Valuation

 Right of use asset valuation

Masanori Narita's profile image
Masanori Narita MRICS posted 27-10-2022 01:12

Hello, I have one question about Right-of-use asset valuation, which is recognized as an investment property (IAS40).

Based on the IAS50(d), the valuation approach is described as below, but I am not sure about how to estimate the discount rate. Is it similar to the rate for the real estate valuation (underlying property)? It would be appreciated if you could give me some advice.

There is not enough guides, etc. in my country. If you have a reference for the fair value measurement of ROU asset, could you please let us know?

 

IAS 40A:

When a lessee uses the fair value model to measure an investment property that is held as a right-of-use asset, it shall measure the right-of-use asset, and not the underlying property, at fair value.

 

IAS 50(d):

the fair value of investment property held by a lessee as a right-of-use asset reflects expected cash flows (including variable lease payments that are expected to become payable). Accordingly, if a valuation obtained for a property is net of all payments expected to be made, it will be necessary to add back any recognised lease liability, to arrive at the carrying amount of the investment property using the fair value model.

Martin Burns's profile image
Martin Burns MRICS posted 07-11-2022 23:15
Hi Masanori, I have just joined the group and viewed this post. In Australia the ROU valuation is taken to be the present value of the rent payments. With regard to assessing the discount rate Deloitte state in their article "Leases: A guide to AASB 16" - An Australian version of IFRS 16

https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-aasb-16-guide-220916.pdf

7.4.2.2 Discount rate
The lease payments should be discounted using: [IFRS 16:26]
• the interest rate implicit in the lease; or
• if the interest rate implicit in the lease cannot be readily determined, the lessee’s incremental borrowing rate.

The interest rate implicit in the lease is defined as “[t]he rate of interest that causes the present value of (a) the lease payments and (b) the
unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor”.
[IFRS 16:Appendix A] The unguaranteed residual value is defined as “[t]hat portion of the residual value of the underlying asset, the
realisation of which by a lessor is not assured or is guaranteed solely by a party related to the lessor". [IFRS 16:Appendix A]

The lessee’s incremental borrowing rate is defined as “[t]he rate of interest that a lessee would have to pay to borrow over a similar
term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic
environment". [IFRS 16:Appendix A]

Unfortunately in Australia, valuers are not usually required to undertake these valuations as all lease payments are deemed to be at market, even if they are not. 

Masanori Narita's profile image
Masanori Narita MRICS posted 07-12-2022 01:28
Hello Martin, thank you very much for you comment. Sorry for my late reply. It is really helpful. Considering that this is the valuation for IAS 40 (investment property), not the initial estimation as ROU asset, a valuation method similar to an intangible asset (a contract asset in Purchase Price Allocation) might be considered.

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