Harbourline Properties: Fair Value Under Material Valuation Uncertainty
Harbourline Properties Ltd owns a Wellington CBD office building classified as investment property under NZ IAS 40 and measured at fair value. At 31 March 2024 the fair value was $28.5 million. During 2025 the anchor tenant, a government agency, gave notice and vacated in December 2024. A seismic assessment rates the building at 34% of new building standard; strengthening is estimated at $4.6 million. The independent valuer reports a fair value range of $19.0 million to $24.0 million and states that the market is thin and a material valuation uncertainty exists. The directors propose retaining the $28.5 million carrying amount, disclosing the uncertainty, and not recognising any loss because no sale is planned. The bank loan is $14.0 million and the covenant requires a loan-to-value ratio no greater than 55%. The audit partner has referred the matter to the audit committee and asks for a technical memorandum.
1. Evaluate the directors’ proposed treatment and recommend the measurement and disclosures under NZ IAS 40.
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The directors’ proposal confuses measurement with disclosure. NZ IAS 40 requires investment property to be measured at fair value at each reporting date. A material valuation uncertainty does not justify keeping a stale carrying amount; it requires more disclosure and possibly a second valuation. The vacated anchor tenant, the 34% NBS rating and the $4.6 million strengthening estimate are observable evidence that the 31 March 2024 value is no longer current. The valuer’s $19.0m–$24.0m range is the best available evidence. Management should select a point within the range supported by the valuation technique and market evidence, not automatically the top of the range. The loss is recognised in profit or loss.
Disclosures should include the valuation technique, key unobservable inputs, the range, sensitivity, the material valuation uncertainty and the highest and best use assessment. A second independent valuation may be prudent, but delay is not a reason to leave the accounts unchanged.
2. Analyse the covenant, audit and ethical implications of the directors’ position.
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The LVR covenant is breached across the valuer’s range. At $24.0m, LVR is $14.0m ÷ $24.0m = 58.3%; at $22.0m it is 63.6%; at $19.0m it is 73.7%. The maximum value that satisfies 55% is $14.0m ÷ 0.55 = $25.45m, which is above the valuer’s range. The board must therefore plan for a breach, notify the bank, seek a waiver and assess going concern. Retaining $28.5m would conceal the breach and mislead users.
For the auditor, the issue is management pressure and the risk of bias. The auditor should document the challenge, consider an independent expert and assess whether the accounts are materially misstated. The CFO and directors face an integrity and objectivity test: the absence of a planned sale is irrelevant to fair value. The audit committee should minute the evidence, approve the revised value and ensure the covenant communication is consistent with the financial statements.