Valuation of assets in 2020

Valuation of assets in 2020

COVID-19 has had a significant economic impact right across the globe which, justifiably, has created a lot of noise in relation to the preparation of SMSF financial statements for the year ended 30 June 2020. 

Certainly we have fielded more questions on this issue than ever before with our clients keen to understand our approach. However, before I take a look at the issues specific to certain asset classes for 2020, I'll briefly revisit the requirements around valuation.

Since August 2012, regulation 8.02B of the SIS Regulations has required each asset of an SMSF to be valued at its market value.  Due to this, it is common for the notes to the financial statements to state that assets are recorded at their market value.  This means the issue of valuation is considered both in the financial audit, where we are providing an opinion on whether the financial report presents fairly in all material respects and in the compliance audit, where we are providing an opinion on whether the trustees have materially complied with the requirements of regulation 8.02B. 

In forming these two opinions our role is not to value the assets; instead we evaluate the evidence and provide an opinion on the appropriateness of the valuation.  This opinion is formed after exercising professional judgement and whilst the approach between SMSF auditors will vary, all auditors must possess evidence which is sufficient and appropriate so as to meet the requirements of the auditing and assurance standards.  In addition, the evidence gathered and the conclusions reached must pass the scrutiny of the ATO and, perhaps most crucially, be sufficient to withstand examination in court should something go wrong.

Due to the above we request that accountants and trustees not only value all assets at their market value but also provide us with the evidence supporting the valuation for us to examine.  Without this evidence the audit will not be  efficient as we will have to ask for it.  If suitable evidence can't be provided to support a valuation then the audit opinion will be modified.

Property - general approach

Despite often being a material asset, property is not a huge risk to us and really, despite the best efforts of trustees to assign a value to it, until a property actually goes to market who knows what it will ultimately sell for.  That said, we do require the trustee to demonstrate they have made a reasonable attempt to determine the market value of the property each year.   To assist trustees in doing this we provide a trustee property valuation template as part of our audit checklist.

We do accept online property valuations which have a high confidence level or a forecast standard deviation of 15% or less.  Where it is difficult to obtain current data on the value of a property then an external valuation may be required and we would generally suggest that one be obtained every 3 years.

Property - COVID-19 impact

My research into 2020 property valuations has told me there is no hard and fast rule which can be applied to the Australian property market.  There will be variations between states, regions, suburbs and individual properties with the type of property and its use both being relevant. Due to COVID-19, some auditors have suggested many more qualifications and auditor contravention reports will be required; however, we do not necessarily believe this to be the case.

Our requirements in relation to property valuations will not be onerous or unreasonable.  We will not dictate that trustees obtain an independent valuation for all 2020 properties and we will not lodge numerous auditor contravention reports.  Instead we will be looking to see that trustees make a reasonable effort when assigning a value to a property and that each valuation considers whether COVID-19 has materially impacted the property.

Unlisted investments - general approach

As with all other assets, we require trustees to value their investments in unlisted entities at market value each year and provide us with evidence to support the valuation used.  Without evidence, we are unable to provide an opinion that the valuation adopted is at market value.

We expect to be provided with the financial statements for an entity so we can understand the investment.  If the value of the entity is based on its net assets, such as in the case of a property trust, then evidence supporting the value of those assets will be necessary.  If the value of the entity is dependent on a goodwill component, then the value is demonstrated by arm's length transactions such as transfers and capital raisings.  The evidence required to support a valuation not based on the net assets of the entity could include financial statements which disclose the capital transactions, or details of a recent share transaction verified by a director or CEO/CFO of the entity.  We ask that the value of businesses with a goodwill component is not simply based on the amount of any retained profits or losses.

If there have been no recent transactions then an independent valuation would be necessary for us not to issue a modified opinion.  Simply including an investment in an unlisted entity in the financials at cost for the last 5 years is not sufficient.

Unlisted investments - COVID-19 impact

An investment in an operating business or property development may be adversely impacted by COVID-19 and could lose a significant amount, if not all, of its value.  Consequently, trustees must take the impact of COVID-19 into account when valuing these assets at 30 June 2020 and not rely solely on pre-COVID-19 information. Again, it is important that our assessment of the valuation methodology is made as easy as possible and therefore please clearly set out how the asset has been valued so we don't have to go looking for it.

We acknowledge businesses may be propped up by Government stimulus (such as JobKeeper) and that therefore the full impact on businesses and valuations may not be seen until 30 June 2021; meaning the impact at 30 June 2020 is unknown.  If trustees document that a business in which they have invested will need to see how economic conditions pick up again later in the 2021 financial year before knowing the impact on its valuation then we are comfortable with the approach of retaining the valuation as is as at 30 June 2020.  However, it should be noted that if something occurs which materially impacts the valuation of an asset sometime between 30 June 2020 and the signing of our audit report, then this information needs to be brought to our attention.

ATO approach

Where a valuation is uncertain or no evidence can be provided, a modified audit opinion is necessary and the ATO has made it clear to auditors that the lodgement of an ACR is required.  However, due to COVID-19, the ATO acknowledges it may not be possible to obtain valuation information and they do not want to penalise trustees because of that.

Therefore, if ACR is lodged which outlines that the breach occurred because the information was not available due to COVID-19, the ATO will not issue a penalty.

The audits for the 2020 and 2021 financial years will differ from the norm because of the impact of COVID-19 and the resulting ATO concessions.  However, ensuring all assets are recorded at their market value and providing evidence to support the valuation remains the key requirement in relation to valuations. 

However, as with everything else in the audit world, valuations are not always black and white so if you have any queries about any issues arising from this topic please do not hesitate to reach out to me at Baumgartner Super on 1300 04 SMSF or via our contact page.