South Australia Local Government
Technical Information Paper
DEPRECIATION
OF
INFRASTRUCTURE ASSETS
February 2009
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Table of Contents
ACRONYMS ............................................................................................................................................. 3
INTRODUCTION ....................................................................................................................................... 4
CONTEXT ................................................................................................................................................. 5
Objective ............................................................................................................................................. 5
Materiality........................................................................................................................................... 5
Relationship with Future Funding Needs and Rates ........................................................................... 5
CONSIDERATIONS ................................................................................................................................... 7
Consumption of Future Economic Benefit .......................................................................................... 7
Drivers of Consumption ...................................................................................................................... 8
KEY ASPECTS: ACCOUNTING STANDARDS ............................................................................................ 10
Allowable Methods ........................................................................................................................... 10
Pattern of Consumption.................................................................................................................... 12
Useful Life ......................................................................................................................................... 13
Residual Value ................................................................................................................................... 16
Depreciable Amount ......................................................................................................................... 16
APPLICATION: OVERVIEW ..................................................................................................................... 18
Selecting the Best Method................................................................................................................ 18
Straight-Line Depreciation ................................................................................................................ 18
Condition Based Depreciation .......................................................................................................... 22
Consumption Based Depreciation .................................................................................................... 24
Renewals Annuity ............................................................................................................................. 27
APPLICATION: PRACTICAL ..................................................................................................................... 28
Decision Tree..................................................................................................................................... 28
Components ...................................................................................................................................... 29
Types/Materials ................................................................................................................................ 29
Structure of the Asset Register ......................................................................................................... 29
OVERVIEW OF PRESCRIBED REQUIRMENTS ......................................................................................... 32
AASB 116 “Property Plant and Equipment” ...................................................................................... 32
Interpretation 1030 “Depreciation of Long Lived Physical Assets: Condition Based Depreciation” 33
Auditing Standards ............................................................................................................................ 35
ACKNOWLEDGEMENTS ......................................................................................................................... 37
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
ACRONYMS
AIFMG
Australian Infrastructure Financial Management Guidelines (published by the National
Asset Management Strategy (NAMS) group of the Institute of Public Works Engineers
Association (IPWEA)
AASB 108
Australian Accounting Standard “Changes in Accounting Estimates and Errors”
AASB 116
Australian Accounting Standard “Property Plant and Equipment”
ASA
Australian Auditing Standards
Depreciable Amount
the cost of an asset, or other amount substituted for cost, less its residual value
Depreciation
the systematic allocation of the depreciable amount of an asset over its useful life
RUL
Remaining Useful Life
RV
Residual Value – 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
the period over which an asset is expected to be available for use by an entity or the
number of production or similar units expected to be obtained from the asset by an
entity
WDV
Written Down Value – is the Gross Cost (or Value) less Accumulated Depreciation
UIG 1030
Urgent Issues Group Interpretation 1030 “Depreciation of Long Lived Physical Assets:
Condition Based Depreciation”
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
INTRODUCTION
Depreciation is an accounting concept that measures and spreads the cost associated with
the using up of an asset over its useful life. Australian Accounting Standards define
depreciation as ‘the systematic allocation of the depreciable amount of an asset over its
useful life’. For most Councils depreciation is the second largest expense item appearing in
their annual income statements (employee costs is usually the largest).
The Independent Inquiry into the Financial Sustainability of Local Government in South
Australia conducted in 2005 recognised the significance of Councils’ annual depreciation
expense to their financial positions. The Inquiry also noted concerns within Local
Government about the reliability of recorded depreciation data and made recommendations
aimed at:
“improving the consistency and comparability of accounting policies impacting upon
the measurement of the key financial sustainability indicators, especially
depreciation and other assets accounting policies.”
Implementing soundly-based depreciation and other asset management policies is central to
the achievement of comparability in the measurement of Councils’ financial performance
and position and to this end the Inquiry noted that;
“Standardising depreciation (and asset valuation) policies, and ensuring their correct
implementation, must be a high priority for local government in South Australia.”1
This information paper deals with the topic of depreciation of infrastructure assets. The
objective of this paper is to provide a technical resource to supplement other publications
such as the Australian Infrastructure Financial Management Guidelines (AIFMG) that are
currently being developed by the Institute of Public Works Engineering Australia.
The paper has been divided into several sections. These include –






1
Context
Considerations
Key Aspects: Accounting Standards
Application: Overview
Application: Practical
Overview of Prescribed Requirements
LGA South Australia Information Paper 17: Depreciation and Related Issues June 2008
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
CONTEXT
Objective
“Depreciation” is defined and its associated requirements are specified in Australian
Accounting Standard AASB 116 “Property Plant and Equipment”. The objective of this
Standard is to prescribe the accounting treatment for property, plant and equipment so that
users of the financial report can discern information about an entity's investment in its
property, plant and equipment and the changes in such investment.2
Depreciation is defined as "the systematic allocation of the depreciable amount of an asset
over its useful life.”3 Furthermore, AASB 116 requires “The depreciation method used shall
reflect the pattern in which the asset's future economic benefits are expected to be
consumed by the entity.”4
Accordingly, the purpose of depreciation is record the value (or cost) of the asset that has
been consumed during the accounting period so that users of the financial statements can
discern information about the council’s assets. Its purpose is solely for financial reporting
and is not intended for any other purpose.
Materiality
Depreciation is recognised in the financial statements as an expense item within the Income
Statement. The quantum of depreciation expense varies from council to council depending
upon the nature, extent and age of the infrastructure base combined with the effectiveness
of the asset management framework.
Typically depreciation expense comprises between 20% - 35% of total expenses and as a
result is considered extremely material. Due to its high materiality and subjective nature the
incorrect calculation of depreciation expense is considered by many auditors to pose the
greatest risk of material misstatement. Accordingly, with the changes in the Accounting
Standards and Auditing Standards, depreciation is receiving extensive audit attention.
Relationship with Future Funding Needs and Rates
Some entities have attempted to use depreciation for purposes other than as a measure of
the value of the asset consumed during the year. For example, in the absence of a robust
Asset Management Plan and Long-Term Financial Plan many have used the figure as either –


a de-facto measure of the amount of future funding required to replace the existing
asset (future funding needs)
or a mechanism to set user charges or rates (budgeting) based on “fully funding”
depreciation.
2
AASB 116 Paragraph 1
AASB 116 Paragraph 6
4
AASB 116 Paragraph 60
3
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
It is prudent to recognise the need to fund asset renewal/replacement. In the absence of a
robust Asset Management Plan or Long-Term Financial Plan the use of depreciation expense
as a de-facto estimate of future funding requirements is considered better than not proving
any estimate.
However there is no direct relationship between depreciation and either future funding
needs or as a rate setting mechanism. Given the significant investment by councils in
infrastructure assets and the associated proportion of total council funds allocated to the
operation and maintenance of these assets, it is imperative that appropriate systems be put
in place to better estimate the requirements for future funding needs (asset replacement
and renewal) and the true cost to provide (and therefore charge equitably) services to the
community using the assets.
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CONSIDERATIONS
Consumption of Future Economic Benefit
The term “Future Economic Benefit” is not defined within the Accounting Standards.
However, the Framework for the Preparation of Financial Statements states –
“Aus54.1
Aus54.2
In respect of not-for-profit entities, whether in the public or private
sector, the future economic benefits are also used to provide goods
and services in accordance with the entities' objectives. However, since
the entities do not have the generation of profit as a principal
objective, the provision of goods and services may not result in net
cash inflows to the entities as the recipients of the goods and services
may not transfer cash or other benefits to the entities in exchange.
In respect of not-for-profit entities, the fact that they do not charge, or
do not charge fully, their beneficiaries or customers for the goods and
services they provide does not deprive those outputs of utility or value;
nor does it preclude the entities from benefiting from the assets used
to provide the goods and services. For example, assets such as
monuments, museums, cathedrals and historical treasures provide
needed or desired services to beneficiaries, typically at little or no
direct cost to the beneficiaries. These assets benefit the entities by
enabling them to meet their objectives of providing needed services to
beneficiaries.”5
For the purpose of this paper the terms Future Economic Benefit is also referred to as
Service Potential.
In short, the consumption of future economic benefit relates to the extent to which the
council is able to continue to deliver the relevant goods or services in accordance with its
objectives.
When determining the Fair Value of an asset the objective of the valuer is to calculate the
value of the remaining level of future economic benefit (or service potential) embodied
within the asset. Depending upon the most likely scenario the Fair Value would be
calculated after considering whether the asset would be reproduced or replaced with a
modern equivalent. This choice provides an insight into the service potential delivered by
the asset and hence how that service potential is consumed.
Depreciation Expense is then calculated to estimate the “amount of service potential that is
expected to be consumed within the next 12 months”.
5
AASB Frameworks for Preparation of Financial Statements
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Drivers of Consumption
Prior to adopting a depreciation method it is imperative that due consideration is given to
the factors that drive the consumption of the assets service potential.
In particular –


AASB 116 requires “the depreciation method used shall reflect the pattern in which
the asset's future economic benefits are expected to be consumed by the entity”6.
UIG Interpretation 1030 prohibits the use of a methodology where “the depreciation
expense is determined without consideration of technical and commercial
obsolescence, such as potential changes in consumer demand, and related factors
which can influence the consumption or loss of future economic benefits during the
reporting period”7
There are many factors that drive the consumption of an asset’s service potential and
likewise, there are many different indicators of the impact of each factor. Additionally,
factors that impact the remaining service potential of a particular asset may vary
significantly to the factors impacting a different asset within the same class of asset. For
example – the council may have constructed Community Halls at two different locations.
Both halls have been maintained the same and both are considered to be in “excellent
physical condition”. However, due the increase in population in one area the hall at that
location is experiencing significant issues with capacity. As a result, it is expected that the
council will decide to demolish the existing hall and construct a new hall with increased
capacity. It is considered highly likely that this will happen within the next six years. While
both halls are in excellent physical condition the consumption of one hall is significantly
greater than the other due to the impact of obsolescence driven by capacity issues.
The above example demonstrates that an increase in utilisation (patronage) can sometimes
lead to issues with capacity and increase in the rate of consumption (via a reduced
remaining useful life). Whereas in other circumstances, a reduction in utilisation (decreased
patronage), may lead to issues with obsolescence and also an increase in the rate of
consumption (via a reduced useful life).
AASB 116 requires that “the future economic benefits embodied in an asset are consumed by
an entity principally through its use. However, other factors, such as technical or commercial
obsolescence and wear and tear while an asset remains idle, often result in the diminution of
the economic benefits that might have been obtained from the asset. Consequently, all the
following factors are considered in determining the useful life of an asset:
(a)
expected usage of the asset. Usage is assessed by reference to the asset's
expected capacity or physical output.
6
AASB 116 Paragraph 60
7
UIG Interpretation 1030 Paragraph 8
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(b)
(c)
(d)
8
expected physical wear and tear, which depends on operational factors such
as the number of shifts for which the asset is to be used and the repair and
maintenance programme, and the care and maintenance of the asset while
idle.
technical or commercial obsolescence arising from changes or improvements
in production, or from a change in the market demand for the product or
service output of the asset.
legal or similar limits on the use of the asset, such as the expiry dates of
related leases.”8
AASB 116 Paragraph 56
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KEY ASPECTS: ACCOUNTING STANDARDS
Allowable Methods
Providing the depreciation method complies with the requirements if AASB 116 and UIG
Interpretation 1030, any method of depreciation can be employed. However, care needs to
be taken to ensure –


All aspects of AASB 116 are complied with including o Method must “match pattern of consumption”
o Where the asset has a number of different components with varying patterns
of consumption, each component is to be depreciated separately
o Depreciation is to be calculated on a systematic basis over its useful life
o A “Residual Value” needs to be determined and must not be depreciated
o As a minimum, the pattern of consumption, Useful Life and Residual Value
need to be reassessed at year end and the depreciation method adjusted if
there are any significant changes.
All aspects of UIG Interpretation 1030 must be satisfied. In particular, the method
must ensure o Depreciation is calculated by reference to the “depreciable amount”
o Appropriate consideration is given to technical and commercial obsolescence
o Maintenance and Capital expenditure are separably identified and accounted
for in accordance with AASB 116.
o The “renewals annuity” method is not used
o Depreciation is calculated separately for each component.
Providing the method chosen accurately reflects the level of remaining service potential
(Fair Value) and the expected rate of consumption of the service potential (Depreciation) all
compliant methodologies will result in the same calculation over the long term. Any
differences should be as a result of timing differences relating to the assumed “pattern of
consumption”.
Additionally, consideration needs to be given to ensure that the auditors will be able to
obtain sufficient and appropriate evidence with respect to the critical assumptions adopted
within the methodology and that the methodology is logical and consistent with the entity’s
understanding of how the asset’s service potential is consumed. This includes assumptions
such as –




The Pattern of Consumption
Useful Life
Residual Value
Depreciable Amount
These aspects are discussed in greater detail in the following pages. AASB 116 requires that
“The entity selects the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the asset. That method is applied
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
consistently from period to period unless there is a change in the expected pattern of
consumption of those future economic benefits”.9
Common methods adopted by local governments include the following –
Straight-Line
Factors Used:
Age only
Typically uses Actual Age
plus RUL to calculate a Total
Useful Life.
WDV is then determined by
RUL/Total Life – Residual.
If applied correctly this
method is good for assets
with a short and predictable
Useful Life. However, in
practice it is often incorrectly
applied resulting in material
misstatement. Care needs
to be taken to ensure the
critical assumptions reflect
the asset lifecycle.
Condition Based
Depreciation
Factors Used:
Physical Condition
Consumption Based Depreciation
Typically a degradation
profile is created based
on a model that
correlates the physical
condition to an estimated
total life cycle. Most
commonly used with road
pavements.
Considers factors such as functionality,
capacity, utilization, obsolescence, etc
at the whole of asset level. Then takes
into account the physical condition and
repair and maintenance history of the
asset to determine the level of
remaining service potential. A Matrix is
created to link the level of service to
the valuation and depreciation.
Factors Used:
Holistic and Component Specific
Factors
The following diagrams show the requirements of AASB 116. In particular –





9
The amount to depreciated is limited to the Depreciable Amount
The Depreciable amount is the Value less the Residual Value
The “Intervention Point” represents a point where the “old” asset is disposed and
replaced with a “new” asset
Depreciation is to be expensed over the “Useful Life” of the asset
The “Useful Life” or “economic life” of the asset is the time to intervention.
AASB 116 Paragraph 62
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February 2009
Pattern of Consumption
A variety of depreciation methods can be used to allocate the depreciable amount of an
asset on a systematic basis over its useful life. These methods include the straight-line
method, the diminishing balance method and the units of production method. Straight-line
depreciation results in a constant charge over the useful life if the asset's residual value does
not change. The diminishing balance method results in a decreasing charge over the useful
life. The units of production method results in a charge based on the expected use or output.
The entity selects the method that most closely reflects the expected pattern of consumption
of the future economic benefits embodied in the asset. That method is applied consistently
from period to period unless there is a change in the expected pattern of consumption of
those future economic benefits.10
There are four alternative “patterns of consumption” which can be used –
Pattern of Consumption
Constant
Increasing
Reducing
Variable
10
Examples
Straight-Line
Condition Based Depreciation
Consumption Based Depreciation
Diminishing Balance Method
Condition Based Depreciation
Consumption Based Depreciation
Units of Production
AASB 116 Paragraph 62
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Useful Life
"Useful life" is defined as –
(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.11
The useful life of an asset is defined in terms of the asset's expected utility to the entity. The
asset management policy of the entity may involve the disposal of assets after a specified
time or after consumption of a specified proportion of the future economic benefits
embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic
life. The estimation of the useful life of the asset is a matter of judgement based on the
experience of the entity with similar assets.12 For example, the council may have a policy to
trade in graders for new ones after 10 years service. In this case the Useful Life of the
Grader to the council is 10 years whereas its Economic Life is somewhat longer because it
can be used for a number of more years by a different entity.
Useful Life needs to be considered in the context of how the asset is consumed and the
impact of cyclical maintenance. The renewal of an asset represents the disposal of the
existing asset and the creation of a new asset with a new “useful life”. When the straightline method is incorrectly applied the main cause for the error is the adoption of incorrect
assumptions such as Useful Life, Age, RUL or Residual Value.
11
12
AASB 116 Paragraph 6
AASB 116 Paragraph 57
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February 2009
Extreme care needs to be taken to ensure that any formulas used to calculate the
depreciation reference the appropriate fields within the Asset Register. The following
example demonstrates the extreme risk for material misstatement caused by the incorrect
application of commonly adopted formulas.
Example – Application of Straight-Line Depreciation
The following example shows how the incorrect application of straight-line depreciation can
result in material misstatement of Fair Value and Depreciation Expense.
In this example, three different calculations have been performed using straight-line
depreciation, the same formulas and based on the same assumptions. The formulas applied
are –
 Useful Life = Age + RUL (Remaining Useful Life)
 Depreciation Expense = (Gross – Residual Value) / Useful Life
 WDV = Gross – (Depreciation * Age)
Each of the following approaches results in three different answers with only one being
correct. The other two result in material misstatement of both WDV and Depreciation
Expense. This example demonstrates the care that needs to be taken when applying the
formulas.
The assumptions are –




Asset originally commissioned 40 years ago.
Based on current condition the RUL is assessed as another 40 years.
The Gross Cost of the asset is $50,000
Every 15 years the asset is renewed at a cost of $15,000 which restores the asset
back to “as new” with a Design Life of 50 years.
The differences between the various methods of calculation are –



Methods A and B assume the “Age” is 40 years because the asset was originally
commissioned 40 years ago. Whereas Method C recognises that the asset was
“renewed” back to “as new” 10 years ago and therefore its real age is only 10 years.
Methods B & C recognise that based on the typically asset management practices of
the council the asset will be renewed “back to as new” in 5 years time and therefore
the RUL is 5 years. Method A assumes a RUL of 40 years being the estimate of time
to total “end of life”
Methods B & C have assessed the Residual Value as $35,000 being the estimated
value of the asset at the time of next renewal whereas Method A has assumed a Nil
Residual Value at “end of life”.
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
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The three different calculations are –
Gross
Age
RUL
Useful Life
(Age + RUL = UL)
Residual Value
Depreciation
(Gross – RV) / UL
Method A
$50,000
40 years
(since date of
commissioning)
40 years
Based on current
condition
80 years
Method B
$50,000
40 years
((since date of
commissioning)
5 years
Based on estimated RUL
till next renewal
45 years
Method C
$50,000
10 years
(date since last renewal)
Nil
Assets like these
never sold
$625
($50k - $0) / 80
$35,000
Gross less renewal to
bring back to “as new”
$333
($50k - $35k) / 45
$35,000
Gross less renewal to
bring back to “as new”
$1,000
($50k - $35k) / 5
5 years
Based on estimated RUL
till next renewal
15 years
Only Method C calculates the WDV and depreciation expense correctly. The impact of the
error for methods A & B are as follows –
Method A
WDV
$25,000
%Error
(37.5%)
Depreciation $625
%Error
(37.5%)
Method B
36,667
(8.3%)
$333
(66.7%)
Method C
40,000
$1,000
-
The following diagram shows the impact of the different methods and the error in
calculation caused by referencing the formula to the incorrect data within the Asset
Register.
50,000
45,000
WDV
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
2050
80
2020
50
2045
2015
45
75
2010
40
2040
2005
35
70
2000
30
2035
1995
25
65
1990
20
2030
1985
15
60
1980
10
Method B
2025
1975
5
Method A
55
1970
Age
0
-
Year
Method C
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Residual Value
Residual Value is defined as –
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.13
The nature of most local government infrastructure assets is such that the assets cannot
ever be sold. However, this does not mean they have no Residual Value.
In relation to cyclical maintenance assets, the renewal of an asset represents the disposal of
the existing asset and creation of a new asset with a new “Useful Life”. For example, the
cost to construct a road seal on a new road might be $25,000 but the cost of a re-seal in 10
years time may only be $15,000 because the number of coats or thickness of the seal to be
placed on top of the existing seal may be less. In this situation the Residual Value would be
$10,000. This is because a renewal of $15,000 results in the creation of an “as new” asset
with a Gross Value of $25,000. i.e. You spend $15,000 and get in an asset worth $25,000.
Therefore the proceeds from the disposal of the old asset (Residual Value) is $10,000.
Depreciable Amount
The Depreciable Amount is defined as –
the cost of an asset, or other amount substituted for cost, less its residual value. 14
AASB 116 requires "the systematic allocation of the depreciable amount of an asset over its
useful life.”15 By default, it does not allow the depreciation of the “non-depreciable”
amount.
13
AASB 116 Paragraph 6
AASB 116 Paragraph 6
15
AASB 116 Paragraph 6
14
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
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From a practical perspective, this means that the Written Down Value of an asset cannot be
less than the Residual Value. The risk of this occurring is increased when the Residual Value
of infrastructure assets is assumed to be nil without first considering the impact of asset
management strategies employed at the council.
For example, most assets tend to be renewed when they are delivering an adequate level of
service because the community is not prepared to accept assets delivering poor levels of
service. Typically the renewal treatment is less than the Gross Current Replacement cost
and therefore indicates the existence of a Residual Value. If Residual Value is incorrectly
assumed to be nil, over time the entire value of the asset will be depreciated rather than
just the depreciable amount. This is because the full value (both the Depreciable Amount
and the Non-Depreciable Amount) of the asset would be depreciated and will result in
material misstatement. The risk is demonstrated in the following diagram.
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APPLICATION: OVERVIEW
Selecting the Best Method
There is no “one best” method that should be applied across all assets. To be successful, the
method must be cost effective and must “reflect the pattern of consumption” of the asset’s
service potential so as to enable the users of the financial statements to make sound
economic decisions.
The purpose of the financial statements is to provide the general purpose users with
information about the current financial status of the council and its performance during the
past 12 months. It is therefore critical that the statements reflect a “true and fair” view of
the value of the assets as well as the amount of loss of value the council expects to
experience in the next 12 months via consumption (depreciation).
For an individual asset, if the rate of consumption is expected to be greater than the
previous year, the depreciation method employed should also reflect an increase in the rate
of consumption. If the rate of consumption is expected to be constant till the end of life the
adoption of a straight-line method would be appropriate.
When selecting the best method to adopt, consideration should be given to –






The nature and size of the portfolio
The risk of material misstatement
Whether the asset tends to be renewed through cyclical maintenance
How often the asset is replaced
How the asset’s service potential is consumed
Whether the information is reliable and relevant enabling it to be used to assist in
other decisions across the local government
Straight-Line Depreciation
The straight-line method is considered most suitable to short lived assets that do not
experience renewal through cyclical maintenance. Typically these tend to be minor items of
plant and equipment such as computers, office equipment, motor vehicles, etc. In these
circumstances there is generally sufficient and appropriate evidence to support key
assumptions such as Useful Life and Residual Value.
In some circumstances the straight-line method may be appropriate for long lived assets.
This is dependent upon –



the “pattern of consumption” being constant
strong evidence to support the critical assumptions of Useful Life, Residual Value and
Remaining Useful Life and
Frequent revaluation whereby Useful Life, Remaining Useful Life and Residual Value
are reviewed and if appropriate re-estimated.
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Where there is little evidence to support the critical assumptions or there is a high level of
uncertainty regarding future projections of when and what renewal will occur, the
appropriateness of this method becomes increasingly questionable.
The calculation is based purely on age. Where appropriate consideration is not given to
technical or commercial obsolescence there is a risk of non-compliance with UIG
Interpretation 1030. Care also needs to be taken to ensure any adjustments resulting from a
change in the RUL or RV are adjusted prospectively and not retrospectively.
The main advantages of the traditional approach to Straight-Line Depreciation are its
simplicity and ease of calculation. However, it should be noted that the option to use it “for
simplicity when the pattern of consumption could not be determined easily” was removed
from the accounting standards in 1997 (AAS 4).
The main disadvantages or risks of applying this method are 



The difficulties experienced in trying to find evidence to support the critical
assumptions (Useful Life, RUL and RV) when trying to depreciate long-lived assets
such as roads, water, sewerage, buildings, etc. The adoption of an assumption that is
more than 5% incorrect will lead to material misstatement of the figures in the
financial statements.
Critical assumptions can easily be incorrectly adopted. As previously demonstrated it
is easy to incorrectly apply Straight-Line by adopting erroneous assumptions. In
many cases the assumptions appear correct but do not reflect the reality of the
assets lifecycle.
The method is often applied without due consideration being given to the impact of
obsolescence. This would result in non-compliance with UIG Interpretation 1030.
When a change is made to a critical assumption many automated systems (Asset
Registers) tend to apply the changes retrospectively against the individual asset
rather than applying it prospectively as required by the accounting standards.
Essentially this results in a revaluation of the asset and therefore would require
revaluation of the entire asset class.
19
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
EXAMPLE - STRAIGHT-LINE DEPRECIATION
The cost to Council for a new Road "Seal" using 3 coats is $50,000
At the time of construction, it is estimated that the road will need to be "re-sealed" with one coat in 10 years time.
The cost of a "re-seal" is estimated to be $35,000.
Gross =
RV =
Useful life =
$50,000
$15,000
10 years
Depreciation = (Gross - Residual Value) / Useful Life
(50,000 - 15,000) / 10
$3,500 p.a.
WDV
50,000
46,500
43,000
39,500
36,000
32,500
29,000
25,500
22,000
18,500
15,000
50,000
40,000
WDV
0
1
2
3
4
5
6
7
8
9
10
Example - Straight-Line Depreciation
60,000
30,000
20,000
WDV
10,000
0
1
2
3
4
5
6
7
8
9
10
Years
As previously stated, one of the most common problems with the application of the
traditional straight-line approach is when changes are made to the critical assumptions. For
example – changing the RUL or Residual Value. AASB 116 requires these to be reassessed at
least at the end of each year. When either of these is changed the standard requires the
changes to be made prospectively and does not allow the changes to be made
retrospectively.
Unfortunately, many systems treat the changes to these assumptions retrospectively by
revaluing the asset and calculating a new depreciation rate. If you choose to do this you
must also revalue the entire class of asset. The following example demonstrates the impact
of a prospective change driven from a change in the estimate of RUL.
20
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
CHANGE IN ASSESSMENT OF REMAINING USEFUL LIFE
After 5 years a "condition assessment" is performed. There are serious concerns over the seal condition.
As a result, the Remaining Useful Life is changed from 5 years to 7 years
At this point the WDV was $32,500. Therefore the depreciation is now calculated as (WDV - RV) / RUL
WDV =
32,500
RV =
15,000
RUL =
7
Depr Exp =
2,500
60,000
Example - change of estimate of RUL
50,000
40,000
WDV
0
1
2
3
4
5
6
7
8
9
10
11
12
WDV (Original) WDV (Revised)
50,000
50,000
46,500
46,500
43,000
43,000
39,500
39,500
36,000
36,000
32,500
32,500
29,000
30,000
25,500
27,500
22,000
25,000
18,500
22,500
15,000
20,000
17,500
15,000
30,000
WDV (Original)
20,000
WDV (Revised)
10,000
0
1
2
3
4
5
6
7
8
9 10 11 12
Years
RE-NEWAL AND REASSESSMENT OF REMAINING USEFUL LIFE
At end year 12 years the road is finally "resealed".
As a consequence, the time to next re-seal is estimated to be 8 years.
The cost to Council for a new Road "Seal" is now estimated at $80,000 and a re-seal at $50,000
Gross Cost =
80,000
RV =
30,000
RUL =
8
Depr Exp =
6,250
WDV (Revised)
50,000.0
46,500.0
43,000.0
39,500.0
36,000.0
32,500.0
30,000.0
27,500.0
25,000.0
22,500.0
20,000.0
17,500.0
15,000.0
80,000.0
73,750.0
67,500.0
61,250.0
55,000.0
48,750.0
42,500.0
36,250.0
30,000.0
Example - renewal and reassessment of RUL
90,000.0
80,000.0
70,000.0
60,000.0
WDV
0
1
2
3
4
5
6
7
8
9
10
11
12
12
13
14
15
16
17
18
19
20
50,000.0
40,000.0
WDV (Revised)
30,000.0
20,000.0
10,000.0
0 1 2 3 4 5 6 7 8 9 10 11 1213 14 1516 17 1819 20
Years
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Condition Based Depreciation
Condition Based Depreciation methods rely upon a known correlation between the physical
characteristics of the asset (e.g. cracking, rutting, roughness, oxidisation) and the relevant
remaining useful life.
It is generally only considered appropriate where the consumption of the asset is primarily
dependent upon the physical condition of the asset. Care needs to be taken to ensure that
the critical assumptions (correlation between each condition assessment and RUL) can be
supported by sufficient and appropriate audit evidence.
In some cases, the RUL of asset may be affected by non-physical factors. In these
circumstances, if appropriate consideration is not given to technical or commercial
obsolescence there is a risk of non-compliance with UIG Interpretation 1030.
The main advantages of Condition Based Depreciation are –



It encourages the capture of data that supports both asset management
(engineering) and accounting needs
The development of condition models provides a better understanding of the
lifecycles and deterioration of the council’s physical assets and hence supports the
asset management function
It enables the objective measure of where an asset is within its lifecycle
The main disadvantages are –



The level of complexity and resources required to identify measure and develop
lifecycles based on specific condition scores. As a result these models tend to only be
developed for roads, sewerage and water assets where the cost/benefit can be
justified.
Often “standard models” are adopted and not “customised” and “validated” for the
particular entity. As a result, there is a risk that the model and measures may not be
relevant, accurately reflect the level of remaining service potential or reflect the rate
of consumption for the particular entity.
The method tends to focus solely on physical condition and as a result is often
applied without due consideration being given to the impact of obsolescence. This
would result in non-compliance with UIG Interpretation 1030.
22
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
EXAMPLE - CONDITION BASED DEPRECIATION
Council has implemented a Pavement Management System
In doing so, it has created a number of algorithms to estimate the RUL of each "seal"
based on various condition scores.
The algorithms for each condition result in the following correlation with estimated RUL
Zero RUL represents total end of life
RUL is assessed on each condition with lowest RUL adopted.
The cost of a "re-seal" is estimated to be $35,000.
Gross Cost =
50,000
RV =
$ 15,000
Useful Life =
10 years
Factor 3
2%
4%
5%
8%
10%
13%
15%
20%
30%
35%
500
30%
25%
400
20%
300
15%
200
10%
100
5%
0
0%
10
8
6
5
4
3
2
1
0
RUL (Years(
In year 3 a "condition assessment" was performed. The results were ACTUAL CONDITION
Factor 1
Factor 2
125
440
RUL
6
5
Therefore RUL =
5
In turn, this leads to a "revaluation" RV =
$ 15,000
Gross =
$ 50,000
Useful Life =
10
RUL =
5
Factor 3
4%
8
Depreciation =
(Gross - RV) / UL
($50k - $15k) / 10
$
3,500
WDV =
Gross - ((Useful Life - RUL) * Depreciation)
$50k - ((10 - 5)* $3,500)
$ 32,500
23
Factor 3 Score
Factor 2
500
490
470
440
400
360
345
305
280
Factor 1 & 2 Scores
CONDITION ALGORTHYM
Condition Scores
RUL (Years)
Factor 1
10
150
8
140
6
125
5
105
4
90
3
75
2
50
1
30
0
10
Chart Title
600
Factor 1
Factor 2
Factor 3
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Consumption Based Depreciation
Consumption Based Depreciation 16is based on measuring the level of the asset’s remaining
service potential after taking into account both holistic and component specific factors. It
was developed from the SLAM (Straight-Line Asset Management) methodology originally
published in the “2000 Queensland Audit Office Better Practice Guidelines for Local
Governments” and is commonly referred to as the Advanced SLAM methodology.
It relies upon the determination of a “pattern of consumption” consistent with the asset’s
Residual Value and path of transition through the various stages of an asset’s lifecycle.
The method uses a Dynamic Matrix to identify a small number of Phases of the asset’s
lifecycle based on the factors that indicate how it is consumed. Based on the entity’s
knowledge of how long the asset transitions from Phase to Phase and the cost of the final
renewal treatment a Valuation and Depreciation Model is determined. The Advanced SLAM
17
methodology is represented as follows –
The method uses the same formulas as used for Straight-Line Depreciation except that
instead of depreciating from the WDV to the Residual Value of the RUL it only depreciates
from the WDV to the value at the next phase over the expected time of transition through
that phase.
To demonstrate, the following example assumes –





16
17
Gross Current Replacement Cost = $100,000
Residual Value = $50,000 (50%)
Phase 3 (WDV = $75,000 and time of transition = 10 years)
Phase 4 (WDV = $65,000 and time of transition = 5 years)
Phase 5 (fully depreciated. RV = $50,000)
Prabhu-Edgerton Asset Management Consumption Model 2007 (www.apv.net)
Prabhu-Edgerton Asset Management Consumption Model 2007 (www.apv.net/downloads)
24
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
If the asset was assessed as being at Phase 4 the calculation of depreciation would
be the same under Straight-Line and Consumption Based. i.e. ($65,000 - $50,000) / 5
years = $3,000.
If however it had been assessed as at Phase 3 the calculations would be different.
Straight-Line Depreciation ($75,000 - $50,000) / 15 years = $1,667
Consumption Based Depreciation ($75,000 - $60,000) / 10 years = $1,500
The main advantages of this method are that 



is that it enables a wide range of factors to be incorporated into the assessment
process while delivering a simple and cost effective mechanism to assess the level of
remaining service potential (WDV) and rate of depreciation
it allows increased flexibility to provide different weightings for different factors
depending upon which factors are impacting individual assets
it significantly reduces the risk of material misstatement because the highest rate of
depreciation coincides with the phases where there is the highest level of assurance
over the critical assumptions
sufficient and appropriate audit evidence is easily supported by the council’s Asset
Management Plans.
The main disadvantages of this method are –


it is relatively new and has only been implemented in a small (but rapidly increasing)
number of councils.
due to its relative newness, many of the common Asset Register systems are yet to
implement Consumption Based Depreciation into their systems. However, most can
accommodate the methodology via import of calculations from Excel or changing the
RUL and RV assumptions to reflect the relevant figures for the next phase.
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
The method is best used for long-lived cyclical maintenance assets where there is little
evidence to support the critical assumptions of alternative methodologies such as StraightLine and Condition Based Depreciation.
EXAMPLE - CONSUMPTION BASED DEPRECIATION
Council has developed a Consumption Based Depreciation methodology for its infrastructure assets.
As part of this process a Dynamic Matrix was created for assessment of Road Infrastructure assets.
The relevant factors identified as relevant to assessing the remaining level of service potential were Holistic Level
Functionality
Capacity
Safety
Obsolescence
Component Level
Physical Condition
Breakage & Repair History
The following assessment criteria were developed to provide a condition rating Phase Points
0
Description
Brand 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 provide 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 some concerns over the
ability of the asset 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 that will 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.
5
At intervention point. No longer providing an acceptable level of service. Requires
immediate renewal, replacemernt or closure.
End of Life
Theoretical end of life
After considerable discussion on "how the asset is normally consumed" it was agreed within the
council that the biggest factors driving consumption of the asset were physical condition and
obsolescence. It was considered that these factors became significantly more critical as the asset
approached the point of requiring immediate attention. i.e. Renewal or replacement.
Accordingly, the "pattern of consumption" was considered to have a "moderate level of
acceleration" as the asset approached that phase in the lifecycle.
Based on experience of the council the following assumptions were adopted Useful Life - in the range 40 - 80 years (adopt 60)
Residual Value - tend to do chemical stabilisation. Cost to renew approx 70%. There adopt 30%
Pattern of Consumption - Moderate acceleration towards end of life
26
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Based on this understanding, the following lifecycle was also developed for Road Pavement Phase
Details
% RSP
Time through phase
Depr Rate
0
1
2
3
4
5
6
100%
93%
83%
69%
51%
30%
0%
15
0.467%
15
0.700%
15
0.933%
9
1.944%
6
3.500%
6
5.000%
Example - Consumption Profile Road Pavement
120%
100%
80%
60%
40%
WDV
20%
0%
65
60
55
50
45
40
35
30
25
20
15
10
5
0
RUL (Years)
Based on assessment of the holistic and component specific factors it was assessed that the asset
was currently at Phase 1 because the pavement was in a very good condition and there were
no concerns with long term obsolescence. Accordingly they felt the level of remaining
service potential was HIGH
The Gross Current Replacement Cost was $1,000,000.
Based on the Consumption Profile WDV =
93% * $1,000,000
$930,000
Depreciation =
0.700% * $1,000,000
$7,000
Renewals Annuity
The Renewals Annuity method cannot be used for financial reporting purposes. It is
specifically prohibited by UIG Interpretation 1030.
However, its use for financial modelling as part of the Asset Management Plan is highly
recommended. The method assumes the existing assets will be maintained at a constant
level of service via ongoing cyclical maintenance.
The net cash flows to undertake the maintenance and renewal are projected out over an
extended period (e.g. 20 years) and are then converted to an annuity to provide an
annualised average cost to maintain the asset.
This method provides an estimate of the amount of funding required to meet future needs
and converts it to an annuity so that the relevant funds can be accumulated consistently and
equitably over a long period so as to avoid sudden significant variations in funding needs.
27
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
APPLICATION: PRACTICAL
Decision Tree
18
18
APV Valuers and Asset Management (Edgerton) 2008 (www.apv.net/downloads)
28
‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Components
Irrespective of the asset class, the first step is consideration of whether the asset is a
“complex asset” meaning that it is comprised of a number of significant components with
varying rates of consumption. If so (and most likely for infrastructure assets) it is imperative
to identify the components which are to be valued and depreciated.
Assets valued at “Market Value” are generally considered to only have one component
because the asset cannot be split into different components and sold separately. With a few
exceptions, most infrastructure assets are deemed to be “complex” assets and are valued
on the Depreciated Current Replacement Cost basis and not on the Market Value basis.
Types/Materials
Typically, a council will have a range of assets within the same Asset Class and the same
Components but are either constructed of different materials or for environmental or other
reasons are subject to differing “patterns of consumption”.
Where the “pattern of consumption” for a particular “Type” is different from another
“Type”, separate depreciation rates are also required.
Structure of the Asset Register
Ultimately, every council is unique. Whether it is because of the different range of assets,
asset management strategies, availability of funding or simply that the expectations of the
community are different between communities requiring differing levels of service.
To be effective, the Asset Register needs to be structured so as to provide the necessary
information to enable compliance with the Accounting Standards as well as assisting in the
provision of good corporate governance which includes good Asset Management.
Consideration also needs to be given to “materiality” and the relationship between the cost
of collecting data and the level of detail to be captured. For example, the cost of collecting
data on 300 components of a building is significant. For an office building 5 – 7 components
is probably sufficient.
Consequently, the setting of Asset Classes, Components and Types needs to be considered
in light of the unique circumstances of the council and its information needs. The following
schedules provide as guidance only of commonly adopted Asset Register Structures. A
limited number of common examples are provided for “Type” as these tend to be unique for
each council.
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
BUILDINGS AND OTHER STRUCTURES
Buildings (Complex)
Component
Floor
Envelope
Fit Out (Floors)
Fit Out (Internal Screens)
Roof
Mechanical Services
Other Services
Type (examples only)
Timber, Concrete
Timber, Concrete, Steel, Glass, Cavity Brick
Carpet, Vinyl, Polished Timber, Tiles
Plaster Board, Timber Panel, Hardboard
Colour Bond, Cement Tile, Concrete
Air Conditioners - split, ducted and wall
Fire, Emergency, Transport
Other Structures
Component
Fence
Hardstand
Internal Roads
Landscaping
Retaining Walls
Security
Miscellaneous
Type (examples only)
timber, steel, short life, long life
bitumen, gravel, concrete
bitumen, gravel, concrete
water features, edging, paving
rock, timber, long life, short life
lights, systems
swim pools, tennis courts
SEWERAGE INFRASTRUCTURE
Passive Assets
Component
Mains
Manholes
Type (examples only)
AC, UVC, PVC, Hobas, Cast Iron
Standard
Active Assets
(Filtration Plant, Pump Stations, etc)
Component
Type (examples only)
Civil
Standard
Electrical
Standard
Mechanical
Standard
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
ROADS, BRIDGES AND STORMWATER
Sealed Roads
Component
Formation
Pavement
Seal
Type (examples only)
Standard
Standard, CBD
Asphalt, Chip Seal
Unsealed Roads
Component
Formation
Pavement
Seal
Type (examples only)
Standard
Standard, Gravel
Gravel
Bridges
Component
Super-Structure
Sub Structure
Rails
Surface
Type (examples only)
Concrete, Timber, Steel Suspension
Concrete, Timber, Steel Suspension
Concrete, Timber, Steel Suspension
Asphalt
Miscellaneous
Component
Footpaths
Kerb & Channel
Stormwater
Reservoirs
Bores
Weir
Dam
Levee Bank
Type (examples only)
Concrete, Bitumen, Gravel, Paved
Left, Right, Traffic Island, Concrete
Reline, No Reline, Concrete
Concrete, steel
Standard
Concrete, Earth
Concrete, Earth
Earth
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
OVERVIEW OF PRESCRIBED REQUIRMENTS
AASB 116 “Property Plant and Equipment”
The purpose of depreciation is record the value (or cost) of the asset that has been
consumed during the accounting period so that users of the financial statements can discern
information about the council’s assets.
Most critical is the requirement that the depreciation method used shall reflect the pattern
in which the asset's future economic benefits are expected to be consumed by the entity19.
There are a number of other specific requirements prescribed by AASB 116. These include –




Where the asset has a number of different components, each component is to be
depreciated separately
Depreciation is to be calculated on a systematic basis over its useful life
A “Residual Value” needs to be determined and must not be depreciated
As a minimum, the pattern of consumption, Useful Life and Residual Value need to
be reassessed at year end and the depreciation method adjusted if there are any
significant changes.
The specific requirements of the Standard include –
Para
6
43
50
51
60
61
19
Requirement
"Depreciable amount" is the cost of an asset, or other amount substituted for
cost, less its residual value.
Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated
separately.
The depreciable amount of an asset shall be 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 and, if expectations differ from
previous estimates, the change(s) shall be accounted for as a change in an
accounting estimate in accordance with AASB 108 Accounting Policies,
Changes in Accounting Estimates and Errors.
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, if there has been a significant
change in the expected pattern of consumption of the future economic
benefits embodied in the asset, the method shall be changed to reflect the
changed pattern. Such a change shall be accounted for as a change in an
accounting estimate in accordance with AASB 108.
AASB 116 Paragraph 60
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
Interpretation 1030 “Depreciation of Long Lived Physical Assets: Condition Based
Depreciation”
In addition to AASB 116 “Property Plant and Equipment” there exists an additional
prescribed requirement of particular relevance to local government assets. UIG Accounting
Interpretation 1030 “Depreciation of Long-Lived Physical Assets: Condition Based
Depreciation and Related Matters.
The Interpretation identifies the characteristics of condition-based depreciation and other
related depreciation methods that do not satisfy the requirements of Accounting Standard
AASB 116 Property, Plant and Equipment. Such depreciation methods have been proposed to
be applied in relation to long-lived assets such as infrastructure assets, particularly where
the assets are subject to detailed management plans to maintain the service levels of the
assets.20
The requirements of UIG Interpretation 1030 applies to all depreciation methods (not just
Condition Based Depreciation methods) that are used to depreciate long-lived physical
assets such as those typically controlled by local governments. For example – roads and
bridges, water and sewerage infrastructure, buildings, etc. This includes straight-line,
condition based or consumption based depreciation methods.
This requirement is often incorrectly misinterpreted as prohibiting the use on Condition
Based Depreciation. The requirement does not prohibit use of any method providing that it
complies with the requirements of AASB 116. The requirement simply states that any
method (including straight-line or any other method) that include any of five characteristics
do not comply with AASB 116. In particular –





Depreciation is not calculated by reference to the “depreciable amount”
Appropriate consideration is not given to technical and commercial obsolescence
Maintenance and Capital expenditure are not separable identified and accounted for
in accordance with AASB 116
Use of the “renewals annuity” method
Depreciation is not calculated separately for each component.
Prior to 1997, the then relevant accounting standard (AAS4 “Depreciation”) stated that the
method of depreciation “should” reflect the pattern of consumption of the assets service
potential. It also provided that where this was not easily determined that “straight-line
depreciation” could be used due to its simplicity. However, in 1997 AAS4 was amended by
removing the easy straight-line option and mandated that “The depreciation method applied
to an asset must reflect the pattern in which the asset's future economic benefits are
consumed or lost by the entity.21”
20
Accounting Interpretation 1030
21
AAS4 Depreciation Paragraph 5.1 (issued August 1997)
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
As a consequence, a range of depreciation methodologies were put forward as alternatives.
These included a number of different Condition Based Depreciation methodologies and,
amongst others, included the Renewals Annuity approach.
UIG 30 (since re-issued as UIG Interpretation 1030) was issued to address some of the
concerns raised about the various alternative methodologies and their impact on the
financial statements. UIG Interpretation 1030 states “Adoption of CBD or similar methods of
depreciation can have a significant impact on the operating results of public and private
sector entities. Differing views are held about the extent to which all, or some, CBD methods
comply with the requirements of AASB 116. Concern has been expressed that, in the absence
of specific authoritative guidance, diverse, and potentially inappropriate, practices may
develop and/or become entrenched. Some commentators note that whatever the benefits of
CBD and similar methods for asset management, cost projection, cash flow budgeting and
pricing purposes, for financial reporting purposes the depreciation method adopted by an
entity must comply with the requirements of AASB 116.”22
The consensus view states –
8.
(a)
(b)
(c)
(d)
(e)
22
23
Condition-based depreciation and other methods of depreciation of long-lived
physical assets, including infrastructure assets, that include any of the following
characteristics do not comply with AASB 116, and shall not be adopted:
the depreciation expense is not determined by reference to the depreciable
amount of the asset;
the depreciation expense is determined without consideration of technical and
commercial obsolescence, such as potential changes in consumer demand, and
related factors which can influence the consumption or loss of future economic
benefits during the reporting period;
expenditure on maintenance and on enhancement of future economic benefits
are not separately identified where reliable measures of these amounts can be
determined, and are not recognised as an expense of the reporting period in
which the expenditure was incurred in the case of maintenance expenditure or
as an asset in respect of asset enhancement expenditure;
the asset is presumed to be in a steady state and a "renewals accounting"
approach is adopted whereby all expenditure on the asset is recognised as an
expense in the period in which it is incurred without consideration of whether
that expenditure enhances the future economic benefits of the asset; and
the major components of complex assets are not identified and are not
depreciated separately where this is necessary to reliably determine the
depreciation expense of the reporting period.23
UIG Interpretation 1030 Paragraph 6
UIG Interpretation 1030
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
In summary, AASB 116 and UIG Interpretation 1030 enables application of any method of
depreciation provided the method –
•
•
•
•
•
•
•
•
Matches the “pattern of consumption”
Only depreciates the “Depreciable Amount”
Depreciates the asset over the Useful Life in a systematic way
Calculates depreciation by reference to the Depreciable Amount
Includes allowance for Technical or Commercial Obsolescence
Treats maintenance and capital in accordance with AASB 116
Does not use the “Renewals Annuity” approach
Calculates depreciation separately for significant components
Auditing Standards
Since 1 July 2006 the audits of all local governments are required to be conducted in
accordance with the requirements of the Australian Auditing Standards (ASA).
There are two major differences between the new Australian Auditing Standards (ASA) and
its predecessor the Auditing Practice Statements (AUP). They are –
 The ASAs now carry “force of law” whereas the AUPs were only a professional
obligation and not a legally enforceable requirement.
 In the main, the word “should” has been replaced with the word “shall”. This
removes significant flexibility for the auditor to disregard or to choose not to
perform certain audit procedures. The auditors are now compelled to complete all
procedures as detailed in the Auditing Standards.
There are a number of Auditing Standards that have a direct impact in relation to
infrastructure assets. These are –
 ASA 500 Audit Evidence
 ASA 540 Audit of Accounting Estimates
 ASA 580 Management Representations
 ASA 620 Using the Work of an Expert
 ASA 545 Auditing Fair Value Measurements & Disclosures
The Auditing Standards are based upon the concept of the auditor satisfying a number of
audit assertions. These include –
(a) Assertions about classes of transactions and events for the period under audit:
(i) Occurrence - transactions and events that have been recorded have
occurred and pertain to the entity.
(ii) Completeness - all transactions and events that should have been
recorded have been recorded.
(iii) Accuracy - amounts and other data relating to recorded transactions and
events have been recorded appropriately.
(iv) Cut-off - transactions and events have been recorded in the correct
accounting period.
(v) Classification - transactions and events have been recorded in the proper
accounts.
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
(b) Assertions about account balances at the period end:
(i) Existence - assets, liabilities, and equity interests exist.
(ii) Rights and obligations - the entity holds or controls the rights to assets,
and liabilities are the obligations of the entity.
(iii) Completeness - all assets, liabilities and equity interests that should have
been recorded have been recorded. 24
In essence, and in relation to infrastructure assets, they require the auditor to
 obtain sufficient and appropriate evidence over the completeness and accuracy of
the asset register
 assess the appropriateness and logic of the valuation and depreciation
methodologies
 ensure that the methodologies fully comply with the Australian Accounting
Standards. In particular AASB116 “Property Plant and Equipment”
 assess the competence, experience and objectivity of any experts used within the
valuation and depreciation exercise
 obtain representations from management over a range of issues
 obtain sufficient and appropriate evidence to support the critical assumptions used
within the methodology.
24
Australian Auditing Standard ASA500 “Audit Evidence”
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‘Depreciation of Infrastructure Assets’ Technical Information Paper
February 2009
ACKNOWLEDGEMENTS
This paper has been developed via a detailed analysis of concepts and practices by the
author as well as the Financial Management Group Project Team. This has included review
of numerous drafts and a series of detailed discussions and workshops.
Its purpose is to provide an avenue for further discussion and enhancement of South
Australian Local Government Financial Management practices and any feedback or
comment is welcomed.
David Edgerton FCPA
Director
APV Valuers and Asset Management
Email:
Phone:
Web:
Address:
david@apv.net
0412 033 845 (mob)
www.apv.net
Head Office (Brisbane)
(07) 3221 3499
Level 11, 379 Queen St
Brisbane QLD 4000
South Australia
(08) 8311 3949
Level 3, 97 Pirie Street
Adelaide SA 5000
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