23-03-2023
HM Treasury review of non-investment asset valuation for financial reporting purposes
HM Treasury has now published a consultation paper on proposed changes to the valuation of assets categorised as property, plant and equipment.
Background
Last year, HM Treasury conducted a thematic review to consider the costs and benefits of the current regime and explore possible alternatives. The findings of the reporting team included the following:
- Elements of the regime are costly relative to their benefits (circa £50m a year)
- Costs are expected to continue to rise significantly
- Uses of the information is limited
- There are unrealised asset management benefits from the valuations undertaken
- DRC measurements are prone to being assumption driven and their contestability affects the audit process
- The work associated with reporting audited asset valuations is a contributory factor in the timeliness of reporting
The team found that there was a case for change.
Proposed changes
The Consultation Paper outlines specific proposals for central government bodies. However, if the proposed changes are adopted, there will be an expectation that they will be reflected in future local authority accounting through the CIPFA/LASAAC Code, unless convincing reasons are given for a different treatment. The proposed changes are summarised in the table below:
|
Asset Category |
Current Measurement |
Proposed Measurement |
|
Networked assets |
Depreciated replacement cost, with the exception of English, Welsh and Scottish Local Authorities which measure networked assets at historical cost |
Depreciated replacement cost |
|
Specialised assets (PPE) |
Depreciated replacement cost |
Historical (deemed) cost |
|
Non-specialised assets (PPE) |
Existing use value |
Fair value |
|
Heritage assets |
Current value like other IAS 16 assets, but where not practicable to value, non-operational heritage assets reported at historical cost |
No change proposed |
|
Social housing assets |
Existing use value |
No change proposed |
|
Surplus assets |
Fair value |
No change proposed |
Transition and implementation plan
The Treasury proposes that amendments will apply from 1 April 2025.
An opportunity to put your views forward
Many valuers will agree that the existing use valuation basis, including DRC, is widely open to interpretation and requires assumptions to be made that can often be difficult to evidence and or defend when challenged. Could the work currently being undertaken by the RICS to engender more consistency in the approach to EUV sufficiently address these problems? Certainly financial reporting standard setters have yet to agree an alternative measurement which they consider robust enough to provide what would be deemed relevant information.
The question of course comes down to how measurements contribute to ensuring the provision of a ‘true and fair’ view of the financial position, performance and cash flows of a local authority. Who are the ‘readers’ of financial statements and what information do they need to know and for what purpose? What valuation basis would best reflect the value of property assets to the authority?
Now is a great opportunity for you to put your views forward. The Exposure draft for public consultation has been published and can be found here: Thematic Review of Non-investment Asset Valuation for Financial Reporting Purposes - Consultation Paper.
The consultation closes 18 May 2023.