Seeking external valuations on land and buildings in 2023

We are progressing through another pivotal reporting period, being 30 June 2023. It’s at this time (or earlier) when directors of companies determine that external valuations may be needed in support of the carrying value of land and buildings recorded in the balance sheet. These could be either owner occupied properties (accounted for under AASB 116 Property, Plant and Equipment) or investment properties (accounted for under AASB 140 Investment Properties). Directors should be aware that their external auditors will most likely request reliable support for the carrying value of land and buildings.

This is certainly not a new dynamic, however there are a few factors that directors need to be aware that may be unique to this reporting period:

1. There has been much speculation about the falling values of properties in Australia’s CBDs as a result of the slow return to offices post COVID-19. This is particularly so for older CBD properties. For any business that owns commercial property, it is almost certain that the external auditor will require a formal valuation in 2023, notwithstanding that the company may have an accounting policy that stipulates the cycle on which external valuations are obtained. As directors, it may be difficult to argue that an impairment trigger under AASB 136 Impairment of Assets does not exist, therefore necessitating an impairment assessment.

2. When an external valuation is sought, directors need to understand exactly what they are receiving in terms of support as such a valuation is likely to form the basis for the assessment of the value of land and buildings. During the COVID-19 period, “significant uncertainty” paragraphs started to appear in valuers’ reports. This practice has continued and is likely to do so for the near future. Directors should consider the following:

• What does “significant uncertainty” mean in the context of the valuation report? The answer to this should be sought in writing if possible. 
• Can the assumptions that form the basis of the valuation report be relied upon?
• What additional work may be required of management to pressure test the assumptions?
• Does the valuation report provide sufficient detail in order to make the required disclosures in the financial report?
• Will the external auditor be satisfied with the valuation report and any additional work completed by the management team if a “significant uncertainty” is present in the valuation report?
• Will the external auditor need to amend the audit opinion if a “significant uncertainty” is present in the valuers’ report?

In summary, if directors have not yet considered the need for external valuations for 30 June 2023, now is the time to act, or now is the time to reflect on what valuation reports have been received.

For further assistance, please do not hesitate to contact your local PKF Audit Partner.