2015
LG Workshops
NSW
David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value
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Agenda
•
•
•
•
AASB Staff Paper – Residual Value
AASB 13 Revisited
Special Schedule 7
CPA Australia Guide to Valuation and
Depreciation
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AASB Staff Paper
Residual Value
Tentative Agenda
Decision
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Fair Value – key concepts
• Fair Value
– level of remaining service potential
• Depreciation
– amount of value expected to consumed over the
year through wear and tear and obsolescence
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Background
• Original paper by David Maxwell (Oct 2014 AASB meeting)
• Sought guidance whether RV must be cash inflow when asset is
eventually sold or disposed or could also be cost saving
• All but one submission (including consultants, councils, valuers and
auditors) agreed with David
• However one submission – must be cash inflow. But to reflect cost
savings … split component into non-recyclable component and
long-life component
• Board agreed with the latter
• Decided –
– No need to change anything
– Staff to issue educational paper
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Definition
The residual value of an asset is the estimated amount that an
entity would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its
useful life.
Useful life is:
• (a) the period over which an asset is expected to be available for
use by an entity; or
• (b) the number of production or similar units expected to be
obtained from the asset by an entity.
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Cyclical Maintenance verses
Recyclable
Non
Recyclable
Recyclable
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Views One and Two
• (a) a residual value is only recognised in circumstances
where an entity expects to receive consideration for an
asset at the end of its useful life. That is, recognition is
limited to instances in that an entity expects to relinquish
control of an asset at the end of its useful life in return for
consideration (View 1); and
• (b) residual value encompasses the cost savings in
replacing an asset. That is, recognition is not limited to
instances in that an entity expects to relinquish control of
an asset at the end of its useful life in return for
consideration (View 2).
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View One
Comp 1
Comp 2
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View Two
Depreciable
Amount
Residual Value
Residual
(non-depreciable)
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Key Points from Staff Paper
• Agenda Paper 8.2 does not make any
assessment or assumptions in relation to fair
value accounting.
View only relates to depreciation expense
Does not apply to valuation
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Key Points from Staff Paper
• short life component (the estimated cost of
planned recycling and stabilisation) has no value
at the end of its useful life and therefore it would
be inappropriate to consider this as recyclable. In
contrast, the full-depth of the long-life
component is in fact being excavated, mixed with
materials and stabilised to restore the road –
that is, it is being recycled.
What was one component is now two components !
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Key Points from Staff Paper
• AASB staff are of the view that componentisation of
parts into sub-parts is not limited to cases in that
sub-parts are physically distinct. Accordingly, AASB
staff continue to consider that recyclable and nonrecyclable gravel could be componentised in order to
accurately reflect the assets management strategy.
No one to one relationship between physical asset register
(per asset management) and financial accounting asset
register
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Key Points from Staff Paper
• Furthermore, staff consider that land, and in
some circumstances, earthworks, are the only
physical assets that are non-depreciable.
View was based on sub-pavement not being
earthworks rather than whether or not some parts
have an indefinite life.
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Key Points from Staff Paper
• Staff consider the appropriate estimation of useful lives
for components is important to accurately calculate the
consumption (depreciation) of economic benefits
embodied within an asset. Staff are of the view that the
useful life of recyclable parts (for example, gravel) could
extend beyond the service life of the larger asset (for
example, the road).
What is useful life of recyclable part of the
pavement? 1000 years?
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AASB Decision
• The Board agreed that recognition of a residual value in
AASB 116 is clear and that it is limited to when an entity
expects to receive consideration at the end of the asset’s
useful life.
• The Board further noted that the appropriate accounting
could be achieved through componentisation in
accordance with the requirements of AASB 116.
• The Board also considered the level of componentisation
is not limited to the circumstances when components are
physically distinct.
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Implications
• Depreciation assumptions and methodology do not have to be
consistent with valuation approach - Valuer can determine Fair
Value based on what means is appropriate
• AASB view ONLY relates to depreciation expense
• RV always NIL or low scrap (so why require annual assessment?)
• Long-life component can have VERY LONG useful life – could extend
beyond the service life of the larger asset (such as the road)
• No guidance on pattern of consumption (not considered in paper)
• Financial Asset Register now different to Asset Management
System Asset Register – no one to one relationship
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However
• Range of consultants and auditors meeting with
AASB staff to say ‘you got it wrong’
• Also that
– staff paper did not include any actual analysis of
concepts
– the paper did not actually answer the question raised
– The boards actual decision is still ambiguous
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AASB13
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Key Aspects of AASB13
• NOT about the Asset
• Focus on HOW the valuations were made
• IS about the methodology
AASB13
Decision Tree
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Asset Classes
•
•
•
•
Probably the biggest issue
Totally missed by many !
All disclosures by ‘Asset Class’
‘Asset Class’ defined by paragraph 94
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Disclosures
• General Disclosures (policies and reconciliations)
• For each ‘Asset Class’
– Valuation Techniques and Inputs
– If level 3
• For each level 2 input (no disclosures)
• For each level 3 input
– Where did it come from
– How was it evaluated
– Quantitative info (eg. min and max)
– How reliable is it (sensitivity +/- %)
– Impact ($) on Fair Value Measurement
CPA Guide
Example
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Special Schedule 7
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Asset Condition
Asset condition assessment is the process of continuous or periodic inspection,
assessment, measurement and interpretation of the data to indicate the condition
of a specific asset so as to determine the need for some preventative or remedial
action.
Councils are strongly encouraged to use the asset condition rankings as set out in the
Asset Condition Assessment table in the Integrated Planning and Reporting Manual
for local government in NSW. Asset conditions are assessed using a scale of one to
five. Assets in condition one are considered to be excellent and that there is no
work required (other than normal maintenance) while assets in condition five are
considered to be very poor with urgent renewal or upgrading being required.
Asset condition should be based on up to date asset condition assessments rather than
an engineering estimates.
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Estimated cost to bring to a satisfactory standard (BTS)
Satisfactory is defined as “satisfying expectations or needs, leaving no
room for complaint, causing satisfaction, adequate”1. The estimated
cost to bring assets to a satisfactory standard is the amount of
money that is required to be spent on an asset to ensure that it is in
a satisfactory standard. This should not include any planned
enhancements.
Unless Council has undertaken consultation with their community and
has agreed to a level of service from councils assets the BTS should
be measured against the second condition rating of Good as stated
in the Integrated Planning and Reporting Manual for local
government in NSW.
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The Office of Local Government (OLG)
references the 1 – 5 rating referenced in the
Integrated and Reporting Manual.
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APV Scale
Score
Description
0
New or very good condition – very high level of remaining service potential.
1
Not new but in very good condition with no indicators of any future obsolescence and
providing a high level of remaining service potential.
2
Aged and in good condition, providing an adequate level of remaining service potential.
No signs of immediate or short term obsolescence.
3
Providing an adequate level of remaining service potential but there are some
concerns over the asset’s ability to continue to provide an adequate level of service in
the short to medium term. May be signs of obsolescence in short to mid-term.
4
Indicators showing the need to renew, upgrade or scrap in near future. Should be
reflected by inclusion in the Capital Works Plan to renew or replace in short-term. Very
low level of remaining service potential.
5
At intervention point. No longer providing an acceptable level of service. If remedial
action is not taken immediately the asset will need to be closed or decommissioned.
6
Theoretical end of life.
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• Based on the IP&R scale and the OLG’s intention for
the ‘satisfactory’ (in the absence of a negotiated level
of service) to be based on a IP&R score of 2 as
satisfactory then the calculation should be based on all
assets where the score is assessed as being ‘below 2’.
• Using the APV scale this would translate scores equal
to or below 3M as shown below. This is because an
asset assessed at 3H under APV scale would still only
require minor maintenance. Assets at the 3M score are
more likely to require a higher level of maintenance.
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CPA Guide
• National Project Team
• Publication – Q2 2015
Current Draft
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Questions
David Edgerton FCPA
Email:
David@apv.net
Web:
www.apv.net
Mob:
0412 033 845
Work:
(07) 3221 3499
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