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12 OCT 2021

Application of the EUV Basis of Value in UK Public Sector Accounting

It has been brought to our attention by stakeholders involved in the valuation of operational owner-occupied properties within the public sector, that valuers (and auditors) are sometimes interpreting the Existing Use Value (EUV) definition – and the conceptual framework for valuations of operational owner-occupied properties – differently. This can ultimately lead to some confusion and inconsistency in its meaning, intention and application.

In recognition of this issue, RICS is in the process of creating an expert working group to produce further guidance and clarification on the interpretation and application of UK VPGA 6 of RICS Valuation – Global Standards: UK national supplement (Red Book UK).

In the interim, this update is intended to assist members by explaining and reaffirming the underpinning principle.

It is anticipated that following this clarification, members and firms will wish to undertake any internal checks or reviews they judge necessary, to ensure they are fully compliant with Red Book UK in these respects when undertaking valuations in this area.

Use of the EUV basis has always been restricted to the valuation of operational property that is owner-occupied by an entity in the UK, and for the sole purpose of inclusion in their financial statements. However, the continued use of EUV by UK public sector bodies, in what is now otherwise an International Financial Reporting Standards (IFRS) financial reporting environment, can give rise to confusion and cause uncertainty regarding its application.

The adoption of IFRS by UK central government bodies, local authorities and the NHS was subject to an adaptation being made to IAS 16. The impact of this is that IFRS 13 and fair value do not apply to the valuation for financial statements purposes of owner-occupied operational property plant and equipment held for their service potential.

In making this adaptation to IAS 16, the purpose of the UK public sector was to enable continued application of the previous FRS 15 measurement principle for its owner-occupied operational assets. The relevant principle here is that it is the value in use that is to be measured, this being the present value of the asset’s remaining service potential. This can be assumed to be at least equal to the cost of replacing that service potential or, in other words, the deprival value in respect of the owner-occupier’s ongoing business function, as opposed to an exit value.

An appreciation of this is essential as the continued use of EUV, in what is otherwise an IFRS based public sector accounting world, would make no sense, as EUV is not recognised by the IFRS accounting standards.

The EUV basis was specifically designed to deliver this former FRS 15 principle and, therefore, the continued use of EUV was mandated by the IAS 16 adaptation. The HM Treasury Financial Reporting Manual (FReM) (see UK VPGA 5), The Code of Practice on Local Authority Accounting (CIPFA ‘Code’) (see UK VPGA 4), and the NHS Group Accounting Manual, require that the basis of value to be used for owner-occupied operational assets is EUV, as defined in UK VPGA 6 of RICS Valuation – Global Standards 2017: UK national supplement:

‘The estimated amount for which a property should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion, assuming that the buyer is granted vacant possession of all parts of the asset required by the business, and disregarding potential alternative uses and any other characteristics of the asset that would cause its market value to differ from that needed to replace the remaining service potential at least cost.’

Starting with an initial presumption that the EUV (the least cost replacement) will be the same as the market value, the valuer is to be aware of the impact of the disregards stated in the EUV definition. This means disregarding the potential alternative uses and any characteristics of the asset that would cause its market value to differ (higher or lower) from that needed to replace the remaining service potential at least cost. UK VPGA 6 provides some examples of the latter.

While the incumbent owner-occupier is not in the marketplace for the property, the assessment of deprival value requires that the continuing demand for the premises, in order to fulfil the existing business delivery function, has to be reflected. One means of accomplishing this is to envisage a hypothetical owner-occupier purchaser in the market at the valuation date and who will buy the property on that date, stepping into the shoes of the existing owner-occupier and carrying on delivery of the same business function in the same way. At the same time, it is necessary to take into account that the bid which the hypothetical owner-occupier would make would also reflect the vacant possession of those parts occupied by the owner.

Valuers are reminded that investment property and non-operational ‘surplus’ or ‘held for sale’ property is to be measured at fair value, arrived at in accordance with IFRS 13.

For the avoidance of doubt, the EUV basis of value is not used where the UK GAAP accounting standards, and in particular FRS 102, are being adopted, as is the case with Academy Trust schools in England for example.