The true cost of non-complying market valuations

The problem is getting it wrong, because the true cost of noncomplying market valuations has financial and operational implications for an SMSF.

What is market value?

The first rule is that the market dictates the value of an asset, not the trustee. Adopting a 'Goldilocks pricing strategy' whereby the trustee has different values depending on their SMSF goals will result in a compliance breach.

The next logical step is to use the market value definition in section 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act): "market value", in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

(a) that the buyer and the seller dealt with each other at arm's length in relation to the sale;

(b) that the sale occurred after proper marketing of the asset;

(c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

For clarity, the definition covers all types of property, including money. It essentially expects SMSF trustees to make valuation decisions using careful consideration and sound judgment, resulting in a fair and reasonable sale.

What do the auditing standards say?

SMSF auditors are equally responsible for meeting their professional obligations under the Australian Auditing Standards as under the SIS legislation.

Auditing Standard ASA 500: Audit Evidence is relevant for market valuations as it requires auditors to design appropriate procedures to obtain sufficient audit evidence.

Auditing Standard ASA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures, requires auditors to assess whether the trustee's estimates are reasonable and whether there is a risk of material misstatement in the financial statements.