ASSET VALUATION UPDATE Changes in the CIPFA/LASAAC approach to asset revaluation

Chris Brain FRICS

Chris spent nearly 25 years working in local government, involved in estate management and strategic asset management.  Having moved on to CIPFA in 2003, Chris has been delivering property consultancy and training across the public sector.  In 2019, he established his own consultancy, Chris Brain Associates, and he continues to support the public sector with property consultancy and training throughout the UK, in strategic asset management, organisational efficiency, and asset valuation.  Chris is a member of ACES and is one of ACES’ Valuation Liaison Officers.

Chris kindly agreed to write this summary of the imminent changes to asset revaluations for balance sheets. As usual, Chris sets out clearly what these complex changes mean for asset valuers. 

Change of approach 

The current financial year sees a big shift from CIPFA/LASAAC (Chartered Institute of Public Sector Accountants/Local Authority (Scotland) Accounts Advisory Committee) on the asset revaluation approach undertaken for local authority balance sheet purposes. 

Until 31 March 2025, the CIPFA/LASAAC position has always been that property indices were a tool for valuers to assist them in understanding market trends and movement. The use of indices in making annual adjustments to valuations in between formal valuations was always contrary to the CIPFA Code – despite some local authorities feeling pressured into doing so by their auditors. 

From 1 April the position of CIPFA/LASAAC on indexation has changed. Not only is it now accepted as a mechanism to adjust valuations between revaluations, it is now effectively mandatory.  Quite a change if you think about it. This is not a change that I am personally that comfortable with but the change has happened, and local authority valuers and accountants are now wrestling with what this means in practice. 

The best place to start is to set out, for avoidance of doubt, what the CIPFA Code now says about valuation frequency, which is now aligned more closely to the FreM (Financial Reporting Manual) produced by HM Treasury, to guide the valuation of UK Government property assets. 

From this year, revaluations for each class of property plant and equipment (PP&E) are undertaken using one of the following three processes: 

• A quinquennial revaluation supplemented by annual indexation in intervening years 

• A rolling programme of revaluations over a five-year cycle, with annual indexation applied to assets during the intervening years 

• Where no index is available, there is a requirement to revalue assets every three years, using a desktop method. 

This new requirement does not affect frequency of revaluation of Council Dwellings, Assets Under Construction, Community Assets, Heritage Assets, Investment Property or Assets Held for Sale, but it does affect Surpus Property, which remain a sub-class of PP&E. 

The CIPFA Code says that when applying indexation, authorities should use the best available index. 

To support authorities in implementing these changes, CIPFA’s Better Reporting Group (BRG) has published (later than originally expected) some application guidance. While this guidance is welcome and helpful to a degree, its use is limited in that the references it makes to property indices is not as detailed or comprehensive as some might have hoped. 

For example, if authorities were expecting to be told which property index to use for which asset, they will be disappointed. If they thought the guidance might reveal a wide range of potential indices, that they were not previously aware of, again they will be disappointed. I doubt this has come as any great surprise. Those that have been valuing local authority property assets for many years know that portfolios can be very diverse and that indexation was always likely to end up being a clumsy tool. 

Which index? 

The first main practical consideration is of course which index to choose.  The BRG application guidance (CIPFA Bulletin 22) does run through a few existing indices, but readers will not be surprised to hear that there is no suggested ‘off the shelf index’ readily available which is suitable for much of the typical local authority property portfolio. 

The exception to this is likely to be the building cost index (BCIS being the most commonly used) for the non-land element of DRC valuations. Valuers will most likely already have such an index to hand, that they, their accountants and their auditors are already familiar with. 

In order to fully index DRC valuations, however, valuers will need to find a suitable land index, which may present some challenges. Some commercial firms produce regular market data reports, which may prove to be a suitable proxy. 

For assets valued using EUV, valuers will need to decide whether to apply the same or different indices to the land element and the non-land element, given they are separated in the balance sheet for depreciation purposes. It is possible that this decision could impact the aggregate of the two figures, so care will be needed and the approach fully documented. 

The selection of an appropriate index for EUV assets is potentially complicated by the EUV basis of value, which is what is often termed an ‘entry’ price rather than an ‘exit’ price. It is the price that an entity would agree to pay for the ability to use the resource in the performance of its duties and delivery of its services. Valuers may have to simply accept they have to adopt a presumption that movement in entry prices mirrors those in exit prices, for the purposes of indexation, even if it does not do so in practice. 

As with all things asset valuation, valuers and accountants do not operate in a vacuum, and everything is open to scrutiny by external auditors. Valuers can expect to be asked questions about the basis of the data in any index, for example is it based on market evidence. They can also expect to be challenged if any chosen index is based on low transaction numbers – although I am not aware that that has regularly come up as an issue with BCIS. 

Indices for smaller geographical areas such as electoral boundaries may not exist and therefore indices will instead need to cover a larger geographical area such as a region. This may see indexed figures in the balance sheet diverging from actual market movement, which would need to be corrected at next revaluation. Time will tell how much of an issue this becomes. 

Whatever index is selected, valuers will need to be alert to the publication frequency of chosen indices, choosing the data set as close as possible to the balance sheet date of 31 March, which is the date that indexation must be applied. 

Immaterial indexation movement 

Authorities will need to make a judgement as to whether the impact of indexation is material (see paragraphs 2.1.2.14–2.1.2.17 and 3.4.2.26–3.4.2.27 of the CIPFA Code). If an authority determines that the impact is immaterial, then it does not need to account for indexation in that year’s accounts. 

However, in applying indexation in the following year, the authority will need to account for the years when indexation was not applied and determine whether the cumulative impact of indexation over the financial years is material. 

Annual valuations 

The second main consideration for many authorities will be deciding the approach to be taken with the revaluation of assets that are currently valued on an annual basis. This has become a significant feature for many local authorities, faced with regular and robust audit challenge on their so-called ‘high value’ assets. However, Bulletin 22 does not address this point directly, presumably because the CIPFA Code is quite clear on the matter. 

The requirement to revalue an asset when its fair value differs materially from its carrying value has now been withdrawn (IAS 16 paragraph 34) from the CIPFA Code. This means that ‘in-year’ and ‘between year’ movement in markets between full revaluations should be adequately reflected by the application of an appropriate property price index. 

As may have been noted above, the revaluation options presented in the CIPFA Code do not offer the opportunity for annual valuation. This means local authority accountants have a decision to make on whether to continue the annual valuation of these ‘high value’ assets – in contravention of the CIPFA Code – or to adopt for those assets one of the options the CIPFA Code mandates. 

From a practical level, considering the prime purpose of the financial statements is to provide a full and fair reflection of the finances of the organisation, it may seem odd that annual valuations are regarded as a bad thing. But they are clearly not permitted by the CIPFA Code. I have even seen an email issued by CIPFA’s Policy & Technical team confirming that annual valuations are not a permissible option. 

If anyone reading this is minded to continue an annual valuation segment in their revaluation programme, they might be wise to reach out early to their auditor to sound them out on how such an approach would be received. Over the many years I have been involved in asset valuation, I have seen plenty of situations where the expectations of auditors differed from the CIPFA Code. So it is not entirely implausible that audit may well prefer (or not object to) you continuing the annual valuation practice for your high value assets. 

Treatment of capital expenditure 

Out of cycle revaluations are not required unless there is an indication of impairment when applying IAS 36, which may require an asset to be fully revalued. This raises the question of what authorities should do when there is capital expenditure on an asset. 

Some accountants may feel more comfortable continuing to regard capital expenditure as a revaluation trigger, but it would be contrary to the CIPFA Code. 

Capital expenditure should from 1 April 2025 be recognised at cost (effectively adding the amount spent to the carrying amount of the asset on the balance sheet). This capital expenditure would then effectively be indexed until the next required revaluation of that asset. 

Transitional arrangements 

Revaluations carried out prior to 2025/26, in line with former requirements of the Code, remain valid throughout the transition period (being 1 April 2025 to the date the next revaluation is due for a given asset). 

Because of this transitional arrangement, you should be able to resist any suggestion from auditors that your baseline valuations, to be used for indexation, are not appropriate. Authorities do not need to engage valuers to revalue all assets during 2025/26 and can move to a five-year cycle as and when formal revaluations become due. 

During the transition period, the maximum period between revaluations must not exceed five years when supplemented by annual indexation, or three years when no index is available. 

The changes on revaluation to the Code are prospective, with no restatement of prior year figures. This will be good news for everyone involved. Therefore, when applying indexation for the first time on 31 March 2026, the calculation of indexation gains or losses will be compared to the 31 March 2025 index (and not the index at the date the asset was last valued, if earlier). 

Avoiding indexation 

Paragraph 4.1.2.38 of the Code outlines the process to follow where no suitable index is available. In such cases where authorities are utilising the option to carry out a desktop revaluation in year three, authorities will need to document the indices they have considered and explain why they have deemed those indices inappropriate to use. 

If you choose this route for some or all of your assets, you can expect robust audit challenge. Not that choosing an index is likely to be without challenge of course. 

Summary 

The adoption of indexation in local authority asset revaluation represents a significant shift in CIPFA/LASAAC’s earlier stance. Some may see it as a welcome change, as it has the potential to reduce valuation workload and remove some areas of uncertainty. Others may see it as an unwelcome change that undermines the validity of balance sheets. Either way, the change cannot be resisted, and new approaches need to be adopted and embraced. 

It should be remembered that indexation is an approximation of market changes – it is not a valuation of a specific asset. Paragraph 4.1.2.39 of the Code makes it clear that absolute precision is not expected, nor is it achievable. Thank goodness for that!