Understanding DRC Valuations for Academies

What is a DRC Valuation?

Academy Trusts are required to report the value of their school buildings in their financial statements. Since schools are not typically bought or sold on the open market, a different approach is needed to determine their value. This is where the Depreciated Replacement Cost (DRC) valuation method plays an essential role in providing an accurate and reliable figure.

A Depreciated Replacement Cost (DRC) valuation estimates the cost to rebuild a school using modern construction methods and materials, less depreciation due to age, condition, and wear. The DRC method gives a true reflection of the value of a school’s physical estate, ensuring fair representation in financial statements and compliance with accounting standards.

Although often considered a "last resort" when market evidence is lacking, the DRC approach is recognised by the RICS Red Book as appropriate for assessing Market Value in such circumstances. It reflects the principle that a purchaser would not pay more for the existing asset than the cost of constructing a modern equivalent that meets the same functional requirements at the date of valuation.

How DRC Works:

• Rebuild Cost: The cost of constructing a new, modern equivalent school using current materials and building techniques.
• Depreciation: The reduction in value due to the age, condition, and functional obsolescence of the building.
• Land Value: The value of the land upon which the school is situated. While land value is typically excluded in educational property valuations, it may be taken into account in some circumstances as per financial reporting standards.

This method ensures that your academy’s assets are accurately valued for accounting and reporting purposes, while also meeting all relevant regulatory requirements.

Why is DRC Used?

The DRC method is vital for several key reasons:

• Purpose-Built Schools: Schools are designed specifically for educational purposes, meaning they are not typical commercial properties, and there are few market comparables.
• No Open Market Value: Educational buildings are rarely sold, and therefore, there is no readily available market value for many school properties.
• Fair, Justifiable Estimates: The DRC method provides a transparent and defensible estimate of the value of a school’s assets.

Why Do Academies Need a DRC Valuation?

Academy Trusts are required to follow specific accounting standards to ensure accurate reporting. This includes:

• SORP 2019 (Statement of Recommended Practice): SORP 2019 sets out the guidelines for how academy trusts should prepare their financial statements. It includes detailed instructions on the accounting treatment of property and asset valuations.
• FRS 102 (Financial Reporting Standard 102): FRS 102 is the key standard under UK Generally Accepted Accounting Practice (GAAP) that governs the financial reporting of academy trusts. FRS 102 includes provisions for the treatment of fixed assets, such as school buildings, and specifies the use of methods like DRC when no open market value is available.
• Funding and Audit Compliance: A DRC valuation ensures that academy trusts meet the requirements of funding bodies, auditors, and other regulatory authorities.