20. Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The highest and best use takes into account the use of the asset that is physically possible, legally permissible and financially feasible.

When measuring fair value, the valuation techniques used maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Unobservable inputs are used to the extent that sufficient relevant and reliable observable inputs are not available for similar assets/liabilities.

Observable inputs are publicly available data that are relevant to the characteristics of the assets/liabilities being valued. Observable inputs used by the department include, but are not limited to, published sales data for land and general office buildings.

Unobservable inputs are data, assumptions and judgments that are not available publicly, but are relevant to the characteristics of the assets/liabilities being valued. Such inputs include internal department adjustments to observable data to take account of particular and potentially unique characteristics/ functionality of assets/liabilities and assessments of physical condition and remaining useful life.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the following fair value hierarchy based on the inputs used:

• Level 1 – inputs are quoted prices in active markets for identical assets or liabilities
• Level 2 – inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
• Level 3 – inputs are unobservable.

The fair value of financial instruments is determined on the following basis:

• the fair value of cash, deposits, advances, receivables and payables approximates their carrying amount, which is also their amortised cost
• the fair value of derivative financial instruments are derived using current market yields and exchange rates appropriate to the instrument
• the fair value of other monetary financial assets and liabilities is based on discounting to present value the expected future cash flows by applying current market interest rates for assets and liabilities with similar risk profiles.

a) Fair value hierarchy

The department does not recognise any financial assets or liabilities at fair value as these are recognised at amortised cost. The carrying amounts of these financial assets and liabilities approximate their fair value.

The table below presents non-financial assets recognised at fair value in the balance sheet categorised by levels of inputs used to compute fair value.

There were no transfers between Level 1 and Levels 2 or 3 during 2018-19.

b) Valuation techniques and inputs

Valuation techniques used to measure fair value in 2018-19 are:

There were no changes in valuation techniques from 2017-18 to 2018-19.

Territory Property Consultants Pty Ltd provided valuations for the land, buildings and infrastructure assets.

Level 2 fair values of land and buildings were based on active market comparison approach which seeks to determine the current value of an asset by referencing to recent comparable transactions involving sale of similar assets.

Level 3 fair values of land were assessed having regard to the highest and best use of the land. Level 3 fair values of specialised buildings and infrastructure were determined by computing their current replacement costs because an active market does not exist for such facilities. The current replacement cost was based on a combination of internal records of the historical cost of the facilities, adjusted for contemporary technology and construction approaches. Significant judgement was also used in assessing the remaining service potential of the facilities, given local environmental conditions, projected usage, and records of the current condition of the facilities.

c) Additional information for level 3 fair value measurements

i) Reconciliation of recurring level 3 fair value measurements of non financial assets

ii) Sensitivity analysis

Unobservable inputs used in computing the fair value of buildings include the historical cost and the consumed economic benefit of each building. Given the large number of department’s buildings, it is not practical to compute a relevant summary measure for the unobservable inputs. In respect of sensitivity of fair value to changes in input value, a higher historical cost results in a higher fair value and greater consumption of economic benefit lowers fair value.

ANNUAL REPORT 2018-19 - DEPARTMENT OF PRIMARY INDUSTRY AND RESOURCES