Valuation and Depreciation of
Road Infrastructure
David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value
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Agenda
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Background
Materiality and Risk
Accounting Standards
Practical Issues
Integration: Valuation and Asset Management
AASB 13
Final Thoughts
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Background
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Some of our WA clients
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Legislative
• 30 June 2015
• All assets to be at Fair Value
– Land
– Buildings
– Infrastructure
– Parks
– Plant
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Accounting Standards
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AASBs (13, 116, 136, 5)
Australian Interpretations (1030, 1050)
IFRIC 1, 4
IFRIC 12 / IPSAS 32 Service Concession Arrangements
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Auditing Standards
• Key outcome is that auditors need to ensure
valuation and methodology –
– Is sound and makes sense
– Complies with all relevant accounting standards
– Undertaken by expert with relevant knowledge
and expertise
– Can be supported by sufficient and appropriate
audit evidence
– Supported by appropriate report and disclosures
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Road Infrastructure
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Sealed Roads
Unsealed Roads
Bridges
Kerb
Stormwater
Footpaths / Cycle ways
TMDs
Traffic Signals
What else?
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Landfills ?
• Complex accounting and valuation issues
• IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities
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Materiality and Risk
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Most material figures
Highly subjective
Non-compliant or overly simplistic approaches
Significant impact on KPIs & Sustainability
Measures
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Remember
• This is not an engineering exercise !
• Nor is it a ‘market valuation’ exercise
• It is –
– Valuation
– Based on Accounting Standards
Essential to have right expertise
with right experience
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Most councils will •
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Use overly simplistic approaches
Based on poor in incorrect assumptions
That do not reflect asset management reality
Resulting in materially incorrect results
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Typically • Fair Value significantly under-stated
• Depreciation Expense (following years)
significantly overstated
• KPIs make asset position and asset
management performance look worse than
actual
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Simplistic v Reality
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Time for Reflection
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What have you done so far?
Have you covered off ALL your asset classes?
Are you well prepared?
Have you used overly simplistic approaches?
Will you ‘over depreciate’ ?
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Overview of Accounting Standards
• AASB13 about the valuation
• AASB116 & others about specific asset types
• Fair Value and depreciation concepts are
critical
• Disclosure –
– Now critical
– Major part of the output
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Fair Value Definition
“the price that would be received to sell an
asset or paid to transfer a liability in an
orderly transaction between market
participants at the measurement date.”
(Exit Price)
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Three techniques
• Market
• Income
• Cost
– Typically used for road & infrastructure
– Note differences between Cost (AASB13/116) and
Depreciated Replacement Cost (AASB136)
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AASB13 Process
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AASB116 Process
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Specific requirements AASB116
6
43
50
51
60
61
"Depreciable amount“ is the cost of an asset, or other amount substituted
for cost, less its residual value.
Each part .... shall be depreciated separately.
Allocated on a systematic basis over its useful life.
The residual value and the useful life of an asset shall be reviewed at
least at the end of each annual reporting period
The depreciation method used shall reflect the pattern in which the
asset's future economic benefits are expected to be consumed by the
entity.
The depreciation method applied to an asset shall be reviewed at least at
the end of each annual reporting period and...... the method shall be
changed to reflect the changed pattern.
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Concepts in simple terms
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Concepts for cyclical
maintenance assets
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Critical Methodology Issues
• Future Economic Benefit
– What does the asset provide?
– drivers of consumption?
• Replacement Cost (existing v proposed)
• Depreciable Amount
– Residual Value and Useful Life
• Pattern of Consumption
• Accumulated Depreciation (% RSP)
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What is WDV &
Depreciation Expense ?
GCRC = $100,000
Assume
Actual Age = 40 years
Pattern of Consumption
Original assumptions
is constant
Useful Life = 45 years
Residual Value = nil
Current condition assessment
RUL = 30 years
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What if you also knew ?
• Asset was renewed 10 years ago ?
• Expect to renew asset back to as new in 5
years time at cost of $50,000 ?
• After the renewal in year 30 the level of RSP
was assessed as = 80%
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Possible outcomes…. But only
one is correct!
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Actual Data
Depreciation = 10,000 / 5
years = 2,000 p.a
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Example: Common Mistakes
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Practical Issues
• Segmentation
• Componentisation
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Inputs & Valuation Hierarchy
Valuation Hierarchy based on –
• Lowest level of input
• Unless input is insignificant
Need to –
• Identify ALL significant inputs
• Classify as level 1, 2 or 3
• Technique DOES NOT determine hierarchy
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What are the inputs?
(observable or unobservable)
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Asset design, location and specification
Condition (and Scoring methodology)
Componentisation / Segmentation
Replacement Cost (Unit Cost)
– what level?
– How developed?
• Component level details (NOT at asset level)
– Residual Value
– Pattern of Consumption
– Useful Life
• Future Use / Obsolescence?
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Component Assumptions
• AASBs mandate that depreciation be applied
at component level
• AASB13 requires these disclosures at
component level
• Whole of asset depreciation assumptions are
‘inappropriate’
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Is ‘Useful Life’ an input ?
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What is ‘Pattern of Consumption’ ?
• What factors drive the consumption of service
potential?
• Do the factors and their impact change over
time?
• Is consumption impacted by asset
management practices?
• Is consumption ‘constant’ or something else?
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What is the Residual Value ?
• Scrap value at point of ultimate disposal?
• Cost saving from renewal ?
• Definition is ‘an amount’ which can be either
• Need to reflect asset management reality
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APV
Consumption Based Approach
100
Very High
High
1
Adequate
Adequate ?
2
3
4
Barely
Adequate
60
5
Unacceptable
LoS = 60
Cost to renew
back to 100
be Closed
ThereforeMUST
Residual
= 40
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APV
Consumption Based Approach
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Integration
Valuation and Asset Management
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Confusion
• Objectives
• Terminology
• Basic Concepts
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Driven by
• Desire for –
– Efficiency (use one set of figures)
– Simplicity over Quality and Accuracy
• Blinkered Views / Culture
• Poor practices through –
– Regulation
– Old School / Outdated Practices
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Outcome
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Asset Management Capability being held back
Valuation and Depreciation materially misstated
Learning and development being stunted
Wastage and Inefficiency
Questionable Strategic Decisions
Erroneous KPIs
Lack of real accountability
Poor Corporate Governance
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Objectives
Strategic Asset Management
Accounting
The Goal of Asset Management is to
meet a required level of service in the
most cost effective way.
Must include “Whole of Lifecycle
Cost”
To provide general purpose users with
information that enables them to
make informed decisions about scarce
resources.
Need to produce Optimised Model
that incorporates –
•Level of Service
•Lifecycle Costs
• Cost of Acquisition
• Maintenance
• Operation Costs
• Renewal / Upgrade (CAPEX)
Key Information provided in financial
statements –
•Fair Value (% of RSP)
•Depreciation Expense (rate of
consumption of the service potential)
•Disclosures (so can interpret the
information)
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Objectives
• The financial statements are about reporting
information about the level of remaining
service potential of “what actually exists” and
the estimate of how much will be consumed
over next 12 months.
• It has nothing to do with future lifecycle costs
(renewal, upgrade, maintenance or
operational)
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Terminology: Depreciation
• Estimate of what service potential will be consumed
in next 12 months i.e. estimate of loss of wealth
What it is Isn’t
Notes
Quasi-estimate of future
funding needs
Future funding needs are about actual lifecycle costs.
Depreciation is neither a cost of acquisition, maintenance,
operational, renewal, upgrade or disposal cost.
Way to measure whether Sustainability is about whether you will be able to continue
an entity is sustainable
to afford future funding needs. Depreciation has nothing to
do with this.
The allocation of the
Gross Cost of an asset
over the useful life
It is about allocating the “Depreciable Amount” NOT the
entire asset. Some assets have extremely high Residual
Value
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Basic Concepts (Valuation)
Concept
Common Mistakes
Gross Current
Replacement Cost
GCRC of what will replace with rather than what exists.
No adjustment for diff in utility.
Irrelevant debate over Greenfield and Brownfield
Residual Value &
Depreciable Amount
Theoretical scrap (that will never happen) rather that actual
Asset Management reality
Just assume zero Residual Value (easy)
Pattern of
Consumption
Just assume everything is constant (straight-line) despite Asset
Management reality
Useful Life
Not linked to Asset Lifecycle
Theoretical guess based on theoretical scrap
Use of Relevant
Factors
Rely on age alone rather than consider the relevant factors
Determination of
WDV
No consideration of actual condition or holistic factors
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AASB13
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What is it about?
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GFC and Sovereign Debt Crisis
Valuation = Subjectivity
Need for greater information
Greater Risk = Greater Disclosures
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Key Aspects of AASB13
• NOT about the Asset
• Focus on HOW the valuations were made
• IS about the methodology
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Asset Classes
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Probably the biggest issue
Totally missed by many !
All disclosures by ‘Asset Class’
‘Asset Class’ defined by paragraph 94
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Asset Classes
94 An entity shall determine appropriate classes of assets and
liabilities on the basis of the following:
(a) the nature, characteristics and risks of the asset or liability; and
(b) the level of the fair value hierarchy within which the fair value
measurement is categorised.
The number of classes may need to be greater for fair value
measurements categorised within Level 3 of the fair value
hierarchy because those measurements have a greater degree of
uncertainty and subjectivity.
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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
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Techniques and Inputs (for each
asset class)
• Market / Income/Cost (or combination!)
• High level overview of process
– Segmentation
– Componentisation
– Condition scoring process
• Identify and disclose ALL inputs
• Classify each input as level 1, 2 or 3
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Final Thoughts
• Understand Auditors Expectations
• Doing Fair Value requires much more than
some calculations (calc is only 25% of work)
• Easy to get key concepts wrong
– Understate value
– Overstate Depreciation Expense
• Be wise about your implementation options
• Integration: valuation and Asset Management
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What can APV do?
• National experts in local government
infrastructure valuation
• Over 25 years experience
• Experienced engineers for infrastructure
• Proven methodology and results
• Full carriage right through to audit sign off
• No need to worry !
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ISO9001 Quality Management
Results to date
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Valuation Timeframe
Council gets data and prepares
Council goes to market
Aug - Sept
APV to prepare proposal
Council to assess proposal and awarded contract
APV appointed and work scheduled
Council to provide asset listing and other data
Confirmation of assumptions
Inspections and valuation preparation
Draft valuation report
Council quality assurance review
Final Valuation Report
Audit review of valuation
Finalise accounts
Final Audit review and Sign Off
Oct
Oct
Nov
Dec
Dec - Feb
Mar
Mar / Apr
May
Jun
Jun
Aug
Sept
Oct
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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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