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End of attention
The appropriateness of the valuation method used
Valuers rely on a range of planning tools and documents in approaching the valuation of petroleum assets and petroleum securities. These planning tools and documents include:
- the project lifecycle
- field of development plan, or
- similar contemporaneous plans for the development of the project.
The planning tools and documents will contain information such as the technical assessment of reserves and resources at a given point in time, the project design by stage, planned expenditure and planned production schedule. These assumptions will inform the valuation process by providing inputs to the valuation method.
In assessing the risk of an inaccurate valuation, the ATO will consider whether the valuation method used was appropriate for the particular circumstances. The ATO considers it good practice for the selection of the valuation method to have regard to guidelines, such as the VALMIN Code, ASIC Regulatory Guide RG 111: Content of expert reports and the International Valuation Standards. For example, the VALMIN Code states that selection of an appropriate valuation method depends on such factors as:
- the nature of the valuation
- the development status of the petroleum assets, and
- the extent and reliability of available information.
There are three broad approaches to valuing a petroleum asset or petroleum security. They are:
- the income approach, which is based on the future income expected in relation to the petroleum asset or petroleum security
- the market approach, which is based on comparable sales from the operations that relate to the petroleum asset or petroleum security, and
- the cost approach, which is based on costs of the operations that relate to the petroleum asset or petroleum security.
Particular methods will be classified into the three broad approaches. Some methods also cross over two or more of the above approaches.
The market approach is the most desirable approach to valuations in a general sense. This is because it reflects the value the market places on a particular asset. However, it may not always be appropriate or possible in the context of petroleum projects as they are not traded frequently and there may not be a deep market to observe. Further, it is uncommon that petroleum projects are comparable.
The income approach is generally recognised as the next best approach for valuing an asset. However, forecasting a future income stream from a petroleum project can be difficult. Projects in production will be able to rely on historical data to aid in forecasting. Projects that are not in production, but where there is a good understanding of the petroleum in the project, may also be able to forecast future income streams. Caution will need to be exercised when forecasting future income streams for petroleum projects in early exploration where there is little knowledge of the petroleum reserve.
The most common and well-known method under the income approach is the discounted cash flow method which is frequently used for petroleum projects in production or pre-production stages.
The ATO considers it good practice to use a primary method and at least one other valuation method as a cross-check where practicable and possible. The ATO also recognises that this can add to costs of compliance for the taxpayer and may only be practicable for the larger scale projects. Where more than one valuation method has been undertaken, the ATO considers it good practice to document:
- any inconsistencies between the alternative valuations, and
- which method the valuer has had primary regard to in determining the value, and the reasons why this method was chosen.