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Good practice application of the joint venture terms method

The terms of an arm's length transaction for a joint venture agreement are sometimes used by valuers to estimate the value of an exploration property. These terms define the investment that a third party is willing to make in order to earn a given percentage of the property. Typically, these joint venture agreements run over a number of years, and exploration expenditure commitments usually exceed the minimum statutory expenditure requirement.

When applying the joint venture terms method, the ATO considers it to be good practice for valuers to:

  • reflect within the analysis firmly committed expenditure and a probability weighting of optional future expenditure
  • give due consideration to changes in market conditions between the time at which the joint venture agreement was entered into and 1 May 2010
  • reflect the tax effect on such expenditure (for example, reflect any income tax deductions the joint venture participant would receive for the expenditure), and
  • account for the time value of money when assessing such expenditures. It is also considered good practice that a discount rate established with reference to comparable projects is calculated and applied when discounting future exploration expenditure commitments.
    Last modified: 03 Jul 2012QC 25073