Val Guidance Property

Valuation Guidance for
Property, Plant and Equipment,

Including Specialised Items in
the Health and Education
Sectors
2007
First Published 2002
Previously Revised 2003
Prepared by
Wareham Cameron & Co Ltd,
Rider Levett Bucknall &
The Treasury
TREASURY:1016649V1
Table of Contents
Introduction ..........................................................................................................................1
Background..........................................................................................................................2
Crown accounting policies ...................................................................................................3
Section 1: Financial reporting and valuation standards ......................................................5
Section 2: Asset classification and valuation methodology ...............................................14
Section 3: Valuations in the health and education sectors – specific considerations........27
Section 4: Instructing and liaising with valuers..................................................................36
Appendix A: Specific guidance for assessing the replacement cost of health and
education buildings ............................................................................................................38
Appendix B: Worked example of a depreciated replacement cost calculation ..................60

Introduction
These guidelines have been prepared by Treasury to assist public sector reporting entities and
their valuers (and particularly those within the health and education sectors) to comply with the
valuation requirements of the New Zealand Equivalent to International Accounting Standard 16:
Property Plant and Equipment (NZ IAS 16) and Crown accounting policies in relation to NZ IAS 16.
They are also intended to help achieve consistency in such valuations. These guidelines
predominantly focus on specialised items of property, plant and equipment (which are the majority
of assets in the health and education sectors). These comprise assets that are not regularly
bought and sold in the market.
The format of these guidelines is as follows:
Background Outlines the purpose of this guidance.
Crown accounting policies Details Crown accounting policies for the revaluation of items of
property, plant and equipment in the health and education sectors.
Section 1: Details the valuation requirements of NZ IAS 16 and the Property

Financial reporting and Institute of New Zealand’s (PINZ) valuation standards as contained in
valuation standards the fifth edition of Professional Practice (which now adopt International
Valuation Standards issued by the International Valuation Standards
Committee (IVSC)).
Section 2: Overviews asset classification and the valuation methodologies that are
Asset classification and appropriate for property, plant and equipment, explaining the depreciated
valuation methodologies replacement cost approach in detail. This section and Section 1 outline
generic (i.e. non-sector specific) requirements and the guidance they
contain applies to all items of property, plant and equipment.
Section 3: Considers specific issues and requirements relevant to the health and
Valuations in the health and education sectors, with a focus on specialised property and the
education sectors application of the depreciated replacement cost approach to valuation.
This section also provides indicative parameters for the values/costs
and useful lives of items of property, plant and equipment commonly
found in the health and education sectors.
Section 4: Provides guidance for engaging and liaising with valuers and identifies
Instruction and liaising with audit requirements.
valuers
Appendices
Appendix A Provides specific guidance for the assessment of the replacement
cost of buildings in the health and education sectors.
Appendix B Provides a worked example of a depreciated replacement cost calculation.
Section 1 outlines the requirements of Financial Reporting and Valuation Standards. Financial
Reporting Standards are mandatory. Valuation Standards and Applications as set out in PINZ
Professional Practice are mandatory for PINZ members. Care has been taken in writing these
guidelines to ensure they accurately reflect the requirements of Financial Reporting and Valuation
Standards. However, if there is a conflict between these guidelines and the Financial Reporting
and Valuation Standards, then the provisions of the standards shall prevail.
VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

INCLUDING SPECIALISED ITEMS IN THE HEALTH AND EDUCATION SECTORS 1
The application of the Depreciated Replacement Cost methodology discussed in Section 2 is
recommended practice. It is acknowledged that there may be variations depending on the
judgement of the valuer.
The indicative parameters for costs and lives contained in Section 3 (and Appendix A) are considered
to be reflective of the market at the time the costing guidelines were prepared (as at 1 May 2007).
Indexing may be required to reflect price changes to the applicable valuation date. Furthermore, the
parameters represent ‘yard-sticks’ and specific asset, market and/or owner circumstances may lead to
the adoption of assumptions outside of the parameters contained in the guidance.
It is the responsibility of the valuer to exercise professional judgement in his/her valuation

assessment. The methodology adopted by the valuer together with any material departures from
the guidance should be fully reasoned and explained.
Health and education asset values are generally inextricably linked to entity operations.
Consequently, valuers and the management of these organisations need to work closely in
discussing key assumptions for the valuation. Such information exchanges and interaction should
occur throughout the valuation process.
For public sector reporting entities, further information on these valuation guidelines or the
valuation process should be directed in the first instance to your Vote Analyst. Alternatively,
enquiries may be directed to Treasury’s Accounting Policy Team.
Background
Public sector entities follow generally accepted accounting practice, which means that, in the first
instance, they apply New Zealand financial reporting standards, which from 2007 are
predominantly made up of New Zealand International Financial Reporting Standards (NZ IFRS). In
the absence of a New Zealand financial reporting standard for a transaction or event, public sector
entities should use professional judgement, as guided by NZ IAS 8: Accounting Policies, Changed
in Accounting Estimates and Errors (paragraphs 7 to 12), to determine which of the available
sources of authoritative support to apply.
It is the responsibility of public sector entities to develop appropriate accounting policies for
reporting purposes. Guidance on the factors to consider when developing such policies is
provided in Treasury Instructions.
The Government will comply with the requirements of NZ IAS 16 in its financial statements for the
periods beginning or after 1 July 2007. All entities preparing financial information for the financial
statements of Government from that period onwards will be required to ensure that the information
they provide complies with NZ IAS 16 and Crown accounting policies in relation to NZ IAS 16.
Treasury considers that there should be consistency in the valuation of specialised items of
property, plant and equipment, such as those held by public sector entities in the health and
education sectors, and that such consistency, and lower transaction costs, is likely to be achieved
if detailed valuation guidance is provided. For those reasons, Treasury has commissioned this
guidance on the valuation requirements of NZ IAS 16. This revised 2007 edition updates previous
guidance based on FRS-3 Accounting for Property, Plant and Equipment. The original guidelines
were produced with stakeholder input to ensure that stakeholders’ information needs were met and
that the guidance produced was fully utilised.

2 INCLUDING SPECIALISED ITEMS IN THE HEALTH AND EDUCATION SECTORS
Crown accounting policies
Current Crown accounting policies are provided in Treasury Instructions. It is the responsibility of
all entities preparing financial information for the Crown financial statements to ensure that they
provide such information in accordance with current Crown accounting policies, as detailed in
Treasury Instructions.
At the time of release of this guidance, Crown accounting policies in relation to items of property,
plant and equipment are as per the table below:
Class of PPE Accounting policy

Land & Buildings Land and buildings are recorded at fair value less impairment losses and, for buildings, less
depreciation accumulated since the assets were last revalued.
Valuations undertaken in accordance with standards issued by the Property Institute of
New Zealand are used where available.
Otherwise, valuations conducted in accordance with the Rating Valuation Act 1998 may be
used if they have been confirmed as appropriate by an independent valuer.
When revaluing buildings, there must be componentisation to the level required to ensure
adequate representation of the material components of the buildings. At a minimum, this
requires componentisation to three levels - structure, building services and fit-out.
Specialist Military Specialist military equipment is recorded at fair value (which is determined using
Equipment depreciated replacement cost) less depreciation and impairment losses accumulated since
the assets were last revalued.
Valuations are obtained through specialist assessment by New Zealand Defence Force
advisers, and the bases of these valuations are confirmed as appropriate by an
independent valuer.
State Highways State highways are recorded at fair value (which is determined using depreciated
replacement cost) less depreciation and impairment losses accumulated since the assets
were last revalued. Land associated with the state highways is valued using an opportunity
cost based on adjacent use, as an approximation to fair value.
Aircraft Aircraft (excluding Specialised Military Equipment) are recorded at fair value less
depreciation and impairment losses accumulated since the assets were last revalued.
Electricity Distribution Electricity distribution network assets are recorded at cost, less accumulated depreciation
and accumulated impairment losses.
Electricity Generation Electricity generation assets are recorded at fair value less depreciation and impairment
losses accumulated since the assets were last revalued.
Other PPE Other property, plant and equipment, which include motor vehicles and office equipment,
are recorded at cost less accumulated depreciation and accumulated impairment losses.
Specified cultural and Specified cultural and heritage assets comprise national parks, conservation areas and
heritage assets related recreational facilities, as well as National Archives holdings and the collections of
the National Library, Parliamentary Library and Te Papa. Such physical assets are
recorded at fair value less subsequent impairment losses and, for non-land assets, less
subsequent accumulated depreciation.

The Crown accounting policies also require:
• Classes of property, plant and equipment that are revalued, must be revalued at least every five
years or whenever the carrying amount differs materially to fair value.
• Items of property must be revalued to fair value for the highest and best use of the item on the
basis of the market value of the item, or on the basis of market based evidence, such as
discounted cash flow calculations.
• If no market based evidence of fair value exists, fair value must be estimated using a
depreciated replacement cost approach.
• Where an item of property is recorded at its optimised depreciated replacement cost, optimised
depreciated replacement cost must be based on the estimated present cost of constructing the
existing item of property by the most appropriate method of construction (‘modern equivalent
asset’), less allowances for physical deterioration and optimisation for obsolescence and
relevant surplus capacity.
• Where an item of property is recorded at its depreciated replacement cost, borrowing costs
must be expensed.
At the time this guidance was being finalised, an amended NZ IAS 23 was approved by the
Accounting Standards Review Board, with applicability for periods beginning on or after 1 January
2009. Under this amended NZ IAS 23, borrowing costs that are directly attributable to the
acquisition, construction or production of an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale, are required to be capitalised as part of the cost of
that asset (NZ IAS 23 para 8) and the option to use the previous benchmark treatment to expense
borrowing costs will be removed. Accordingly, from 1 January 2009, borrowing costs will also be
required to be allowed for in revaluations where a cost based approach (depreciated replacement
cost) is adopted. (NZ IAS 16 para 33.14)
The Crown will utilise the transitional provisions associated with the 2007 amendment to NZ IAS 23
and continue to expense borrowing costs up to that date, while developing its response to this
amendment, given the difficulties in:
• identifying the relationship between particular borrowings and qualifying assets given that most
of the financing activity of the Crown is coordinated centrally
• determining appropriate interest rates as the Crown uses a range of debt instruments to borrow
funds at varying rates of interest, and
• developing a consistent approach given that the Crown can be expected at various times to
move between being a net lender and a net borrower.
Due to the requirement for line-by-line consolidation of all state-owned enterprises (SOEs) and
Crown entities in the Crown financial statements, these entities are required to provide their
financial information to Treasury (for Crown financial statement and forecast purposes) on a basis
consistent with Crown accounting policies.

Section 1: Financial reporting and valuation standards
This section details the requirements for valuations of property, plant and equipment in accordance
with NZ IAS: Property, Plant and Equipment (NZ IAS 16) and relevant Property Institute of New
Zealand (PINZ) standards, applications and guidelines. Where additional explanation is required
readers are referred to NZ IAS 16 or the relevant PINZ material within Professional Practice.
Financial reporting standards:

NZ IAS 16: Property, Plant and Equipment
NZ IAS 16: Property, Plant and Equipment requires that an item of property, plant and equipment
that qualifies for recognition as an asset shall initially be measured at its cost. Cost is deemed to
be at fair value where it is acquired at no cost or nominal value (NZ IAS 16.15 and NZ IAS
16.15.1). After initial recognition, a reporting entity shall choose either the cost model or the
revaluation model as its accounting policy, and shall apply that policy to an entire class of property,
plant and equipment. (NZ IAS 16 para. 29)
Under the revaluation model, after recognition as an asset, an item of property, plant and
equipment whose fair value can be measured reliably shall be carried at a revalued amount, being
its fair value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity
to ensure that the carrying amount does not differ materially from that which would be determined
using fair value at the balance sheet date. (NZ IAS 16 para. 31)
Valuations shall be conducted either:
a by an experienced valuer, or
b where the entity employs a person sufficiently experienced to conduct a valuation, by that
person, so long as the valuation has been subject to review by an independent valuer. (NZ IAS
16 para. 35.1-3)
For plant and equipment, where there is an active market or readily available price indices that
1
establish the item’s fair value with reasonable reliability , the valuation need not be conducted or
reviewed by an independent valuer or experienced employee. (NZ IAS 16 para 35.3)
If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued. (NZ IAS 16 para 36)
NZ IAS 16 also provides the following definitions and guidance:
Fair value
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm’s length transaction. (NZ IAS 16 para 6).
The fair value of land and buildings is usually determined from market-based evidence by appraisal
that is normally undertaken by professionally qualified valuers. The fair value of items of plant and
equipment is usually their market value determined by appraisal. (NZ IAS 16 para 32)
1
Such a valuation is not applicable where depreciated replacement cost is the most appropriate basis for
determination of the fair value of an item of plant and equipment
If there is no market-based evidence of fair value because of the specialised nature of the item of
property, plant and equipment and the item is rarely sold, except as part of a continuing business,
an entity may need to estimate fair value using an income or a depreciated replacement cost
approach. (NZ IAS 16 para 33)
Depreciated replacement cost
Depreciated replacement cost is a method of valuation that is based on an estimate of:
a in the case of property:
i the fair value of land; plus
ii the current gross replacement costs of improvements less allowances for physical
deterioration, and optimisation for obsolescence and relevant surplus capacity,
b in the case of plant and equipment owned by public benefit entities, the current gross
replacement cost less allowances for physical deterioration, and optimisation for obsolescence
and relevant surplus capacity. (NZ IAS 16 para.33.1)
Revaluation frequency2
The frequency of revaluations depends upon the changes in fair values of the items of property,
plant and equipment being revalued. When the fair value of a revalued asset differs materially from
its carrying amount, a further revaluation is required. Some items of property, plant and equipment
experience significant and volatile changes in fair value, thus necessitating annual revaluation.
Such frequent revaluations are unnecessary for items of property, plant and equipment with only
insignificant changes in fair value. Instead, it may be necessary to revalue the item only every
three or five years. (NZ IAS 16 para 34)
Independent valuer
The fair value of property, plant and equipment is determined or reviewed by an independent
valuer who holds a recognised and relevant professional qualification and who has recent
experience in the location and category of the property plant and equipment being valued. (NZ IAS
16 para 35.2).
Disclosure is required in respect of each valuation conducted:
• the name of each valuer
• a statement in respect of each valuer as to whether they are an employee of the entity or
whether they are contracted as an independent valuer
• the total fair value of property plant and equipment valued by that valuer
• where the valuation has been conducted by an employee of the entity the name of the
independent valuer who reviewed the valuation, and
• the date(s) of such valuations (NZ IAS 16 para 77.2).
2
Refer to the Crown accounting policies section of this guidance for details of the policies to be adopted when
providing information for inclusion in the Crown’s financial statements.
In addition, valuers are referred to IVS 3 Valuation Reporting and IVA 1 Valuation for Financial
Reporting within PINZ Professional Practice for a detailed commentary on reporting and disclosure
requirements.
Where an independent valuer has not been used because there is an active market or readily
available price indices that establish the fair value of an item of plant or equipment with reasonable
reliability, this fact shall be disclosed. (NZ IAS 16 para 77.3)
Componentisation3
NZ IAS 16 does not prescribe the unit of measure for recognition, i.e. what constitutes an item of
property, plant and equipment. Thus, judgement is required in applying the recognition criteria to
an entity’s specific circumstances (NZ IAS 16.9)
However, NZ IAS 16 does require each part of an item of property, plant and equipment with a cost
that is significant in relation to the total cost of the item to be depreciated separately. Thus an entity
allocates the amount initially recognised in respect of an item of property, plant and equipment to its
significant parts and depreciates separately each such part. NZ IAS 16 notes for example, that it may
be appropriate to depreciate separately the airframe and engines of an aircraft (NZ IAS 16.43-44).
The implication of this is that where the reporting entity does have an item of property, plant and
equipment that is accounted for at a component level, any revaluation will need to be valued at a
similar component level.
Borrowing costs4
At the time of writing this guidance, an amended NZ IAS 23 is imminent, with applicability for
periods beginning on or after 1 January 2009. Under this amended NZ IAS 23, borrowing costs
that are directly attributable to the acquisition, construction or production of an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale, will be
capitalised as part of the cost of that asset (NZ IAS 23 para 8) and the current benchmark
treatment to expense borrowing costs will be removed.
Accordingly, borrowing costs should also be allowed for in revaluations where a cost based
approach (depreciated replacement cost) is adopted. (NZ IAS 16 para 33.14)
Under the transitional provisions associated with the 2007 amendment to NZ IAS 23, an entity is
not required to comply with the requirement to capitalise borrowing costs until periods beginning on
or after 1 January 2009, and is permitted to expense all its borrowing costs. The Crown will utilise
these transitional provisions (see Crown Accounting Policies) however Crown entities that directly
incur borrowing costs may capitalise those relevant borrowing costs earlier. If such an option is
taken the information on borrowing costs capitalised, both in the year to date, and incorporated into
depreciated replacement cost valuations must be separately disclosed.
3
4
The Financial Reporting Standards Board (FRSB) has considered the issue as to whether a public
sector capital charge is a borrowing cost. As a consequence of these deliberations the FRSB (in
its report to the Accounting Standards Review Board on NZ IAS 32 dated Oct 2004):
• noted that public sector capital charges represent a charge on the net assets employed by
public sector entities, and do not relate to any financial instrument, either debt or equity, and
that making an interpretation that they did would be inappropriate
• noted that the capital charge is designed to ensure that the costs of capital are included in the
costs of services and to require that they be reported elsewhere would effectively thwart their
purpose, and
• agreed not to include additional guidance for public benefit entities.
Accordingly, the capital charge should not be considered a borrowing cost eligible for
capitalisation.
Optimisation
NZ IAS 16 (para’s. 33.4 to 33.11) contains specific guidelines regarding the degree of optimisation
that should be applied when using the depreciated replacement cost approach. This is further
discussed in Section 2 of this guidance.
Valuation standards:
IVA 1: Valuation for Financial Reporting
PINZ Professional Practice has seen a continued move towards International Valuation Standards
with the fifth edition (effective 1 March 2007) incorporating all IVSC Standards, Applications and
Guidance Notes. IVA 1 and NZVGN 1 provide guidance to valuers when preparing asset
valuations for financial reporting purposes for both NZ IAS 16, NZ IAS 40: Investment Property
(NZ IAS 40) and NZ IAS 5: Non-current Assets Held for Sale and Discontinued Operations (NZ
IFRS 5). IVA 1 and NZVGN 1 apply the principles developed in the IVS’s to the requirements of
the IAS’s/IFRS’s.
While plant and equipment is revalued in accordance with NZ IAS 16, property may fall under NZ
IAS 16 or NZ IAS 40.
Property to be accounted for (and revalued) under NZ IAS 16 is generally defined as property held
for use in the production or supply of goods or services or for administration purposes or sale in the
ordinary course of business.
Additional examples of property that fall under the provisions of NZ IAS 16 include property held for
the future use as owner-occupied property, property held for the future development and
subsequent use as an owner-occupied property, property occupied by employees and property
that is being constructed or developed for future use as an investment property.
Property to be accounted for (and revalued) under NZ IAS 40 is property held to earn rentals or for
capital appreciation or both. (NZ IAS 40 para 5)

In respect of public benefit entities, property may be held to meet service delivery objectives rather
than to earn rental or for capital appreciation. In such situations the property will not meet the
definition of an investment property and will be accounted for under NZ IAS 16, for example:
a property held for strategic purposes. and
b property held to provide a social service, including those which generate cash inflows where the
rental revenue is incidental to the purpose for holding the property. (NZ IAS 40 para 9.1).
Public benefit entities are defined as: reporting entities whose primary objective is to provide goods
or services for community or social benefit and where any equity has been provided with a view to
supporting that primary objective rather than for a financial return to equity holders. (NZ IAS 16,
para NZ 6.1)
Some properties comprise a portion that is held to earn rentals or for capital appreciation and
another portion that is held for the use in the production or supply of goods or services or for
administration purposes. If these proportions can be sold separately, an entity accounts for the
proportions separately. If the proportions could not be sold separately, the property is an
investment property (i.e. falls under the provisions of NZ IAS 40) only if an insignificant portion is
held for use in the production or supply of goods and services or for administration purposes. (NZ
IAS 40 para 10)
Non-current Assets Held for Sale and Discontinued Operations are assets for which the carrying
amount will be recovered principally through a sale transaction rather than through continuing use.
For this to be the case, the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable.
The flow chart on the following page provides guidance on the classification of property assets
between NZ IAS 16 and NZ IAS 40 for financial reporting and valuation basis purposes. The focus
of these guidelines is the revaluation of assets in accordance with NZ IAS 16 and in particular,
valuation where reliable market evidence of the value of a property does not exist and valuation
using depreciated replacement cost is required.

Asset classification framework for valuation purposes
Property Asset
Is the property surplus to the entity's

Yes requirements or held for sale in the ordinary
course of business?
No
Is the property available

for immediate sale in its No
present condition and is
the sale highly probable?
Is a significant portion of the
property owner occupied or
intended to be used for the
production or supply of goods or
services or for administration
purposes as opposed to being held
Yes No Yes
to earn rentals or for capital
appreciation?
Public Benefit Entities
Is the property held to meet Yes

service delivery objectives
rather than to earn rental or
capital appreciation?
No
NZ IFRS 5 NZ IAS 40 NZ IAS 16
Fair Value Less

Fair Value Fair Value
Disposal Costs
Market Value less

Market Value Market Value
Disposal Costs
Is their reliable market-

No based evidence of the
property being valued?
Yes
Depreciated Sales Comparison /

Replacement Cost Income Approach
IVA 1 and NZVGN 1 also provides the following definitions and guidance:
Market value
The term “fair value”, used in NZ IAS 16 and NZ IAS 40, is generally synonymous with the term
“market value” as defined in International Valuation Standard 1: Market Value Basis of Valuation
(IVS 1) and adopted in IVA 1. Market value is “the estimated amount for which a property should
exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each acted knowledgeably, prudently,
and without compulsion”. (IVS 1 para 3.1)
5
Where the market/fair value of a property, plant and equipment asset is not able to be reliably
valued using market-based evidence for the same or a similar asset, depreciated replacement cost
is to be used to estimate fair value.
Specialised assets / depreciated replacement cost approach
Items of property, plant and equipment that are not able to be reliably valued using market-based
evidence for the same or a similar asset are referred to as being specialised. Specialised assets
are those that are rarely if ever sold on the open market, except by way of a sale of the business of
which they are a part, due to their uniqueness, which may arise from the specialised nature and
design of the buildings, their configuration, size or location or other factors.
Key characteristics of specialised assets are that they:
• Are useful to a limited number of uses or users
• Rarely, if ever, sell on the open market, except as part of the business entity
• Are generally specialised structures, and
• Earn revenue that has not been derived from an open market and for which market based
evidence does not exist.
In general, specialised asset are those that, due to some specialised physical or geographical
factor, offer very little utility for any purpose other than that for which they were originally designed.
Apportionment of value / componentisation
In undertaking valuations generally, valuers will frequently be required to undertake an

apportionment of reported property values, allocating value separately to the land element (non-
depreciable) and the buildings (depreciable). Valuers should, as far as possible, continue to apply
market concepts. While it is acknowledged that buildings cannot be separated from the land that
they occupy, valuers should recognise that the purpose of carrying out the apportionment is to
establish a basis for measuring the consumption in the financial statements. For non-specialised
property, the land value should be established and deducted from the total (fair value) to arrive at
the depreciable amount for the buildings. In the case of specialised property, the total fair value
will be the sum of the land value and the depreciated replacement cost of the improvements (and
therefore no separate apportionment to land value is required).
The componentisation requirements of NZ IAS 16 will require the valuer to undertake further
6
valuation apportionments of non-land assets where instructed by the reporting entity . Valuers
may also be requested to explicitly advise on appropriate useful lives over which asset
components should be depreciated for accounting purposes. These requirements may require the
valuer to seek the professional assistance of specialist valuers (such as plant valuers) or other
experts such as engineers or quantity surveyors, where the valuer does not have the necessary
expertise. (IVA 1, section 6.2.2 and NZVGN 1 para 6.5)
5
From here on, the terms “fair” and “market” value are used interchangeably, meaning the same thing for the purposes
of valuations for financial reporting.
6
For the purposes of componentisation, the costs attributed to the components should be based on
an apportionment of the overall replacement costs (or value) where the latter can be reliably
sourced from the market (i.e. a top-down, as opposed to a bottom-up, approach). The reason for
this is that the top-down approach will more accurately reflect the market replacement cost/value,
as aggregating the replacement costs/values of individual parts from a bottom-up approach will
7
usually produce an inflated overall figure .
The degree of componentisation for valuation purposes will largely reflect the way the asset is
accounted for by the reporting entity. Accordingly, valuers should discuss the required level of
componentisation with the reporting entity.
Borrowing costs8
Where the reporting entity adopts the alternative treatment allowed in NZ IAS 23: Borrowing Costs
(NZ IAS 23), of capitalising borrowing costs, the amount of borrowing costs that would be
embodied in the fair value of the asset is included as a component of DRC. The amount to be
included as a component of DRC is determined on the basis of the average debt-to-equity ratio
and average cost of debt applicable to entities undertaking the same activities as the entity
reporting. (NZ IAS 16 para NZ 33.14)
Owner-occupied property
Where the primary approach to valuation of owner-occupied properties for financial reporting
purposes is capitalisation or discounting of future rental income, the valuer shall assume that a
notional lease is in place on market terms and conditions reflecting the current use. This approach
assumes that the owner-occupier is using the property for its highest and best use. If it is not, then
the property would need to be valued having regard to its highest and best use. (NZVGN 1 para
6.5)
Report disclosures
IVS 3, section 5.0 stipulates that the valuer’s written report shall disclose the following information:
• Clearly and accurately provide the conclusions of the valuation in a manner that is not
misleading
• Identify the client, intended use of the valuation and relevant dates (i.e. the date at which the
valuation estimate applies, the date of the report and the date of inspection)
• Specify the basis of the valuation, including the type and definition of value
• Identify and describe the property rights or interests to be valued, physical and legal
characteristics of the property and classes of property included in the valuation
• Describe the scope / extent of the work used to develop the valuation
• Specify all assumptions and limiting conditions upon which the value conclusion is contingent
7
For certain assets, such as infrastructure, where there are no overall replacement costs/values, a bottom-up
approach will be the only option.
8
• Identify special, unusual, or extraordinary assumptions and address the probability that such
conditions will occur
• Include a description of the information and data examined, the market analysis performed, the
valuation approaches and procedures followed and the reasoning that supports the analysis,
opinions and conclusions in the report
• Contain a clause prohibiting the publication of the report in whole or part, or any reference
thereto, or to the valuation figures contained therein, or to the names and professional affiliation
of the Valuer’s, and
• Include a Compliance Statement that the valuation has been performed in accordance with
IVSs, disclose any departure from the specific requirements of IVSs and provide an explanation
for such departure.
The Compliance Statement contained in the Valuer’s report shall also confirm that:
• The statements of fact presented in the report are correct to the best of the Valuer’s knowledge
• The analysis and conclusions are limited only by the reported assumptions and conditions
• The Valuer has no (or if so, a specified) interest in the subject property
• The Valuer’s fee is not contingent upon any aspect of the report
• The valuation was performed in accordance with an ethical code and performance standards
• The Valuer has satisfied professional education requirements
• The Valuer has experience in the location and category of the property being valued
• The Valuer has (or has not) made a personal inspection of the property, and
• No one, except those specified in the report has provided professional assistance in preparing
the report.
For the purposes of valuations prepared in accordance with this document, it is also recommended
that the basis of depreciation (in a depreciated replacement cost valuation) be stated.

Section 2: Asset classification and valuation methodology
This section overviews the asset classification and standard valuation methodologies that are
appropriate for property, plant and equipment, and explains the depreciated replacement cost
methodology in detail.
Asset classification
The classification of an asset is central to the selection of the most applicable financial reporting
standard to account for that asset for financial reporting purposes (as detailed in Section 1 of this
guidance). In turn, the valuation methodology to be adopted is dependent on whether the asset
can be valued by reference to market based evidence (i.e. whether the asset is regarded as non-
specialised). Where the value of the asset is not able to be determined using market based
evidence, the asset is regarded as specialised.
Assets to be accounted for under NZ IAS 40 are those that are held primarily to earn rental or for
capital appreciation or both. These assets trade in the market place and accordingly are valued by
reference to the active market or to market based evidence.
Assets that are to be valued under NZ IAS 16 will usually represent operational assets. These are
assets that are:
• integral to the supply of the entity’s output, or
• being held or developed by an entity to be integral to the supply of the entity’s output in the
future.
The valuer (possibly in conjunction with the reporting entity) will usually determine whether these
assets are specialised, non-specialised or a mixture.
Valuation methodologies
There are three main approaches to determining market value:
• Sales comparison approach (comparable sales method, direct market comparison)
• Income (capitalisation) approach (including discounted cashflow analysis), and
• Cost approach (depreciated replacement cost).
The first two approaches apply to non-specialised assets, while the latter applies to specialised assets.
In some circumstances a cost approach is also applied to non-specialised properties as a check.
There will be circumstances where an asset that is regarded as non-specialised forms part of a
larger specialised asset or group of specialised assets. Examples would likely include:
• Student or staff housing/flats/apartments within a hospital or university campus
• A university registry or administration building
• A carpark within the campus of a hospital or tertiary education institution.

In the case of a specialised network or campus comprising numerous assets it is recommended
that there is a ‘rebuttable assumption’ that all the assets are specialised i.e. the campus or network
is considered holistically rather than at an individual asset level. The reason for this approach is
that in most cases the assets are closely inter-related and their values are directly linked to the
operations of the entity.
A ‘specialised’ assumption can be rebutted if there is reliable market evidence for any individual
asset, it is legally and physically possible to separate, and separation would not affect the integrity of
the network or campus and therefore it could be economically rationale to separate. It will generally
be the valuer’s judgement as to whether market based techniques (rather than depreciated
replacement cost) should be applied to individual assets. This decision should also reflect:
• The availability of market based evidence that enables the value of the asset to be reliably
determined
• Evidence that there is/would be demand for the asset in its current use in the absence of the
specific entity operations (if no such demand would exist, then the asset is inextricably inter-
related with the other specialised assets and to value the asset using market based techniques
may over-state the value as an individual asset), and
• The materiality of the particular asset in the context of the overall value of property assets.
Cost based valuation methodologies
Cost based valuation approaches use the cost of reproducing the asset, or the modern equivalent
of the asset, as an estimate of the asset’s fair value. The rationale for this is that if the asset:
• is able to be reproduced
• provides the utility or service expected of the cost, and
• is in its highest and best use
then potential buyers will pay a cost-related price, which is equivalent to the cost of reproducing the
asset themselves.
Cost-based valuation approaches include:
• Reproduction cost, and
• Depreciated replacement cost.
Reproduction cost
The reproduction cost of an asset is the cost of reproducing that asset with exactly the same
appearance and character, and using the same materials, where available, or where these could
be specially manufactured. Reproduction cost is most applicable when valuing assets of a special
character that are intended to be retained in their present form (for example, a heritage building).

A property that is described as a heritage asset has some cultural, environmental or historical
significance. Heritage assets include historical buildings and monuments, archaeological sites,
conservation areas and nature reserves and works of art. Heritage assets often display the following
characteristics (although these characteristics are not necessarily limited to heritage assets):
• Their economic benefit in cultural, educational and historic terms is unlikely to be fully reflected
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in a financial value purely based on market price
• Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by
sale
• They are often irreplaceable and their economic benefit may increase over time, even if their
physical condition deteriorates, and
• It may be difficult to estimate their useful lives, which in some cases could be several hundred
years.
In the case of property, where there are prohibitions or severe restrictions on either demolition or
alteration of the building, reproduction cost (as opposed to replacement cost, which is detailed in
the next section) should be used.
Depreciated replacement cost
Depreciated replacement cost (DRC) measures the minimum cost of replacing or replicating the
service potential embodied in the assets with modern equivalent assets in the most efficient way
practicable, given the service requirements, the age and condition of the existing assets and
replacement in the normal course of the business.
Replacement cost is the cost of replacing an existing asset with a substantially identical new
modern equivalent asset. When calculating depreciated replacement cost, NZ IAS 16 requires that
physical deterioration be taken into account and that optimisation for obsolescence and relevant
surplus capacity occur.
The underlying principle is that DRC, through the optimisation process, recognises:
• that an entity may have more assets than it needs, and/or
• that some of those assets may be over-engineered or technically obsolescent.
The DRC methodology comprises the following broad steps:
1) Develop/review asset registers
2) Develop standard replacement costs (including components, where applicable)
3) Optimise and calculate optimised replacement cost (ORC)
4) Assess useful lives
5) Determine depreciation and calculate DRC
6) Assess land value.
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Rare and collectible works of art would be an exception.
Each of these steps is explained in the following sections:
1) Develop / review asset registers
The asset register compiled by the reporting entity should itemise all items of property, plant and
equipment and provide general data on the entity’s assets (especially the material items),
including:
• Land and title/ownership information
• Age/remaining lives for land improvements and plant and equipment
• Quantities, size or capacity
• Construction details
• Condition and performance information
• Costing information (original cost and major refurbishment details and costings, where
available)
• Component information (where applicable).
The valuer will need to be satisfied as to the accuracy of the data used in the valuation. The extent
of data review will be at the judgement of the valuer.
Plant and equipment is deemed to include assets owned by the reporting entity that are utilised in
the every-day activities of the reporting entity. Generally, these assets are not of a fixed nature
and are able to be moved around for operational purposes. Building services assets that may be
considered to be plant and equipment, such as lifts and building services, are considered integral
(and fixed) and are therefore accounted for as a component of the building.
2) Develop standard replacement costs
Under NZ IAS 16, an item of property, plant and equipment shall initially be recognised at its cost,
which includes costs directly attributable to bringing the item to working condition for its intended
use. (NZ IAS 16 para 16) Similarly, such costs should be allowed for in replacement costs adopted
for valuation purposes.
Building replacement/construction costs are based on market rates or evidence, which would
typically be estimated from:
• Recent construction cost contracts for new buildings or extensions completed by the reporting
entity
• The valuer’s knowledge of construction costs of other buildings considered similar
• Costing databases/information such as Rawlinsons New Zealand Construction Handbook, and
• Specialist costing advice from professionals such as quantity surveyors.
In addition to construction costs there should be allowances for other site works, professional fees,
borrowing costs (where applicable) and resource consent costs.

As previously mentioned, in the case of heritage property, where there are prohibitions or severe
restrictions on either demolition or alteration of the building, reproduction costs should be used.
These would be assessed on a case-by-case basis, as uniform rates will typically not apply to
heritage buildings.
Plant and equipment is to be assessed by reference to available suppliers’, agents’ and manufacturers’
data, in addition to costing information that is able to be provided from the reporting entity.
Specific comments in relation to certain costs are:

10
• Borrowing costs: Where the reporting entity has a policy of capitalising borrowing costs under
the provisions of NZ IAS 23: - Borrowing Costs (NZ IAS 23), interest costs incurred during the
period of construction are to be included in the assessment of replacement (or reproduction)
cost. Under NZ IAS 16, the amount to be included as a component of depreciated replacement
cost is determined on the basis of the average debt to equity ratio and average cost of debt
applicable to entities undertaking the same activities as the entity reporting. (NZ IAS 16 para.
33.14). Therefore borrowing costs are calculated at a rate that reflects the standard interest
rates obtainable by a notional or hypothetical owner (i.e. an owner of similar assets), not at rates
that are specific to the actual owner of the asset.
• Resource consents: Many specialised properties require initial and ongoing resource consents.
These consents often involve considerable time and expense to ensure compliance with the
required public consultation processes. Generally, resource consent costs would form part of
the fair value of a major specialised asset and, in circumstances where the consents have a
finite life, would normally be accounted for as a separate component.
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Componentisation
For the purposes of componentisation, it is considered that buildings should be divided into the
following main components:
• Building structure and external envelope
• Building services, and
• Fitout.
These are considered to represent the main components of buildings that have different useful lives or
provide benefits to the entity in different patterns, thus requiring different depreciation rates/methods.
NZ IAS 16 notes that each item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item shall be depreciated separately. (NZ IAS 16 para. 43).
While it is considered that the three building components identified above should form the basis for
component valuations, the actual level of componentisation will need to reflect the specific assets,
materiality and the approach adopted/deemed necessary by the reporting entity. This will be a
matter to be discussed between the valuer and the reporting entity and may lead to fewer or
additional component levels (including sub-components, such as, for example, air-conditioning and
lifts within building services).
10
11
The degree of componentisation for plant and equipment will need to be assessed on a case-by-
case basis.
3) Optimise and calculate optimised replacement cost
Possible degrees of optimisation are shown in the following diagram:
Extent of
Optimisation under
IAS 16
DRC Valuation
A B C D E F
Reproduction of existing Surplus assets eliminated Obsolescence eliminated Over-design eliminated Site reconfiguration Changed location
assets
Low High
Degree of Optimisation
A commentary as to the degrees of optimisation follows:
i Reproduction of existing asset: The reproduction of an asset to its existing form and standard
represents zero optimisation. It is applicable to assets such as historic/heritage buildings.
ii Surplus assets eliminated: Identifies those assets that are not necessary for the production of
the goods and/or services produced by the entity. Where such assets are separable, they will
be held either for sale, investment or development and should be valued accordingly. (refer
also to NZ IAS 16 para NZ 33.6)
iii Obsolescence eliminated: Obsolescence may arise from factors such as outmoded design and
functionality of an asset or changed code requirements preventing reconstruction of an asset in
its current form. In determining depreciated replacement cost, optimisation for obsolescence is
made by reducing the reproduction cost of the specific asset held to the cost of a modern
equivalent asset that provides equivalent service potential. (refer also to NZ IAS 16 para NZ
33.5)
iv Over-design eliminated: Over-design may arise where there is no longer a demand for the
capacity offered by the asset. Under NZ IAS 16, optimisation for this is applied only to surplus
capacity that is not currently required and for which there is no reasonable prospect of it being
required while the asset is utilised in its current form. Optimisation is not applied to surplus
capacity that, while rarely or never used, is necessary for stand-by or safety purposes. (refer
also to NZ IAS 16 para NZ 33.6)

v Site reconfiguration: Optimisation through site reconfiguration is applicable to non-land assets
only and applies where the existing configuration of non-land assets on a site is considered
operationally inefficient. Site reconfiguration will be acceptable optimisation only to the extent
that operational inefficiencies require an allowance for physical deterioration or for
obsolescence and over-design outside of that already encompassed in the optimisation
process.
vi Changed location (or greenfields): Attempts to value the replacement cost of assets based on
the most cost-effective, or optimal, set of assets to achieve the required level of service
potential. Greenfields optimisation therefore assumes the capacity to design and build an
entirely new optimal network of assets for the entity, regardless of the historical constraints that
may have applied.
A key element of the optimisation process is the extent of optimisation. Most depreciated
replacement cost valuations utilise incremental optimisation, which allows progressive or
incremental optimisation to the extent that such incremental growth occurs in the normal course of
business. Under-utilised assets are replaced and redundant assets are removed, but the historical
configuration of the campus of assets is broadly retained. The concept is often referred to as
brownfields, in contrast to greenfields.
The incremental (or brownfields) DRC approach recognises that there is always some degree of
sub-optimality and allowance for future growth in future demand. It also reflects the historical
development of the existing business, the time lag in asset planning and construction, the very long
lives of the assets and the replacement of asset components, in the normal course of business. As
campuses or systems expand and change, a degree of sub-optimality at any point of time is
inevitable and is part of the total cost of output.
Greenfields optimisation attempts to value the replacement cost of assets based on what is the
most cost-effective, or optimal, set of assets to achieve the required level of service potential (in
terms of capacity, service quality and useful life). Greenfields optimisation therefore assumes the
capacity to design and build an entirely new optimal campus of assets for the entity, regardless of
the historical constraints that may have applied.
In practice, a greenfields replacement cannot occur in the normal course of business (except in
rare circumstances). Furthermore, a greenfields replacement is rarely feasible, given the
constraints imposed by the existing assets and customer access.
For the purposes of NZ IAS 16, depreciated replacement cost is the fair value of the land plus the
current gross replacement cost of improvements, less an allowance for physical deterioration and
optimisation for obsolescence and relevant surplus capacity. The depreciated replacement cost for
plant and equipment is the same as for land improvements. This will usually include bars A to D,
as discussed above.
The DRC approach assumes no improvement in the asset’s performance or service. Therefore the
DRC value of the existing assets, although based on modern equivalent assets, does not reflect
higher service and quality standards or a greater capacity than is presently the case.
Optimisation is subject to the following principles and constraints:
• It should satisfy the current levels of service supplied. As a general rule, an asset providing
more than the required level of service (after allowing for predicted growth) should be optimised
downwards.

• The allowance for growth should be supported by asset management plans. Optimisation
cannot increase the value of the asset and in no case should the optimised capacity exceed the
current system capacity. An under-capacity system should be accepted as the optimised
system.
• Optimisation should only be done on a bottom-up approach at asset level. General

assumptions about oversizing or obsolescence cannot be made at a campus or network level
and applied top-down to all individual assets (unless it can be demonstrated by the reporting
entity that the latter approach is used in practice to determine optimal asset
capacity/configurations).
• It should consider minimum safety and technical standards or design philosophies.
4) Assess useful lives
The following life estimates are required to determine DRC:
• useful life
• asset age
• remaining useful life.
NZ IAS 16 para 6 defines useful life as being either:
a the period over which an asset is expected to be available for use by an entity, or
b the number of production or similar units expected to be obtained from the asset by an entity.
NZ IAS 16 para. 56) states that the following factors need to be considered in determining the
useful life of an item of property, plant and equipment:
a expected usage of the asset. Usage is assessed by reference to the assets expected capacity
or physical output
b expected physical wear and tear , which depends on operational factors such as the number of
shifts for which the asset is to be used, the repair and maintenance programme, and the care
and maintenance of the machinery while idle
c technical or commercial obsolescence arising from changes or improvements in production, or

from a change in the market demand for the product or service output of the asset
d legal or similar limits on the use of the asset, such as the expiry dates of related leases.
Other key principles in determining an asset’s useful life are:
a The remaining useful life, which can be assessed by either:
• Assessing the expected useful life and deducting the asset age, or
• Assessing the remaining life of the asset using condition and economic information (this is
considered the more robust option but is often limited by the availability of condition data).

b The useful life used must be the minimum of:
• The physical life, which is the period of time until the asset ceases to provide the required
level of service (or be the lowest cost alternative to do so) because of physical deterioration
of the asset, and
• The economic life, which is the life until the asset ceases to be the lowest cost alternative to
satisfy a particular level of service due to any other factors.
c Determination of the asset’s useful life is a matter of judgement based on the experience of the
entity / valuer with similar assets.
d Useful lives are assessed for existing assets while replacement costs are calculated for modern
equivalent assets (or reproduced assets in the case of heritage items).
e Useful lives must be assessed for groups of assets with similar lives.
f Assets not currently being used to provide services (such as those held for standby services)
will still have a useful economic life.
g In estimating the useful life, ongoing maintenance is expected to occur throughout the life of the
asset.
An asset’s physical life is the maximum possible useful life. However, there are factors, other than
physical deterioration, that may cause the asset to be replaced at an earlier date. Such factors
might include:
• Demand either increasing or decreasing, which may drive replacement/upgrade programmes or

decommissioning prior to the end of the asset’s physical capability to provide the service.
• Legislative, regulatory and environment changes, which can often affect operational practices
and therefore asset lives.
• Technological redundancy, which should be considered as an economic factor only if the entity
has a formal replacement programme for the technologically redundant assets.
• The fact that operational and maintenance costs typically increase with age, which may result in
the cost of keeping the asset in operation becoming higher than the cost of replacement. A
cost-benefit analysis may demonstrate that the replacement is justified prior to reaching the
physical life.
Valuers and reporting entities may also have regard to information on expected lives issued by
individual asset manufacturers, the New Zealand Inland Revenue Department or other similar
authoritative sources.
Physical lives, whether assessed as a useful life or remaining physical life as at the date of
valuation (and useful life representing the actual age plus the estimated remaining physical life),
should be adopted unless there are economic factors which suggest with reasonable certainty that
the life is something less.
Where an asset has undergone major refurbishment works, the actual age of the asset will usually
need to be revised at the completion date of the works. This is particularly applicable in the case of
heritage buildings, which will often undergo major refurbishment near the end of their physical life.

The approach to lives set out above applies for all items of property, plant and equipment,
including, where applicable, components within assets.
5) Determine depreciation and calculate DRC
For valuation purposes, depreciation is calculated on the depreciable portion of an asset (its
optimised replacement cost less the estimated residual value).
Residual value
The residual value is the estimated net amount that will be received when the asset is removed
from service. NZ IAS 16 para. 6 defines residual value as “the estimated amount that an entity
would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if
the asset were already of the age and in the condition expected at the end of its useful life”.
12
Buildings are generally regarded to have a nil residual value. Where it is considered that a
building residual value is appropriate, the valuer is to disclose the reasoning and assumptions.
Residual values for plant and equipment are to be based on:
• the experience of the valuer obtained whilst valuing similar assets, and
• the experience of the reporting entity in terms of the level of net costs achieved when disposing
of such assets,
and will usually be expressed as a percentage of ORC.
When undertaking valuations of property, plant and equipment which have restoration, dismantling
or removal obligations associated with them (essentially a negative residual value), the valuer must
request guidance from the entity from whom valuation instructions are received about how such
obligations are to be dealt with in the valuation. In all such circumstances, the valuation report is to
disclose how such obligations have been treated.
Depreciation
The way in which depreciation is allocated over the life of the asset (for accounting or valuation
purposes) shall reflect the pattern in which the assets future economic benefits are expected to be
consumed by the entity. (NZ IAS 16 para. 60)
In property valuation, elements of depreciation may be classified as:
• Physical deterioration
• Functional obsolescence, or
• Economic obsolescence.
12
Where it is shown that a building will likely have some alternative use at the end of the useful life for its current
activities, then this should be recognised by estimating a residual value.
Physical deterioration in improvements is a result of wear and tear over the years, combined with a
lack of necessary maintenance. Functional obsolescence is caused by advances in technology
that create new assets capable of more efficient delivery of goods and services. Modern
production methods may render previously existing assets fully or partially obsolete in terms of
current cost equivalents. Economic obsolescence is the result of external influences affecting the
value of the subject asset. External factors may include changes in the economy, which affect the
demand for goods and services.
Key principles to consider in establishing the depreciation rates are:
• How the asset is consumed – is it due to the passing of time or usage (at the aggregate or
component level, whichever is applicable).
• The depreciation pattern is proportional to the predominant factor that impacts on the length of
time that the asset can continue to provide the service.
• The pattern of the physical deterioration of an asset is not an appropriate technique to represent
the depreciation of the asset, as the physical deterioration will not necessarily represent the
pattern of consumption of economic benefits.
• The chosen method is to be consistently applied from period to period unless there is a change
in the expected pattern of consumption of economic benefits from that item.
• When the pattern of economic consumption does not materially differ from straight line, or
where the pattern cannot be reasonably determined and demonstrated, straight line
depreciation is recommended as a reasonable basis for approximating the consumption of
economic benefits.
The depreciation methods considered most relevant for valuation purposes are:
Straight line:
Annual depreciation = depreciable amount/estimated useful life
This method allocates the depreciable amount as a function of time, which produces a constant
expense charge. The major assumption associated with this method is that the asset’s economic
usefulness (decline in service potential) is the same each year.
For valuation purposes, this is the usual approach adopted for property assets.
Reducing balance (or diminishing value):

Annual depreciation = carrying amount (opening) x depreciation rate
This method uses a constant depreciation rate and applies it to the carrying amount (the original
cost less accumulated depreciation) of the asset at the beginning of the period. The amount of
depreciation charge will be higher in the initial periods and reduce over the periods. Once the
asset’s carrying amount reaches the residual value, depreciation will stop.
This method is sometimes applied to plant and equipment, as many of these types of assets tend
to depreciate more quickly in their earlier years. However, in the case of specialised plant and
equipment, straight line depreciation is generally considered to more appropriately reflect the
consumption of economic benefits embodied in the asset (unless the production unit method, as
detailed below, is more applicable).

Production unit method:
Annual depreciation = depreciable amount x (production this year/total estimated production or activity)
This method assumes that depreciation is a function of use or productivity instead of a function
of time elapsed. The life of the asset is considered in terms of output provided or the number of
hours worked (input measure). Where the loss of service potential is a function of activity or
productivity, the production method will provide a good match of costs and revenues.
This approach will be suitable for items of plant and equipment that have lives that are a function of
their productivity. A pre-condition to its application is that production can be accurately measured.
For DRC valuation purposes, depreciation is the portion of depreciable amount (optimised
replacement cost – residual value) applicable to the period, based on the consumption of service
potential/economic benefits as at the date of valuation. The DRC valuation calculations for the
above mentioned depreciation methods are:
Straight line:
DRC = (depreciable amount x (remaining useful life/useful life)) + residual value
Reducing balance (or diminishing value):

DRC = optimised replacement cost x (1-rate)^age
“Rate” is the rate of annual valuation depreciation applicable and is calculated according to the
formula:
(1-residual value percentage)^(1/useful life)
Production unit method:

DRC = (depreciable amount) x (production during remaining useful life/production over useful life) + residual
value
The above calculations are applicable to assets considered at both the aggregate and component
level.
NZ IAS 16 requires the residual value, useful life and depreciation method applied to items of
property, plant and equipment to be reviewed at least at each financial year-end, and to be
changed if there is a significant change from previous expectations. (NZ IAS 16 para. 51)
When an item of property, plant and equipment is revalued, any accumulated depreciation at the
date of the revaluation is treated in one of the following ways:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount. This method is
often used when an asset is revalued by means of applying an index to determine its
depreciated replacement cost.
(b) eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This method is often used for buildings.
The amount of the adjustment arising on the restatement or elimination of accumulated depreciation
forms part of the increase or decrease in the carrying amount of the asset. (NZ IAS 16 para 35)
These requirements have an impact on revaluation and therefore the valuer and reporting entity
should discuss these assumptions.

6) Assess land value
Under NZ IAS 16, the fair value of land is always its market value even when applying the DRC
approach to the property. Implicit within the definition of market value is the concept of highest and
best use. This is the most probable use of an asset which is physically possible, appropriately
justified, legally permissible, financially feasible, and which results in the highest value of the asset
being valued. The existing use of the land may or may not, represent the highest and best use. It is
therefore the responsibility of the valuer to consider different uses and corresponding land values in
estimating highest and best use and market value. Where there is no evidence of market land
values for the existing use of the land, alternative highest and best land uses need to be considered.
For land, reliable market-based evidence is considered to be market evidence of land in a similar
or alternative use, which is located adjacent (or in close proximity) to the land asset being valued.
In addition to third party transactions, arm’s-length purchases or sales by the reporting entity will
provide relevant market evidence. Adjustments for physical characteristics such as size, shape,
contour etc. will typically need to be addressed by the valuer.
Optimisation is not applied in determining the value of the land component for the purposes of the
DRC approach. This is a specific requirement under NZ IAS 16 para. NZ 33.11.
Where land is designated or zoned specifically for the activities of the entity, the valuer may be
required to consider the likely alternative uses for the land and the prospects of the designation
being uplifted or the land being rezoned.
In the case of land that is comprised in multiple titles, the value will generally be assessed as the
sum or aggregate of the individual title values. Where the value of the land as an amalgamated
parcel is greater than the sum of the individual parcels, then the higher value should be adopted.
Aspects of land valuation specific to the education and health sectors are discussed in the
following Section 3, under the heading of “Land value”.

Section 3: Valuations in the health and education sectors – specific
considerations
This section backgrounds valuations in the public sector and provides additional sector specific
guidance for valuing specialised items of property, plant and equipment in the health and education
sectors. This information is supplementary to the more detailed (but generic) guidance provided in
Section 2 of this guidance.
Background
Assets in the public sector comprise conventional property, plant and equipment types as well as
different asset types, including heritage/conservation assets, infrastructure assets, public utility
plants, recreational assets and public buildings.
In the public sector, the concept of service potential usually takes the place of free market
cashflows and the test of adequate profitability applied in the private sector. Service potential is
measured as the level of productive capacity that would have to be replaced if the entity was
deprived of the asset. In the public sector, continued service potential is expressed in quantifiable
physical terms such as remaining useful life and remaining productive capacity. The directors or
managers of the asset generally undertake the test of adequate service potential, which
determines whether the asset meets the requirements set for its productive capacity.
Public sector asset valuation employs many of the same procedures and approaches as valuation
of private sector assets. Valuations of public sector assets for which market evidence exists
employ most (if not all) of the same procedures and approaches as valuation of private sector
assets. Many classes of public sector assets are, however, of particularly specialised character
and there is insufficient market evidence upon which to base an assessment of their value. The
degree to which market based evidence exists, and the purpose of a public sector asset valuation,
will determine the methodology applied.
The balance of this section focuses on property, plant and equipment in the health and education
sectors and in particular, the application of depreciated replacement cost (DRC) methodology. The
entities concerned are:
• District Health Boards
• Tertiary education institutions (universities, polytechnics, colleges of education and wananga),

and
• Ministry of Education (schools).
Nature of assets / classification

Items of property, plant and equipment in the health and education sectors are generally regarded
as being of a specialised nature. They also, for the most part, comprise assets held in a campus
type environment.
Land and buildings comprise the bulk of the value of property, plant and equipment within the
health and education sectors. Plant and equipment is also significant, with scientific and other
specialty equipment being particularly significant for tertiary education institutions.

Libraries and special collections (such as art, permanently retained library collections and
antiquities) are classified as “Other Assets” in the Crown financial statements. It is noted that
these assets can represent a significant asset class in the education sector, particularly for tertiary
education institutions.
Typical assets within the health and education sectors comprise:
Health Education
Land – usually large holdings beneath campuses and Land – usually large holdings beneath campuses and
also that accommodating standalone buildings also that accommodating standalone buildings
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Buildings – comprising functions such as: Buildings – comprising functions such as:
In-patient care Classrooms
Specialist in-patient care Laboratories
Diagnostic and treatment Libraries
Specialist procedure areas Specialty teaching (e.g. health or hospitality clinics)
Ambulatory care Lecture theatres
Administration Administration (including student recreation)
Support services Gymnasiums
Staff amenities and training Maintenance sheds
Maintenance facilities Relocatable classrooms
Residential accommodation (staff or student) Practical trade tuition
Basement areas Residential accommodation (staff or student)

Basement areas
Other site works – such as: Other site works – such as:
Sewer and stormwater drainage Sewer and stormwater drainage
Site services (electrical, water, fire) Site services (electrical, water, fire)
Emergency electric generators Emergency electric generators
Parking areas Parking areas
Roadways/footpaths Roadways/footpaths
Fencing Fencing
Landscaping Landscaping
Covered walkways Covered walkways
Playing fields
Farm areas
Plant and equipment – such as: Plant and equipment – such as:
Specialist medical equipment Teaching furniture and equipment
Medical furniture and fittings Administration equipment
Computers/information systems/software Computers/information systems/software
Catering/kitchen equipment Specialist equipment (such as catering, industrial or
Vehicles scientific)
General engineering and maintenance equipment Vehicles
General furniture, effects and fittings Accommodation equipment
Libraries and special collections Libraries

Special collections
Valuation methodology
The majority of the above assets will be valued on a DRC basis as they comprise specialised
assets for which market based evidence is insufficient. Certain assets are, however, likely to be
able to be valued using market based approaches. Examples would include:
13
More detailed descriptions are contained in Appendix A of these guidelines.
Property:
• land
• residential accommodation (staff or student)
• carparks (at grade (i.e. at ground level only), or buildings)
• administration buildings (i.e. an office)
• retail blocks/units
Plant and equipment:
• motor vehicles
• computers (standalone)
• catering/kitchen equipment
• certain (generic/general) furniture and fittings
• special collections.
In respect of property, as discussed in Section 2, for a health or education campus it is

recommended that there is a ‘rebuttable assumption’ that all the assets are specialised i.e. the
campus or network is considered holistically rather than at an individual asset level. The reason
for this approach is that in most cases the assets are closely inter-related and their values are
directly linked to the operations of the entity.
A ‘specialised’ assumption can be rebutted if there is reliable market evidence for any individual
asset, it is legally and physically possible to separate, and separation would not affect the integrity
of the network or campus and therefore it could be economically rationale to separate.
It will generally be the valuer’s judgement as to whether market based techniques (rather than
DRC) should be applied to individual assets. This decision should also reflect:
• The availability of market based evidence that enables the value of the asset to be reliably
determined
• Evidence that there is/would be demand for the asset in its current use in the absence of the
health/education operations (i.e. demand for the asset is not dependent on the presence of the
hospital/tertiary education institution/school), and
• The materiality of the particular asset in the context of the overall value of property assets. For
example, a block of retail shops within the main building of a hospital or tertiary education
institution may simply be valued with the building using DRC on the grounds of materiality. In
such instances, judgement is required by the valuer and the reporting entity.
Assets that, in the valuer’s judgement, are able to be valued based on market evidence, should be
excluded from the DRC assessment of the other items of property, plant and equipment. The non-
specialised assets would, however, ultimately be aggregated with the specialised assets for the
purposes of reporting the value of the class of assets.

Where there is actual income information for a non-specialised asset, in considering this data for
valuation purposes the valuer may be required to make adjustments where owner-occupied space
(as opposed to third party lease arrangements) is not reflective of market rates. Consistent with
the valuation of owner-occupied properties for financial reporting purposes where capitalisation or
discounting of future rental income is adopted, the valuer should assume that a notional lease is in
place on market terms and conditions reflecting the current use (assuming the entity is using the
property in its highest and best use).
Within the plant and equipment category, special collections include works of art, permanently
retained library collections and antiquities. Permanently retained library collections contain books
and other material deemed to have cultural, aesthetic or historical value and for which the entity
commits sufficient resources to permanently preserve the collection. If the collection is owned by
the entity and is in the nature of an investment in which the entity is free to deal, the collection
should be valued at market value. Works of art would normally fall into this category. To value
special collections, the entity/valuer would often need to obtain relevant expert advice.
Application of DRC methodology
The depreciated replacement cost (DRC) methodology has been fully detailed in Section 2 of this
guidance. This section provides further guidance when applying the DRC methodology for assets
in the health and education sectors.
Replacement costs
Buildings
Appendix A of this guidance provides detailed guidelines for assessing the replacement costs for
buildings in the health and education sectors, encompassing unit rates ($ per m2) for the various types
of buildings found in these sectors. The rates provided represent costing ranges that should be used,
having regard to the qualitative descriptions provided in respect of the buildings being valued.
The overall building replacement costs provided are based on analysed rates from market contracts.
Where available, these should be crosschecked by the valuer against other sources of costing
information discussed in the previous section. It is also noted that most of the major hospitals have
undergone substantial redevelopment programmes since 1999 and that this represents a good
source of costing information for valuation purposes. The Capital Goods Price Index referred to
could also be used as a means of updating historical costing data that the reporting entity may hold
(and also for updating the current costing data provided in these guidelines).
Where a building asset has more than one function (the costings are based on functions), then the
building replacement cost should be calculated by aggregating the replacement costs by function,
which will be based on proportionate gross floor areas. In the case of hospital buildings, some
overall building cost rate checks are provided where the building is multi-functional.
The replacement costings contained in Appendix A of this guidance are for modern equivalent
assets. Where there are heritage/conservation buildings requiring preservation, reproduction, as
opposed to replacement, costs should be adopted. These may require specialist input from a
costing professional.
In addition to main buildings, allowances for any additional building specifics and site works
(reasonably significant for a campus) should be made. Costing rate parameters for these are also
provided.

The costing ranges should not be regarded as absolute parameters. There may be circumstances
where costing rates to be applied fall outside the range provided. The valuer and the reporting
entity will need to exercise judgement in these circumstances.
Plant and equipment

Plant and equipment is to be assessed by reference to available suppliers’, agents’ and manufacturers’
data in addition to costing information that can be provided from the reporting entity.
14
Borrowing costs
Where the entity capitalises borrowing costs, key assumptions for the calculation of borrowing costs
relate to the interest rate, typical borrowings percentage and period. These should be market based
and reflect what could be considered typical for the industry and asset concerned. For example, the
Crown Financing Agency (CFA) is a provider of debt to District Health Boards and would provide useful
guidance on borrowing costs in the health sector. The valuer should discuss typical borrowing
percentages and interest rates in the specific sector with the reporting entity.
In terms of period/duration, borrowing costs should be calculated on the typical construction time
for the individual asset, or group of assets where they are related. The asset(s) should be
representative of how they would typically be replaced by the reporting entity. This is consistent
with the incremental approach to DRC detailed in Section 2 of this guidance, which indicates that
asset growth within a campus is typically incremental rather than greenfields (to assume that
everything would be constructed at once would imply much longer construction periods).
For valuation purposes, capital charge is not regarded as a borrowing cost.
15
Componentisation
For building assets, Appendix A of this guidance provides costing guidance for the:
• building structure and external envelope, and
• building services.
In practice, building fitout is the most variable of the components and therefore it is considered
appropriate that this item be the residual item to make up the overall building replacement cost
(unless detailed fitout costings are available to the valuer. Notwithstanding, in such cases it is
expected that the component replacement costs should not exceed the overall building cost rates
contained in Appendix A of this guidance).
Componentisation of items of plant and equipment should be assessed on a case-by-case basis.

The degree of componentisation adopted is to be discussed and agreed between the valuer and
the reporting entity and will be influenced by:
• how the assets are accounted for by the reporting entity
• the materiality of the asset components, and
• asset management/replacement plans.
14
15
Site works for campuses within the education and health sectors are reasonably significant and
therefore it is likely that these would represent a further component level to be considered. In
some cases it may also be necessary to separately consider sub-components of components
(e.g. air-conditioning within building services, which can be a significant item in various health and
tertiary education buildings).
A step by step process should be applied in the componentisation process which considers the life
of the campus, the life of the building or sitework asset and the life of the components that make up
the asset. The remaining life of the building or sitework asset shouldn’t exceed the remaining life
of the campus. Furthermore, the remaining life for building service components shouldn’t exceed
the remaining life of the building structure (i.e. the remaining life of the building structure
establishes a ‘maximum’ for the remaining lives of the building services).
Optimisation
The degree of optimisation to be applied (as specified by NZ IAS 16: Property, Plant & Equipment)
has been addressed in Section 2 of this guidance. Essentially, optimisation for obsolescence and
surplus capacity is required. In the case of buildings, the costings that have been provided in
these guidelines reflect modern equivalent assets and therefore no further allowance for
obsolescence is required.
Optimisation for surplus capacity requires the entity to assess whether it has capacity that will not
be used for the foreseeable future. Thus, capacity that is required for seasonal fluctuations in
demand (such as occurs in hospitals where there is a higher demand in winter than summer) must
be included in the valuation.
When examining optimisation for surplus capacity, schools (through the Ministry of Education)
have considerable information (based on forecast rolls for the next five years) on what is actually
required and would be replaced. Tertiary education institutions and hospitals do not have such
information at a centralised level and optimisation will most probably need to be considered for the
specific entity. In such cases, the valuer will need to have careful regard to the reporting entity’s
business and asset management plans, as these will directly impact on the usage of property,
plant and equipment.
Useful lives
Lives reflecting physical useful life expectations should be applied, unless there are specific and
foreseeable factors that are likely to cause the asset to be replaced at some earlier date. Factors
that might lead to this have been discussed in Section 2 of this guidance and will need to be
discussed with the reporting entity.
The table below sets out broad life ranges for the main items of property, plant and equipment
within the health and education sectors. The actual lives adopted for the assets held by specific
entities should be assessed in accordance with the factors outlined in Section 2 of this guidance.

Asset class/component Indicative life Asset class/component Indicative life
range (years) range (years)
Health sector Education sector
Property Property
Buildings Buildings
Structure/envelope 25-100 Structure/envelope 25-100
Building services Building services

Plumbing 15-30 Plumbing 15-30
Laboratory/medical services 10-30 Laboratory/medical services 10-30
Heating and ventilation 15-35 Heating and ventilation 15-35
Fire 15-40 Fire 15-40
Electrical 15-30 Electrical 15-30
Lifts 25-50 Lifts 25-50
Building fitout 5-20 Building fitout 5-20
Other site works 15-70 Other site works 15-70
Plant and equipment Plant and equipment

Specialist medical equipment 5-20 Teaching furniture and equipment 5-20
Medical furniture and fittings 5-20 Computers/information systems 3-10
Computers/information systems 3-8 Specialist equipment
Engineering and maintenance 10-40 (eg. Catering, industrial or scientific) 5-20
Library collections 3-15 Accommodation equipment 5-20
Library collections 3-15
As with the replacement cost rates, the above should be referred to as guidance rather than
absolute parameters.
Factors influencing the adoption of asset lives at the lower or higher end of the ranges include:
Buildings:
• Construction details – a building constructed of reinforced concrete, steel or reinforced concrete

framed, with walls of permanent materials, is likely to have a useful life towards the higher end
of the range, whereas a light timber framed and clad building (such as a relocatable classroom)
would be at the lower end. A brick, stone or concrete walled structure without steel or
reinforced concrete frame would most likely be in the mid to upper end of the range.
• Tenure – the tenure of a property may influence the life of an asset. For example, the life of a
building asset could not exceed the term of a terminating land lease.
• Utilisation – the type and amount of usage will influence the life. Uses that are more demanding
on the building and its services will reduce lives (for example, student hostels as compared to
teachers’ accommodation).
• Capital expenditure/maintenance – higher levels of such expenditure by the reporting entity will
lead to longer lives.

Plant and equipment:
• Utilisation (as above).
• Environment conditions – for example, assets exposed to sea air and salt water will deteriorate
at a faster rate than those that are not exposed to such conditions.
• Manufacturer/quality – different manufacturers will often have different levels of specifications

which impact on lives. The higher the specification/quality, the longer the likely life.
• Maintenance – items that are subject to regular maintenance will have lives at the higher end of
the range.
Overriding the above factors will be economic considerations, which could result in the adoption of
a shorter life based on entity-specific operational requirements.
Depreciation
Buildings should not usually be ascribed with any residual value, although there may be some
circumstances where a residual value is appropriate (for example, relocatable classrooms,
‘generic’ type buildings that would lend themselves to alternative uses – for which there would
likely be demand, and ‘historic’ or iconic buildings for which it is probable that some alternative use
would exist).
Plant and equipment should be assessed on a case-by-case basis. Special and permanent
collections will not usually be depreciated.
For the purposes of calculating depreciation, a straight line basis should be adopted for property.
For plant and equipment, diminishing value may be used, as these assets tend to depreciate more
quickly in their earlier years (unless the production unit method is applicable to the item of plant
and equipment).
Land value
Land value is to be assessed with reference to market data. Land in a campus will usually
represent a substantial sized land parcel. Campus land should typically be valued as an aggregate
parcel (even though it may be made up of multiple titles). This reflects the fact that campus land
typically accommodates a mixture of inter-related assets and it would not be possible to sell the land
in a ‘piece meal’ way. Hence, the valuer, in determining the fair value, may be required to have
regard to feasibility/residual land valuation approaches where the data for large land sales is limited.
For land in the health and education sectors, valuers should consider comparable land values for
the same or similar uses (if available) and also the highest and best alternative use/s. In
considering alternative uses, the presence of special designations or zoning should not adversely
impact on the land values unless there would be difficulties in having these uplifted or rezoned.
Land in the health and education sectors may be subject to restrictions or impediments. These
may take many forms and could include:
• Historic designations (such as a historic building on the site)
• Conservation strips (land not able to be built on)
• Treaty of Waitangi (giving rise to a possible resumption of the land for Treaty settlement
purposes)

• Offer back obligations (section 40 requirements to offer the land back to previous owners should
the entity decide to sell)
• Reserve or endowment status (restricting the use of the land, either current or future)
Allowances for items such as these should typically be by way of a deduction from the assessed
‘unencumbered’ market land value. Such deductions should represent the extent to which the
valuer considers such memorial/interests would impact on the market value of the land (i.e. be
applied in the marketplace). Any material discounts should contain sufficient explanation and
reasoning by the valuer.
A restriction on the ability of an entity to sell the land may not, in itself, represent a detriment to its
fair value while the entity has an operational use of the parcel for the foreseeable future. In such
cases the entity is getting the use of the land ‘rent-free’ and, over a long term, this will substantially
equate to receiving the full benefits of outright ownership.
A restriction on the use of the land may have a negative impact on value where an owner is not
able to use the parcel more intensely (and an owner likely would if it were not for that restriction).
For example, a prohibition on any further buildings on a largely underdeveloped site would have a
negative impact on the land’s market value.
Worked example
A worked example of the application of the DRC methodology described in these guidelines is
contained in Appendix B of this guidance.
In the example, the DRC of an asset is the sum of the estimated ‘DRC’s of the components’ While
the DRC of an asset could be assessed in a more ‘holistic’ approach, and the allocation to
components taken as a secondary exercise, the former approach is preferred because:
• it focuses on the asset in a more detailed way leading to a more thorough consideration as to
assumptions for the material component items (which in turn will be used for accounting
purposes)
• it is transparent in terms of the valuation assumptions adopted, whilst still allowing for valuer
judgement (but across a wider number of items), and
• the requirement under NZ IAS 16 to componentise invariably leads to the need to estimate the
DRC values/proportions of components anyway.
As noted in the previous Componentisation section, component replacement costs should not
exceed overall building cost rates.
It is noted that the valuer may elect to check/compare the results by other means and this may
lead the valuer to amend the final DRC assessment of the asset. Where this occurs, the valuer
should disclose the different approach/es and how the final figure has been reconciled/determined
in the valuer’s professional judgement.

Section 4: Instructing and liaising with valuers
Instructions
Instructing entities should prepare a comprehensive brief to ensure that the valuer is aware of the
assets to be valued, the quantity and quality of information available and the outputs required. To
enable the valuer to assess the nature and extent of the valuation assignment, the brief should
specify as far as possible:
• The purpose and date of the valuation
• That the valuation methodology should be in accordance with NZ IAS 16: Property, Plant and
Equipment (NZ IAS 16) and PINZ Professional Practice, in particular the IVS 1 Market Value
Basis of Valuation, IVS 3 Valuation Reporting, IVA 1 Valuation for Financial Reporting and
NZVGN 1 Valuations for Use in New Zealand Financial Reports
• A list and description of the assets to be valued (a printout from the asset register will usually
show the format of data to be supplied to the valuer)
• Details or a description of other information that will be made available (ages/remaining lives,
condition assessments, recent maintenance/capital expenditure works, recent/historical costing
information, certificates of title, component/sub-component items, asset management plans etc.)
• Where applicable, financial information including asset income (including lease terms and
conditions), operating expenses and required maintenance/capital expenditure costings
• When the valuation is required, and
• Any other specific information required from the valuer (credentials, proposed team, timetable,
expectations as to management input required, fees etc.).
If the valuation is to be carried out internally, the independent reviewer should be involved early in
the process so that the methodology can be reviewed before the valuation is carried out.
Valuation process and report

The instructing entity should ensure that it has a representative/s to liase with the valuer
throughout the valuation process for the purposes of:
• Asset inspections
• Discussing and clarifying information on the assets
• Discussing entity operational requirements/asset management plans that will impact on the
assumptions adopted for valuation purposes (for example optimisation, lives, capital
expenditure plans, disposals etc.)
• Reviewing valuation numbers and key assumptions, and
• Ensuring that the report has been prepared in compliance with relevant standards and
guidelines.
Section 1 of this guidance lists the information that is required to be contained in the valuation
report in accordance with relevant financial reporting and valuation standards.

Audit requirements
At the client’s request, and subject to appropriate consent, valuers shall respond to requests for
information from the entity’s auditor and shall discuss and explain the valuations openly. The client
has the primary responsibility for the form and content of the financial statements. The auditor has
the responsibility for forming and expressing an independent opinion on whether the financial
statements prepared by the client fairly present the financial position and performance of the entity,
and comply with relevant financial reporting standards.
The auditors are required to confirm the valuer’s qualifications and independence and will typically
review the validity of all assumptions that may have material consequences to the accuracy of the
valuation, generally focussing on:
• Basis of valuation (including whether the asset is specialised or non-specialised)
• Asset existence (completeness and accuracy of registers at replacement component level)
• Assumptions as to useful lives
• Consistency between unit replacement costs used and current contracts (where available)
• Consistency between inputs to the valuation process and asset management plan assumptions, and
• Assumptions regarding optimisation/deterioration/use of the asset.

Appendix A: Specific guidance for assessing the replacement cost of health
and education buildings
A1: PREFACE
Education buildings comprise those buildings in tertiary education institutions (universities,

polytechnics, colleges of education) and schools (intermediate, secondary and primary). Health
buildings comprise those buildings in public hospitals throughout New Zealand.
The replacement costs for such buildings are to be built up from the construction cost rates per
square metre (m2) given in the following tables. Replacement costs are based on a broad
classification of building scale and the type of fit-out as determined by use (i.e. by the function the
building serves). Establishing the appropriate cost per square metre (m2) within the range for a
particular building requires consideration of the outline specification, which defines the lower and
upper ends of the range of quality.
The replacement cost is the current equivalent cost of an existing building for the same gross floor
area, in similar form, rebuilt in modern cost effective materials and/or plant for the replaced existing
element without specification upgrade.
The replacement cost referred to herein assumes a modern building of the same size, serving the
same function and built to ensure compliance with current Building Code requirements. Therefore,
the replacement cost does not recognise depreciation or obsolescence in respect of building age,
technical obsolescence, over design, surplus floor area, seismic upgrading to meet code
requirements, Building Act code non-compliance, deferred maintenance, demolition or removal of
hazardous materials which may be applicable to the actual building being assessed.
The replacement cost rates quoted herein are based on labour costs, material prices and market
conditions at 1 May 2007. The Capital Goods Price Index for Non Residential Buildings for March
2007 is forecast by the New Zealand Institute of Economic Research Inc to be 1343. Thus, when
undertaking a replacement cost assessment, the rates given herein will require updating to the
current index figure as published by Statistics New Zealand. A forecast of the index figures
beyond the published figures is provided by the New Zealand Institute of Economic Research Inc
and published quarterly by Rider Levett Bucknall as a client service (refer to Appendix A6 of this
guidance).
Between 1999 and 2009 most of the major hospitals within New Zealand will have undergone and
completed redevelopment programmes. As such, each District Health Board should hold
information on the final construction redevelopment costs of new buildings, new additions to
existing buildings and the retrofitting or refurbishment of existing buildings. It would therefore be
prudent in the valuation process for such (updated) information to be relied upon, with the
replacement cost assessment process as described herein used as a check.
As noted in the Introduction to these Guidelines, the indicative parameters for costs are considered
to be reflective of the market at the time the costing guidelines were prepared (May 2007).
Indexing may be required to reflect price changes to the applicable valuation date. Furthermore,
the parameters represent ‘yard-sticks’ and specific asset, market and/or owner circumstances may
lead to the adoption of assumptions outside of the parameters contained in the guidance.

A2: APPROACH TO REPLACEMENT COSTS
Basis of replacement cost rates
Rates have been established from analysis of historical data of buildings, which fall within the band
of levels, use of the building and the quality range described.
On the assumption that the replacement cost rate for the subject building is assessed correctly
(taking account of the band of levels, use of the building, the quality plus complexity and site
condition) then, with the application of appropriate cost engineering techniques, buildings are
capable of being constructed for the given replacement cost.
Rates given fall within the spectrum of the quality range as described in the outline specification,
which details the lower and upper range of quality in respect of each building element.
Rates have been averaged to take account of the size of construction contracts. The rates make
no provision for a construction contingency allowance.
In assessing the replacement cost the following issues need to be addressed (in addition to
building specifics) and, if appropriate, an adjustment made to the given rates:
• significant floor plate size (in excess of the norm)
• particularly high floor to floor height
• heavy floor loading, unusual form or style, and
• any unusual sub-ground condition.
Replacement cost rates for modern buildings assume that all building services, engineering plant
and equipment to service the subject building are included within the building and allowed for in the
rate given herein. Therefore, an existing separate boiler house or energy centre, together with site
reticulation of services, which serves a building or buildings included in the valuation process,
becomes obsolete.
Rates herein are based on Auckland region construction costs, which are the national high.
Accordingly, due allowance for the variance in regional construction costs between the Auckland
region and other regions must be made. This variance is highly dependent on local costs of labour,
materials, transport, operating overhead and, most importantly, local building activity represented by
the volume of work in place. Such variance could be in the order of up to minus 5%.
Application of replacement cost rates
Replacement cost rates are to be applied to the overall gross floor area of the building measured
over the outside face of external walls measured over all openings in floors and inclusive of
corridors, circulation spaces, public areas, lift shafts, lift lobbies, stairs, service areas and access
ways. The area must also include the area of mezzanine floors.
Elements such as decks, patios, balconies, verandas, canopies, covered ways and the like should not
be included in the gross floor area. These should be an additional cost – refer to building specifics.
Rates are given for guidance only and care must be taken in using them, as the replacement cost
of some buildings in certain circumstances will fall outside the range of rates quoted. If the valuer
is in doubt as to the appropriateness of rates applicable to a subject building then specialist
quantity surveying/costing advice should be sought.

Building specifics
Building specifics are elemental costs that are not included in the rates per m2 for the replacement
cost. Such elements include, but are not necessarily limited to:
• decks
• balconies
• canopies
• atriums
• undercroft space (open area under the lowest floor).
Site specifics
Site specifics are elemental costs that are not included in the rates per m2 for the replacement
cost. Such elements include, but are not necessarily limited to:
• sewer and stormwater drainage
• seismic base isolation of structures
• site services (electrical, water, fire)
• emergency electric generators
• retaining walls
• covered walkways
• carparking and roadway paving
• footpaths
• fencing
• landscaping
• topsoil and grass.
Exclusions
The building replacement rates given do not include:
• finance costs and holding charges
• fluctuations in building costs during construction
• territorial authority resource consent and building consent costs or charges
• start up costs
• Goods and Services Tax (i.e. all costs are net of GST)
• professional fees (dealt with separately)
• work external to the building perimeter (dealt with under site specifics)

• plant, equipment and chattels such as:
- mobile and fixed specialist medical equipment in hospital buildings

- specialist teaching and audio/visual equipment
- curtains, blinds, drapes and tracks
- loose furniture such as tables, chairs, movable lamps, planters
- television sets
- computer hardware and software and special networking
- kitchens (preparation, cooking, heating and refrigeration equipment)
- cafeteria/kitchens (crockery, cutlery, glassware, utensils)
- gymnasiums (movable sporting equipment)
- residential (beds, bedding, linen, towels, consumables)
- workshops (work benches, machinery, tools)
- art forms, hangings, pictures, prints, carvings or special ethnic decoration
- library books, documents, electronic systems
- stock, stationery, consumables.
Professional fees
Professional fees should be applied as follows:
• Single storey simple buildings such as maintenance sheds, light industrial

buildings and relocatable classrooms 5.0% to 7.5%
• Other relatively simple single storey buildings 7.5% to 10.0%
• Buildings up to, say, $5.0m 12.0% to 14.0%
• For more significant buildings of, say, over $5.0m 14.0% to 17.0%
This variance accounts for the various consultant disciplines involved in the project such as architect,
structural engineer, building services engineer, quantity surveyor, project manager, programmer,
resource consent planner, landscape architect, acoustic engineer and traffic engineer.
Analysis of building replacement cost (componentisation)
The replacement cost of a building (and also, but separately, building specifics and site specifics),
where required, is to be analysed into three major building components – structure and envelope,
building services and fitout. The sub-components, which form the cost of these three major
building components, are described in the outline specification for the respective sector.
The purpose of this analysis is to assist in estimating the replacement cost of components that are
considered to have different useful lives.
The component cost of the building structure and envelope is assessed by selecting a rate within
the range given in the section component for the applicable sector. The range of rates takes into
account factors such as sub-ground condition, bulk excavation, shoring, underpinning, building
retaining walls and quality, as described in the appropriate outline specification.
The component cost of building services is assessed by applying a rate to the various building
services trade sections contained within the building. The range of rates takes into account quality,
as described in the appropriate outline specification.

Building fitout costs, in practice, represent the most variable of the component costs and therefore
it is appropriate that this item be the residual value to make up the adopted overall building
replacement cost. An exception to using this item as a residual will be where the valuer has
access to detailed replacement costs for all components (for example, where there are detailed
costings from a quantity surveyor).
An example of an assessment sheet is set out on the following page. The building replacement
cost should fall within the overall costs per m2 range provided in the following section. The extent
of componentisation will largely reflect the way the asset is accounted for by the reporting entity
and the requirements for valuation. Application of ‘component percentages’ (to the overall
replacement cost/s) may also be used as a check. Valuer judgement is ultimately required to
ensure that the apportionment to components is considered appropriate and reasonable.

Example building replacement cost assessment sheet:
Component Assessed GFA Building Component analysis

rate/ m2 elemental Structure/ Building Building
cost envelope services fitout
Structure/envelope
1 and 2 storey building
3 storey and over building
Building fitout (as a residual)
Building services
Plumbing
Laboratory services
Medical services
Heating and ventilation services:
Air conditioning
Mechanical ventilation
HW radiators/ventilation
HW radiators/windows
Radiant heat wall units
Fire services:
Manual fire alarm system
Automatic detector system
Sprinkler fire protection
system
Electrical services
Lifts
Fume extract units
Other:
SUBTOTAL
Building specifics
Decks - covered
Decks - uncovered
Balconies
Canopies
Atrium
Undercroft space
Site specifics
Sewer and stormwater drainage Lump sum
Site services (electrical, water, Lump sum
fire)
Emergency electric generators
Retaining walls
Covered walkways
Carparking and roadway paving
Footpaths
Fencing
Landscaping (reasonably
dense)
Topsoil and sown grass
SUBTOTAL:
BUILDING REPLACEMENT COST:

TOTAL COST OF STRUCTURE/ENVELOPE:
TOTAL COST OF BUILDING SERVICES:
TOTAL COST OF BUILDING FITOUT (as a residual):

A3: EDUCATION SECTOR GUIDANCE
Outline specification
The following is intended to provide an indication of the quality at the lower and upper range of the
replacement cost rates given herein.
The following components comprise the building structure and external envelope:
Component Lower end of range Upper end of range
Foundations, The range in rates in and between 1 and 2 storey buildings and 3 storey and over buildings
ground floor slab, takes into account sub-ground condition, bulk excavation, shoring, underpinning, building
columns beams, retaining walls and structural form generally.
structural walls,
upper floors
Roof Timber or steel framed sheathed with Timber or steel framed sarked and sheathed with
long run metal sheet material, or metal resilient fabric roofing.
coated tiles. Concrete slab with mastic asphalt membrane.
External walls Light framed walls sheathed with a Pre-cast concrete panels with exposed aggregated
and external painted sheet or board material. natural finish. Generally good quality,
finish maintenance free.
Windows and Standard light framed aluminium or Commercial section framed windows with anti-sun
external doors timber windows with single clear glazing, or tinted glazing. Maybe sun screens. Aluminium
opening sashes. Standard external doors and frames with floor springs.
doors.
Stairs and Open tread, steel framed with pre-cast Pre-cast concrete stair flights with patent type stair
balustrades concrete or timber treads. No floor nosings and a vinyl floor covering. Metal balusters
coverings. Painted metal balustrade. with timber or metal handrail.
The following components comprise the building fitout:

Partitions Timber or steel framed lined with Timber or steel framed lined with standard plaster
standard plaster-cored wallboard. cored wallboard.
Internal doors Standard painted generally hollow core Non-standard (in height and width) generally solid
doors with average quality hardware. core doors with kickplates and good quality
hardware.
Floor finishes Average quality carpet (say 40oz level Higher quality carpet (say 48oz, 100% wool or
loop 100% wool or 80/20 wool nylon), 80/20 wool nylon – from single dent high pile to
sheet vinyl flooring in toilets and service double dent low pile).
areas. Ceramic tiles in toilets and service areas.
Wall finishes Paint finish or wallpaper. Vinyl or fabric wall covering over a sub-lining.
Gloss paint or plastic laminate wall Ceramic wall tiles in toilets and service areas.
board in toilets and service areas.
Ceiling finishes Proprietary suspended mineral fibre Proprietary suspended rebated fibrous plaster
ceiling system with a 1200x600 two way acoustic tile ceiling system with a 600x600
exposed suspension grid. concealed suspension grid.
Fittings and Generally timber paint finish with natural Timber veneered with clear finish to all inside
fixtures finish inside. surfaces.
Fitments include cupboards, counters, Fitments include cupboards, counters, benches,
benches, sink benches, fixed seating, sink benches, fixed seating, chalk boards, stages
chalk boards, stages and fixed shelving. and fixed shelving.

The following components comprise the building services:
Plumbing This element provides for tanks, hot water cylinders, cold and hot water reticulation; waste, soil
and vent pipes; traps, taps and all fittings. Roof spouting, gutters and downpipes are included in
the roof element. The quality range varies due to PVC or copper pipework, sophistication of
reticulation, and the level of quality in fittings and associated tapware.
Laboratory The element includes gas and vacuum systems, compressed air system,
services chemical wastes, special sinks and tap ware.
Heating and Air conditioning using perimeter Air conditioned using an all air highly zoned system
ventilation radiators or convectors with conditioned with temperature and humidity control, some
services air system with limited zone controls but degree of specialist area services. Various
with temperature and humidity control. ancillary supply and exhaust systems to suit core
Various ancillary supply and exhaust and service area functions.
systems to core and service areas to suit
space functions.
Mechanical ventilation system providing Mechanical plenum ventilation system highly
ventilation and heating to all areas but zoned, with limited humidity control. Also
with large zone control. Humidity control extensive ancillary supply and exhaust system
limited. Also ancillary supply and exhaust ventilation to suit space functions.
ventilation system to suit space functions.
Hot water radiator or convector heating to Hot water radiator or convector heating to the
perimeter limited to face zone control, perimeter with space control. Highly zoned plenum
with plenum ventilation to central core ventilation to the central core and service areas
and service areas. Ancillary exhaust where activities are specialised and systems are
systems to suit area functions within the quite extensive.
core areas.
Hot water radiator or convector heating to Hot water radiator or convector heating to
perimeter areas only, opening windows perimeter areas only, opening windows for
for ventilation. No mechanical ventilation ventilation. Including limited minor extract systems
to the central core or service areas. to central core and service areas.
Radiant type wall mounted electric or gas Radiant type wall mounted hot water heating units.
heating units.
Fire services Manual breakglass alarm system in Sprinkler system with manual breakglass hose
conjunction with a thermal alarm system, reels and fire extinguishers.
hose reels and fire extinguishers.
Electrical services Will be lightly provided with electrical High level of electrical servicing with recessed
services, usually surface mounted fluorescent lighting, wired emergency lighting and
fluorescent or incandescent lighting, some essential distributed power, PA systems,
battery emergency lighting and no central lock, communication and data wiring
specialist power or electrical safety systems and medical grade wiring installation. This
requirements. element will also include security, communication
and data systems.
Lift service The lift service quality range can be observed by the lift car speed; the waiting time at
peak hours; car quality; provision of car position indicators on each floor;
one or two control panels in the lift car.
Fume extract Fume extract units, enclosures or hoods. The rate range will cover number of units,
units sophistication and extraction system.

Building types
The cost of buildings varies according to functional use. Some buildings are designed for a
dedicated use, while some are designed with multi-functional purpose. Education buildings contain
many and varied functions, however some functions have a similar construction cost. Accordingly
functions have been grouped into the following categories:
Classrooms
Teaching spaces, classrooms used for small classes and tutorials, crèches
Laboratories
Science, engineering and physics
Libraries
Main libraries excluding archive and term storage facilities
Specialty teaching
Includes scientific, health and hospitality clinics
Lecture theatres
Auditoriums all with tiered seating
Administration
Office accommodation, administrative services, student unions, common rooms, reception areas,
staff amenities, cafeterias
Gymnasiums
Hall, change rooms, ablutions
Maintenance sheds
Ground maintenance buildings, storage sheds, etc.
Relocatable classrooms
Light timber framed modular classroom unit with entry lobby and in some instances a toilet facility
Practical trade tuition buildings

Single storey industrial or warehouse type buildings
Residential accommodation
Multi-unit blocks including student and staff flats, hostels, residential housing
Basement areas
Areas enclosed by external walls – storage, carparking

Building replacement cost rates
The following is an estimate of the range of building construction costs per m² over the gross floor
area (GFA) for the selected functional areas by overall height of building and quality range:
Function 1 and 2 storey buildings 3 storey and over buildings

$/m2 GFA $/m2 GFA
Classrooms $1,600 To $1,800 $2,000 to 2,200
Laboratories $2,050 To $2,300 $2,200 to $2,500
Libraries $2,000 To $2,250 $2,150 to $2,450
Specialty teaching $1,800 To $2,000 $2100 to $2300
Lecture theatres $2,500 To $3,500
Administration $2,000 To $2,200 $2,400 to $2,700
Gymnasiums $1,800 To $2,000
Maintenance sheds $800 To $1,000
Relocatable classrooms $1,000 To $1,200
Practical trade tuition buildings $1,300 To $1,500
Residential accommodation $1,800 To $2,000 $2,000 to $2,400
Basement areas $600 To $800 $600 to $800
Note:
a The above rates do not include building specifics or site specifics as defined herein.
b The above rates do not include professional fees as defined herein.
c The rates are as at 1 May 2007.
d The rates make due allowance for the main contractor’s preliminary and general costs (i.e. site
establishment, site running and management, site clearance) and profit margin.

Building replacement cost components
Refer to the previous section “Analysis of building replacement cost (componentisation)”. The
range of rates for assessing the major component/sub-component costs are estimated as:
Component Unit Rate range

Low High
Structure/envelope
1 and 2 storey building M2 $600 To $800
3 storey and over building M2 $700 To $1,000
Building fitout (a residual cost)
Building services
Plumbing M2 $60 To $100
Laboratory services M2 $30 To $50
Air conditioning M2 $250 To $450
Mechanical ventilation M2 $170 To $250
HW radiators with ventilation M2 $150 To $200
HW radiators with windows M2 $85 To $135
Radiant heat wall units M2 $50 To $100
Fire services:
Manual fire alarm system m2 $5 To $10
Automatic detector system m2 $15 To $30
Sprinkler fire protection system m2 $40 To $75
Electrical services m2 $100 To $180
Lifts m2 $40 To $80
Fume extract units m2 $50 To $80
Building specifics
Decks - covered m2 $400 To $500
Decks - uncovered m2 $200 To $300
Balconies m2 $500 To $800
Canopies m2 $400 To $1,000
Atrium m2 $750 To $1,000
Undercroft space m2 $400 To $450
Site specifics
Sewer and stormwater drainage Lump sum
Site services (electrical, water, fire) Lump sum
Emergency electric generators Each $150,000 To $450,000
Retaining walls m2 $250 To $600
Covered walkways m2 $350 To $700
Carparking and roadway paving m2 $25 To $55
Footpaths m2 $75 To $90
Fencing m $70 To $150
Landscaping (reasonably dense) m2 $50 To $90
Topsoil and sown grass m2 $12 To $20
Note: the above rates include due allowance for the main contractor’s preliminary and general
costs and profit margin.

A4: HEALTH SECTOR GUIDANCE
Outline specification
The following is intended to provide an indication of the quality at each end of the quality range of
the replacement cost rates given herein.
The following components comprise the building structure and external envelope:
Foundations, The range in rates in and between 1 and 2 storey buildings and 3 storey and over
ground floor slab, buildings takes into account sub-ground condition, bulk excavation, shoring,
columns, beams, underpinning, building retaining walls and structural form generally.
structural walls,
upper floors
Roof Timber or steel framed sheathed with Timber or steel framed sarked and sheathed with
long run metal sheet material, or metal resilient fabric roofing.
coated tiles. Concrete slab with mastic asphalt membrane.
External walls and Light framed walls sheathed with a Pre-cast concrete panels with exposed aggregated
external finish painted sheet or board material. natural finish. Generally good quality, maintenance
free.
Windows and Standard light framed aluminium or Commercial section framed windows with anti-sun
external doors timber windows with single clear or tinted glazing. Maybe sun screens. Aluminium
glazing, opening sashes. Standard doors and frames with floor springs.
external doors.
Stairs and Open tread, steel framed with pre-cast Pre-cast concrete stair flights with patent type stair
balustrades concrete or timber treads. No floor nosings and vinyl floor coverings with steel or timber
coverings. Painted steel balustrade. balusters and timber or metal handrails.
The following components comprise the building fitout:

Partitions Timber or steel framed lined with Timber or steel framed lined with standard plaster
standard plaster-cored wallboard. cored wallboard.
Internal doors Standard size painted hollow or solid Non-standard (in height and width) solid core doors
core doors with timber frames with with metal protected crushing strip and face panel
average quality hardware. and folded metal doorframes.
Floor finishes Average quality carpet (say 40oz level Higher quality carpet (say 48oz, 100% wool or
loop 100% wool or 80/20 wool nylon). 80/20 wool nylon – from single dent high pile to
Sheet vinyl flooring in toilets and double dent low pile).
service areas. Ceramic tiles in toilets and service areas.
Wall finishes Paint finish or wallpaper. Vinyl or fabric wall covering over a sub-lining.
Gloss paint or plastic laminate wall Ceramic wall tiles in toilets and service areas.
board in toilets and service areas.
Ceiling finishes Proprietary suspended mineral fibre Proprietary suspended rebated fibrous plaster
ceiling system with a 1200x600 two acoustic tile ceiling system with a 600x600
way exposed suspension grid. concealed suspension grid.
Fittings and Generally timber paint finish with Timber veneered with clear finish to all inside
fixtures natural finish inside. surfaces.
Fitments include cupboards, counters, Fitments include cupboards, counters, benches,
benches, sink benches, fixed seating, sink benches, fixed seating, and fixed shelving.
and fixed shelving.

The following components comprise the building services:
Plumbing This element provides for tanks, hot water cylinders, cold and hot water reticulation; waste,
soil and vent pipes; traps, taps and all fittings. Roof spouting, gutters and downpipes are
included in the roof element. The quality range varies due to PVC or copper pipework,
sophistication of reticulation, and the level of quality in fittings and associated tapware.
Medical services Generally limited to a small number of Would cover areas where significant distribution of
spaces provided with medical oxygen, medical oxygen, vacuum, nitrous oxide and
vacuum, nitrous oxide and medical air medical air services are provided such as theatres,
system etc. recovery areas and intensive care.
Heating and Air conditioning using perimeter Air conditioned using an all air highly zoned system
ventilation services radiators or convectors with with temperature and humidity control, some
conditioned air system with limited degree of specialist area services. Various
zone controls but with temperature ancillary supply and exhaust systems to suit core
and humidity control. Various ancillary and service area functions.
supply and exhaust systems to core
and service areas to suit space
functions.
Mechanical plenum ventilation system Mechanical plenum ventilation system highly
providing ventilation and heating to all zoned, with limited humidity control. Including
areas but with large zone control. extensive ancillary ventilation exhaust systems to
Humidity control limited. Including suit the area functions.
ancillary supply and exhaust
ventilation system to suit area
functions.
Hot water radiator or convector Hot water radiator or convector heating to the
heating to the building perimeter perimeter with space control. Highly zoned plenum
limited to face zone control, with ventilation to the central core and service areas
plenum ventilation to central core and where activities are specialised and systems are
service areas. Ancillary exhaust quite extensive.
systems to suit area functions within
the core areas.
Hot water radiator or convector Hot water radiator or convector heating to
heating to perimeter areas only, perimeter areas only, opening windows for
opening windows for ventilation. No ventilation. Including limited minor extract systems
mechanical ventilation to central core to central core and service areas.
or service areas.
Radiant type wall mounted electric or Radiant type wall mounted hot water heating units.
gas heating units.
Fire services Manual breakglass alarm system in Sprinkler system with manual breakglass hose
conjunction with a thermal alarm reels and fire extinguishers. This would be
system, hose reels and fire generally applicable to all buildings over two
extinguishers. This would be limited storeys and high bed numbers.
to single storey buildings up to 20
beds and two storey buildings up to 10
beds.
Electrical services Will be lightly provided with electrical High level of electrical servicing with recessed
services, usually surface mounted fluorescent lighting, wired emergency lighting and
fluorescent or incandescent lighting, some essential distributed power, nurses call, PA
battery emergency lighting and no systems, central lock, communication and data
specialist power or electrical safety wiring systems and medical grade wiring
requirements. installation. This element will also include security,
communication and data systems.
Lift service The lift service quality range can be observed by the lift car speed; the waiting time at peak
hours; car quality; provision of car position indicators on each floor; one or two control panels
in the lift car. Costs vary between passenger, service and bed lifts.
Other specialised Such services could include the likes of special air conditioning such as stratified air and
services HEPA filtration to theatre suites, intensive care, isolation units, recovery rooms, sterile areas,
and electronic/electromagnetic/radio frequency screening. Advice should be taken from
industry or professional consultants as to their cost.

Building types
Replacement cost rates for the various departments within a hospital vary. In order to simplify the
assessment, the varying cost of departments have been averaged and combined to provide a
function cost. Due allowance will need to be considered where a building contains more than one
function. The functions below list the major departments within a hospital:
In-patient care
Ward areas including: medical/surgical, paediatric, women’s, ATR/rehabilitation, AAU beds
Specialist in-patient care

ICU/CCU/HDU, NICU delivery suites
Diagnostic and treatment

Emergency department, imaging, cardiac unit, nuclear medicine, oncology
Specialist procedure areas

Operating theatres, surgical day procedures, CSSD, dental clinic, renal dialysis
Ambulatory care
Clinics, day medical, women’s clinic/offices, paediatric clinic/offices, physiotherapy/paediatric
CDT/occupational therapy
Administration
Entry lobby, staff/administration offices
Support services
Kitchen – food preparation, cooking, washing, storage; laundry – washing, ironing, handling;
pharmacy – office and storage
Staff amenities and training

Dining, lounge, changing, recreation, training/lecture/seminar rooms, library
Maintenance facilities
Maintenance workshops, engineering workshops, general storage
Residential accommodation
Nurses, staff, lifecare, VIP flats
Basement areas
General storage, carparking/service area

Replacement cost rates
The following is an estimate of the range of building construction costs per m² over the gross floor
area (GFA) for the selected functional areas by overall height of building and quality range:
Function 1 and 2 storey buildings 3 storey and over buildings

$/m2 $/m2
In-patient care $2,400 to $2,800 $2,900 to $3,200
Specialist in-patient care $2,700 to $3,100 $3,200 to $3,500
Diagnostic and treatment $2,600 to $3,000 $3,000 to $3,300
Specialist procedures areas $3,500 to $4,100 $3,900 to $4,300
Ambulatory care $2,400 to $2,800 $2,900 to $3,200
Administration $2,200 to $2,400 $2,500 to $2,700
Support services $2,400 to $2,600 $2,700 to $2,900
Staff amenities and training $2,000 to $2,300 $2,300 to $2,600
Maintenance facilities $1,000 to $1,400
Residential accommodation $1,800 to $2,000 $2,100 to $2,500
Basement areas $600 to $900 $600 to $900
Note:
a The above rates do not include building specifics or site specifics as defined herein.
b The above rates do not include professional fees as defined herein.
c The rates are as at 1 May 2007.
d The rates make due allowance for the main contractor’s preliminary and general costs (i.e. site
establishment, site running and management, site clearance) and profit margin.
The above rates apply to buildings serving the described function. They also apply to the various
areas within a multi-functional hospital building.
However, in the case of a multi-functional hospital building where separate areas are unobtainable,
as a general rule the overall on-average rate should be:
1 and 2 storey buildings, between $2,400 and $3,200 per m2 GFA
3 storey and over buildings, between $3,300 and $3,900 per m2 GFA

Building replacement cost components
Refer to the previous section “Analysis of building replacement cost (componentisation)”. The
range of rates for assessing the major component/sub-component costs are estimated as:
Component Unit Rate range

Low High
Structure/envelope
1 and 2 storey building m2 $600 to $800
3 storey and over building m2 $700 to $1000
Building fitout (a residual cost)
Building services
Plumbing m2 $100 to $180
Medical services m2 $30 to $55
Air conditioning m2 $400 to $650
Mechanical ventilation m2 $170 to $250
HW radiators with ventilation m2 $180 to $250
HW radiators with windows m2 $85 to $135
Radiant heat wall units m2 $50 to $80
Fire services:
Manual fire alarm system m2 $6 to $10
Automatic detector system m2 $18 to $30
Sprinkler fire protection system m2 $60 to $110
Electrical services m2 $270 to $350
Lifts m2 $40 to $80
Building specifics
Decks – covered m2 $400 to $500
Decks – uncovered m2 $200 to $300
Balconies m2 $500 to $800
Canopies m2 $400 to $1000
Atrium m2 $750 to $1000
Undercroft space m2 $400 to $450
Site specifics
Sewer and stormwater drainage Lump Sum
Site services (electrical, water, fire) Lump Sum

Emergency electric generators Each $150,000 to $450,000
Retaining walls m2 $250 to $600
Covered walkways m2 $350 to $700
Carparking and roadway paving m2 $25 to $55
Footpaths m2 $75 to $90
Fencing m $70 to $150
Landscaping (reasonably dense) m2 $50 to $90
Topsoil and sown grass m2 $12 to $20
Note the above rates include a due allowance for the main contractor’s preliminary and general
costs and profit margin.

A5: REPLACEMENT COST ANALYSIS EXAMPLES
The following are hypothetical examples of an analysis of buildings serving various functions into
the major components of structure/envelope, building fitout and building services (including sub-
components):
1 and 2 level education buildings
Classr Lab Library Lecture Admin Gym

m theatre
Building replacement cost rate: $1,750 $2,150 $2,100 $2,700 $2,100 $1,900
Structure/envelope
1 and 2 level $700 to $1,000 $850 $900 $900 $950 $900 $900
3 level and over $800 to $1,200
Building fitout (residual cost) $592 $782 $802 $970 $825 $732
Building services
Plumbing $60 to $100 $70 $100 $80 60 $80 $60
Laboratory $30 to $50 $50
services
Mechanical
services
Air conditioning $250 to $450 400
Mechanical/ $170 to $250
ventilation
HW radiators/ $150 to $200 $170
ventilation
HW radiators/ $85 to $135 $100 $100 $130
windows
Radiant heater wall $50 to $100 $100
units
Fire services
Manual alarm $5 to $10 $8 $8 $8 $8
system
Automatic detector $15 to $30 $25
system
Sprinkler system $40 to $75 $60
Electrical services $100 to $180 $130 $150 $140 $160 $140 $100
Lifts $40 to $80
Fume extract units $50 to $80 $60
Other: audio/ $80
visual system
Total services $308 $468 $398 $780 $375 $268

element:
Check total: $1,750 $2,150 $2,100 $2,700 $2,100 $1,900

3 level and over education buildings
Classrm Lab Library Hospitality Admin Accom-

modation
Building replacement cost rate: $2,100 $2,300 $2,250 $2,300 $2,500 $2,300
Structure/envelope
1 and 2 level $700 to $1,000
3 level and over $800 to $1,200 $1,000 $1,000 $1,050 $1,050 $1,150 $1,100
Building fitout (residual cost) $645 $755 $725 $815 $875 $700
Building services
Plumbing $60 to $100 $70 $100 $80 $100 $80 $100
Laboratory $30 to $50 $50
services
Mechanical
services:
Air conditioning $250 to $450
ventilation
HW radiators/ $150 to $200 $170 $170 $170
ventilation
HW radiators/ $85 to $135 $100 $100 #135
windows
Radiant heater wall $50 to $100
units
Fire services:
Manual alarm $5 to $10
system
Automatic detector $15 to $30 $25 $25 $25 $25 $25
system:
Sprinkler system $40 to $75 $75
Electrical services $100 to $180 $130 $150 $140 $150 $140 $130
Lifts $40 to $80 $60 $60 $60 $60 $60 $60
Fume extract units $50 to $80 $60
Other:
Total services $455 $545 $475 $435 $475 $500

element:
Check total: $2,100 $2,300 $2,250 $2,300 $2,500 $2,300

1 and 2 level health buildings
IN- DIAGNOSTIC SPECIALIST AMBULATORY SUPPORT

PATIENT & PROCEDURES CARE SERVICES
CARE TREATMENT AREAS
(WARDS)
BUILDING REPLACEMENT COST RATE: $2,700 $3,000 $3,700 $2,700 $2,500
STRUCTURE/ENVELOPE
1 and 2 Level $600 $800 $750 $750 $750 $750 $750
3 Level and Over $700 $1000
BUILDING FITOUT (residual cost) $735 $1,055 $1,655 $820 $840
BUILDING SERVICES
Plumbing $100 to $180 $175 $145 $180 $160 $115
Medical Services $30 to $55 $50 $50 $55 $40
Mechanical
Services
Air conditioning $400 to $650 $600 $600 $650 $550 $450
Ventilation
HW Radiators/ $180 to $250
Ventilation
Windows
Radiant Heater $30 to $45
Wall Units
Fire Services
Manual Alarm $6 to $10
System
Automatic $18 to $30
Detector System
Sprinkler System $60 to $110 $110 $100 $100 $100 $75
Electrical Services $270 to $350 $280 $300 $310 $280 $270
Lifts $30 to $70
Other:
Total Services $1,215 $1,195 $1,295 $1,130 $910

Element:
Check Total: $2,700 $3,000 $3,700 $2,700 $2,500

3 level and over health buildings
IN- DIAGNOSTIC SPECIALIST AMBULATORY SUPPORT

PATIENT & PROCEDURES CARE SERVICES
CARE TREATMENT AREAS
(WARDS)
BUILDING REPLACEMENT COST RATE: $3,100 $3,300 $4,000 $3,100 $2,800
STRUCTURE/ENVELOPE
1 and 2 Level $600 $800 $950 $950 $950 $950 $950
3 Level and Over $700 $1000
BUILDING FITOUT (residual cost) $870 $1,155 $1,715 $940 $885
BUILDING SERVICES
Plumbing $100 to $180 $175 $145 $180 $160 $120
Medical Services $30 to $55 $55 $55 $55 $40
Mechanical
Services
Air conditioning $400 to $650 $600 $600 $650 $600 $500
Ventilation
Ventilation
Windows
Radiant Heater $30 to $45
Wall Units
Fire Services
Manual Alarm $6 to $10
System
Automatic $18 to $30
Detector System
Sprinkler System $60 to $110 $110 $100 $100 $100 $75
Electrical Services $270 to $350 $340 $340 $350 $310 $270
Lifts $30 to $70
Other:
Total Services $1,280 $1,195 $1,335 $1,210 $965

Element:
Check Total: $3,100 $3,300 $4,000 $3,100 $2,800

A6: BUILDING COST FORECASTS
The Capital Goods Price Index (CGPI) for non-residential buildings should be used for the purpose
of updating building costs.
The CGPI was introduced by Statistics New Zealand in May 1981 with quarterly price data dating
from the December 1979 quarter. The building costs of shops, restaurants and taverns have a
14.4% weighting in the index, while office and administration building costs make up the remaining
85.6%. The index includes the costs of additions and alterations as well as new projects. Building
activity is classified according to predominant usage. An example would be that a large office
block that has some shops on the street frontage would be considered to be entirely an office and
administrative building.
The CGPI is calculated by measuring the current cost of constructing representative buildings and
then comparing these costs to those in a fixed base-period. This requires the regular collection of
prices for standardised inputs. The contribution of a price change to any one input is dependent on
the importance of that item to the representative building as a whole. Price data is collected by
Statistics New Zealand from various sources such as the New Zealand Building Economist, their
own commodity price surveys and wage rate surveys.
The CGPI is one of 60 price indices designed to assist the adjustment of capital formation, as
recorded in the national accounts, from current to constant price measures. This is necessary to
allow meaningful comparisons of capital formation over time. As originally designed, the CGPI is
conceptually an index of the price of capital to the final user or owner. Statistics New Zealand has
been concerned about the ability of the CGPI to account for price discounting in the building
industry. Discounting can occur at several levels in the building process: in the supply of raw
materials; in the provision of sub-contract services; and between the developer and the final buyer.
The method used by Statistics New Zealand suggests that the potential for missing the effects of
discounting is greatest between the developer and the buyer. As such the CGPI may be
considered to better represent trends in costs to developers of constructing buildings, rather than
their price to the final user. The latter would reflect, amongst other things, land prices and
developers’ margins.
The CGPI, like other official cost and price measures, is based on national and industry-wide
aggregates. Therefore, it will not necessarily accurately reflect cost increases in specific projects.
Instead the index should be seen as a guide to national construction cost inflation over time.
The index forecast figures have been prepared by the New Zealand Institute of Economic
Research Inc (NZIER) exclusively for Rider Levett Bucknall, which publishes them quarterly as a
client service.

The following are the Statistics New Zealand published index figures:-
2005 March 1214

June 1228
Sept 1243
Dec 1248
2006 March 1269

June 1294
Sept 1318
Dec 1331
2007 March 1332

June 1334
The following are NZIER index forecasts figures:-
2007 Sept 1370

Dec 1388
2008 March 1409

June 1425
Sept 1439
Dec 1464
2009 March 1479

June 1483
Sept 1496
Dec 1515
2010 March 1530

June 1539
Sept 1552
Dec 1574
Source: Statistics New Zealand; NZIER, Forecasts

Appendix B: Worked example of a depreciated replacement cost calculation
Worked Example - Depreciated Replacement Cost

(3 level and over education + lab building example,
1
as contained Appendix A of this guidance)
Comments
Building Type LAB
BUILDING REPLACEMENT COST RATE - $/m2: $2,300 Overall assessed rate - market based with reference
to Replacement Costs guidance
Gross Floor Area (optimised) - m2 1,500
Building Replacement Cost $3,450,000 [Building Replacement Cost Rate * Optimised Gross Floor Area]
Allowance for any Building Specifics (decks, balconies etc.) $50,000 [Based on cost rate * area of item]
Total Building Replacement Cost $3,500,000
Site Specific works (optimised) $75,000 [Lump sum or calcuated figure. For a campus or large site,
site works may be a separate 'improvements' category]
Building and Site Replacement Cost $3,575,000
Allowance for Professional Fees 10.0% $357,500 [Building and Site Repacement Cost * Fees percentage]
Allowance for Consent Fees $20,000 [Usually a lump sum]
Replacement Cost including fees $3,952,500
Borrowing Costs $0 [where applicable - average debt ratio * Replacement Cost *
interest rate * constuction period * 0.5)
Total Replacement Cost $3,952,500
Apportionment to components Indicative rates

per Appendix A
SITE WORKS (taken from above) $75,000 2.1% [% = Component cost / Building and Site Replacement Cost]
STRUCTURE/ENVELOPE
1 and 2 Level - $/m2 $700 to $1,000
3 Level and Over - $/m2 $800 to $1,200 $1,000
Component Cost (includes any Building Specifics) $1,550,000 43.4% [% = Component cost / Building and Site Replacement Cost]
BUILDING FITOUT ($/m2 as residual cost) $755 [Building Replacement Cost - Structure/Envelope - Building Services]
Component Cost (as a residual) $1,132,500 31.7% [% = Component cost / Building and Site Replacement Cost]
BUILDING SERVICES
Plumbing $60 to $100 $100
Laboratory Services $30 to $50 $50
Mechanical Services
Air conditioning $250 to $450
Mechanical/ Ventilation $170 to $250
HW Radiators/ Ventilation $150 to $200
HW Radiators/ Windows $85 to $135 $100
Radiant Heater Wall Units $50 to $100
Fire Services
Manual Alarm System $5 to $10
Automatic Dector System $15 to $30 $25
Sprinkler System $40 to $75
Electrical Services $100 to $180 $150
Lifts $40 to $80 $60
Fume Extract Units $50 to $80 $60
Other: Audio/ Visual System
Total Services Element: $545 [Could be lump sum or aggregation of sub-components depending
on materiality]
$817,500 22.9% [% = Component cost / Building and Site Replacement Cost]
Check Total (excludes any building specifics/site works): $2,300 [Structure/Envelope + Services + Fitout must equal Building
Replacement Cost]
TOTAL $3,575,000 100.0%
DRC at Component Level (1) RC (2) Comp. % Age (3) Total Life (4) Dep'n (5) Dep'n DRC (6)
SITE SPECIFICS $82,920 2.1% 10 70 14.3% $11,846 $71,074
STRUCTURE/ENVELOPE $1,713,671 43.4% 10 60 16.7% $285,612 $1,428,059
BUILDING FITOUT (residual cost) $1,252,086 31.7% 10 15 66.7% $834,724 $417,362
BUILDING SERVICES $903,823 22.9%
Electrical services $225,000 5.7% 10 30 33.3% $75,000 $150,000
Balance of services $678,823 17.2% 10 25 40.0% $271,529 $407,294
TOTAL $3,952,500 100.0% $1,478,711 $2,473,789
DRC Calculation Notes:

(1) Level of components may be greater or lesser, depending on the requirements of the reporting entity.
There should be separate calculations for each component and sub-components, where applicable. In the example,
electrical services has been assumed to be a material sub-component of building services.
(2) Total Replacement Cost * Component %
(3) & (4) Should reflect physical and economic factors. Total life may also be calculated from an assessment of Remaining Life.
(5) Depreciation for valuation purposes based on straight line (assumes nil residual value)
(6) RC less estimated Depreciation


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Valuation Guidance for

Property, Plant and Equipment,

Previously Revised 2003

Crown accounting policies ...................................................................................................3

Section 1: Financial reporting and valuation standards ......................................................5

Section 2: Asset classification and valuation methodology ...............................................14

Section 3: Valuations in the health and education sectors – specific considerations........27

Section 4: Instructing and liaising with valuers..................................................................36

Appendix B: Worked example of a depreciated replacement cost calculation ..................60

The format of these guidelines is as follows:

Background Outlines the purpose of this guidance.

Section 1: Details the valuation requirements of NZ IAS 16 and the Property

Appendix B Provides a worked example of a depreciated replacement cost calculation.

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

It is the responsibility of the valuer to exercise professional judgement in his/her valuation

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

Class of PPE Accounting policy

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

Financial reporting standards:

Valuations shall be conducted either:

NZ IAS 16 also provides the following definitions and guidance:

Depreciated replacement cost

Depreciated replacement cost is a method of valuation that is based on an estimate of:

a in the case of property:

i the fair value of land; plus

Disclosure is required in respect of each valuation conducted:

• the name of each valuer

• the date(s) of such valuations (NZ IAS 16 para 77.2).

• agreed not to include additional guidance for public benefit entities.

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

a property held for strategic purposes. and

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

Is the property surplus to the entity's

Is the property available

Public Benefit Entities

Is the property held to meet Yes

NZ IFRS 5 NZ IAS 40 NZ IAS 16

Fair Value Less

Market Value less

Is their reliable market-

Depreciated Sales Comparison /

Specialised assets / depreciated replacement cost approach

Key characteristics of specialised assets are that they:

• Are useful to a limited number of uses or users

• Are generally specialised structures, and

Apportionment of value / componentisation

In undertaking valuations generally, valuers will frequently be required to undertake an

• The Valuer has satisfied professional education requirements

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

• integral to the supply of the entity’s output, or

• Sales comparison approach (comparable sales method, direct market comparison)

• Income (capitalisation) approach (including discounted cashflow analysis), and

• Cost approach (depreciated replacement cost).

• Student or staff housing/flats/apartments within a hospital or university campus

• A university registry or administration building

• A carpark within the campus of a hospital or tertiary education institution.

VALUATION GUIDANCE FOR PROPERTY, PLANT AND EQUIPMENT,

Cost based valuation methodologies

• provides the utility or service expected of the cost, and

• is in its highest and best use

Cost-based valuation approaches include:

In-patient care Classrooms

Specialist in-patient care Laboratories

Diagnostic and treatment Libraries

Specialist procedure areas Specialty teaching (e.g. health or hospitality clinics)

Ambulatory care Lecture theatres

Administration Administration (including student recreation)

Support services Gymnasiums