Average values

Valuing assets, debt, other liabilities, equity and other matters

The value of assets, debt capital, other liabilities, equity capital and other matters requiring a value is calculated by applying the relevant accounting standards. These standards also govern how amounts recorded in foreign currency are converted into Australian currency. The relevant accounting standards are the Australian equivalents to International Financial Reporting Standard (AIFRS) as adopted by the government on 1 January 2005. An entity must comply with the accounting standards when valuing a matter for thin capitalisation purposes, regardless of whether they are otherwise required to apply the standards.

It is to be noted that certain modifications to the application of the accounting standards apply for non-ADI entities and ADI entities for the purposes of making calculations under the thin capitalisation regime.

Find out more in:

• sections 820-682, 820-683 and 820-684 of the ITAA 1997 (for non-ADIs)
• sections 820-300 and 820-310 of the ITAA 1997 (for ADIs).

The value the entity uses in its books of account for accounting purposes and the value it uses for thin capitalisation purposes do not necessarily need to be the same, provided that the value used for thin capitalisation purposes is established by complying with the accounting standards.

Our discretion

To ensure the integrity of the values used, we have the discretion to substitute an appropriate value where we consider that the entity has either overvalued its assets or undervalued its liabilities.

As the exercise of this power may directly affect an entity's assessment, an entity that is dissatisfied with our decision to substitute a value may object to the decision under Part IVC of the Taxation Administration Act 1953.

For more information, see section 820-690 of the ITAA 1997.

Average values

The value of a matter is measured at several points during either the income year or the income period if either:

• the thin capitalisation rules applied for only part of the year
• different thin capitalisation rules applied to different parts of the year.

The value is then averaged over that year or period.

A financial entity (non-ADI) can calculate the average by applying one of the following 3 methods:

• the opening and closing balances method
• the three measurement days method
• the frequent measurement method – this method contains two sub-options: a quarterly option and a more frequent option.

One method must be used to calculate the average value of all matters and must be consistently applied during the period. However, an entity can change the method used from one income year to the next. Also, if an entity changes categories part-way through the year, it can use different methods. For example, if an entity was an inward investment vehicle (financial) and then becomes an outward investing financial entity (non-ADI) (for example, by acquiring a foreign subsidiary), it can use different methods for each part year period. See Application to part-year periods.

An ADI must always use the frequent measurement method.

The different methods are explained in the following table.

Table 6: Methods for valuing matters

Method	Days on which value is measured – measurement days	How to calculate the average value	Special conditions
Opening and closing balances	The first day of the period. The last day of the period.	Add the values together and divide by 2.	Cannot be used by an ADI entity. Refer to section 820-635 of the ITAA 1997 for more information.
Three measurement days	The first day of the period. The last day of the first half of the income year. The last day of the period.	Add the values together and divide by 3.	Cannot be used by an ADI entity. The period must include at least either the first day of the income year or the last day of the income year and be at least 6 months long. Refer to section 820-640 of the ITAA 1997 for more information.
Frequent measurement method (quarterly basis)	The first day of the period. The last day of each quarter in that period. The last day of the period, unless the last day was already included.	Add the values together and divide by the number of measurement days.	One of the methods that must be used by an ADI entity. Refer to subsection 820-645(2) of the ITAA 1997 for more information.
Frequent measurement method (more frequent basis)	The measurement days are the days occurring at a regular interval chosen by the entity, for example, monthly, weekly, daily. The first day of the measurement period. The last day of each regular interval for the measurement period. The last day of the measurement period unless the last day was already included in the second dot point.	Add the values together and divide by the number of measurement days.	One of the methods that must be used by an ADI entity. The regular interval selected cannot be less than one day or more than 3 months. An entity can choose to measure some matters on a more frequent basis under this method and measure the remainder on a quarterly basis – for example, measure assets and debt daily and non-debt liabilities and equity quarterly. However, in respect of the matters that the entity has selected to measure more frequently, it must use the same regular interval – for example, the entity cannot measure assets daily, debt weekly and non-debt liabilities monthly. Refer to subsection 820-645(4) of the ITAA 1997 for more information.