Audit Results Report – Annual 2017-18 Financial Audits of Local Government Entities

Financial reporting challenges relating to asset valuations

During our audits we noted a variety of valuation methodologies being used for property, plant, equipment and infrastructure in the WA LG sector. In this first year of our LG financial auditing, we noted several issues relating to these valuations. One issue was the timely completion of valuations – at least 3 audits were completed late because the LGs received their valuation reports too late.

Two other aspects were of particular concern:

  • the cost of performing valuations
  • inconsistent valuation methods.

The cost of performing valuations

Australian Accounting Standard 116 Property, Plant and Equipment requires entities to elect to measure property, plant and equipment, including infrastructure, using either a revaluation model (at fair value) or a cost model. In the public sector, it is common practice to measure assets such as land, buildings and infrastructure at fair value, requiring periodic valuations.
However, it is more common for the public sector to measure assets such as equipment (including computing equipment), some plant, furnishings and motor vehicles at cost less accumulated depreciation, thereby avoiding the often significant expense and effort of periodically valuing the assets and auditing the valuations.

The WA State public sector measures these assets at cost, whereas local governments are required, by Regulation 17A of the LG Financial Management Regulations, to fair value the assets through periodic valuations. A recent revision to the LG Financial Management Regulations, effective 1 July 2018, will remove the requirement to value assets below $5,000. However, we suggest consideration also be given to requiring local governments to report all assets in these asset sub-classes using the cost model.

Inconsistent valuation methods

Valuation methodologies used for property, plant, equipment and infrastructure in the LG sector sometimes vary significantly across the different valuers. Some revaluations performed in 2017-18 yielded significant increments or decrements compared to the values of the previous revaluations, which were generally performed between 2013 and 2015. We concluded that most of the revalued assets were reported at amounts that materially represented fair value. However, in some instances, we asked LGs and their valuers to revisit the estimated values, resulting in some amendments.

Of particular concern is the inconsistent approach across different LGs, for valuing land assets that have restricted use. These include sports grounds, parks, gardens, sumps, foreshore, or land reserved as ‘bush forever’. One of the reasons for inconsistency is differing interpretations of the principles in Australian Accounting Standard AASB 13 Fair Value Measurement. In particular, the standard requires valuers to take into account the highest and best use to which a market participant could put the asset. However, the standard also specifies the need to take into account the characteristics of the asset, including any restrictions on sale or use.

Different valuers are applying different interpretations of these principles, resulting in significant differences in values attributed to these types of restricted use assets. This impacts comparability of the assets of local governments. Both the Australian Accounting Standards Board (AASB) and the International Public Sector Accounting Standards Board (IPSASB) currently have projects under way relating to fair value of public sector assets, and it is anticipated that they will provide guidance that could then be consistently applied in the LG sector.


  1. The Department should re-assess the potential advantages if LGs are required to report equipment assets using the cost model.
  2. LGs should robustly assess the assumptions and methodology of their valuers, in particular the approach for valuing land assets with restricted use.
  3. LGs and the Department should monitor the progress of the AASB and IPSASB public sector fair value projects.

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