Methodology and Assumptions Reviews

Increasingly one of the more common projects APV is now being requested to undertake by our clients is review of existing methodologies and underlying depreciation assumptions. In many cases this is being driven by concerns over Sustainability Ratios and the entity's own intuition that the figures provided via previous valuations (whether by other valuers or by in-house staff) do not reflect the asset management reality.

With changes in the definition and concept of Fair Value flowing from the implementation of AASB13 and a range of clarifications and guidance issued by the AASB in recent years it is clear that some valuations delivered over the past few years have not been updated to comply with the new requirements. 

Unfortunately this also includes valuations calculated by Asset Management systems that still try to link the valuation to depreciation expense despite the AASB clarifying that they are not related and are to be determined independently of each other. Typically this approach results in the understatement of values.

Commonly one of the other issues is the failure to split components into short-life and long-life parts which in turn usually results in significant over-depreciation.

 

Both of these of course impact the resulting Sustainability Ratios used to judge the performance of the entity.