This is because members are usually able to switch between investment options at any time and thus the situation may develop where members seek to switch their equity entitlements out of one option and those entitlements cannot be realised in cash from the existing assets (because they are illiquid or intangible). Trustees should also consider if their fund will be able to earn sufficient income in the future to offset against any current FITB; and when that is likely to occur.

Of course such a consideration cannot be exact and to that extent it must use a mix of skill, experience and judgment. In our view trustees should consider (at least) the following for their fund: • what are the demographic profiles of the fund’s member base and could that impact cash flow in the future; • what proportion of cash flow is from a “regulated” member source, versus those from member rollovers or exits from the fund; • what is the typical time horizon for assets that comprise the fund’s investment strategy; • what are the historical and future growth rates used for the funds’ investment strategy; and • how long might the current economic and investment cycle persist? Depending on the outcome of these considerations, it may be appropriate that the sum total of the fund’s FITB be “discounted”.

The size of any discounting factor would need to assume that today’s value of an FITB will reduce in the future due to the effects of inflation and positive investment returns (if it cannot be utilised until a future point in time). A further factor which may affect the value of a fund’s FITB arises where the fund comprises of both superannuation and a pension section. Under Section 295F of the Income Tax Assessment Act (1997), a form of proportional averaging (based on the relative assets supporting the accumulation and pension sections of a fund) can be used to reduce the taxable income (and deductible expenses) of the fund.

Given the significant rate of growth of most funds’ pension sections, this may also effect how the future value of a current period FITB should be determined. In summary, it is not a simple case to value an FITB. In many instances deriving the value of an FITB based on the types of assets, their classification and income types will only be the first step. Trustees then need to consider future utilisation issues; if the FITBs face value should be discounted and if so using what rate; as well as the impact of tax legislation and Australian Accounting Standards Board requirements before reaching a judgment as to how the FITB should be included in the fund’s unit price (or crediting rate) calculations and it’s financial statements.

Join the discussion