasons for any material differences. Our experience in legal disputes covers the Federal, Supreme and Family Courts.
FIXED ASSET REGISTER VERIFICATION AND RECONSTRUCTION
As previously indicated the valuers at Mitchell Munn have been clean singthe content of fixed asset registers since 1989.This includes the total cleansing of data prior to its transfer into new software such as SAP to ensure it clearly defines the assets comprising the business.
Major fixed asset register reconstructions undertaken by our valuers include Qantas on a worldwide basis and Western Mining Corporation prior to its acquisition by BHP.
We regard the knowledge our valuers have acquired over the last 30 years in undertaking fixed asset register verifications and reconstructions as being so extensive that we would claim to have Intellectual Property in this type of work. For this reason, our preference is to engage with any prospective client through an initial meeting, rather than share our intellectual property on our website.
If you wish to discuss fixed asset register verification and data cleansing,then please contact Nicholas Munn on 03 9864 6501.
GET IN TOUCH
We are based in Melbourne. Our valuers provide advice on a local, national and international basis. We do business where you do business, no matter how large or how small your business. Please contact us to discuss your valuation requirement