Implications of AASB’s
Residual Value Decision
David Edgerton FCPA
Director
Quality + Expertise +
Flexibility + Innovation =
Confidence & Real Value
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Outline
•
•
•
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Background and context
Key points of the decision
What it means
Issues and solutions
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Background and context
• Oct 2014 Question to AASB
• Assets subject to renewal
– Recognition that ‘value is preserved’ and ‘costs
saved’ through recycling
– Different practices adopted
– Was there need to change definition of RV?
• AASB
– Tentative Decision (Feb 2015)
– Final decision May 2015
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AASB Research and Outreach
• Board identified two approaches
• View One (RV = zero)
• View Two (RV = cost saved through recycling)
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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 of the decision
• RV is the amount received as consideration
when control is relinquished.
• Therefore likely to be nil or insignificant
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However • Assets need to be appropriately
componentised
• If components renewed – split into short and
long life components and depreciate
separately
• Furthermore – Components do not have be
physically identifiable
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In addition
• Subject to materiality: OK to use RV as the
separate component and using blended
depreciation rates
• Concept of depreciation is different for
valuation than for financial reporting
– valuation and depreciation expense are not
linked
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For example:
20m dredged channel
A
D
Long
Depreciation
Short
Fair Value
Replacement Cost
Valuation
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What it Means
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If Current Assume Zero RV
• Does not mean your depreciation expense is
correct !
• Most likely over-stated
• Need to consider whether you need to split
between short-life and long-life components
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Assume:
Example
Component A
Component B
Total
40,000
40,000
40
1,000
60000
0
60,000
30
2,000
100,000
Component A
Component B
Total
25,000
15,000
40,000
15,000
45,000
60,000
100,000
Short-Life
Gross
Residual Value
Depreciable Amount
Useful Life
Depreciation Expense
25,000
0
25,000
40
625
15,000
0
15,000
30
500
1,125
Long-Life
Gross
Residual Value
Depreciable Amount
Useful Life
Depreciation Expense
15,000
0
15,000
100
150
45,000
0
45,000
100
450
600
Replacement Cost
Residual Value
Depreciable Amount
Useful Life
Depreciation Expense
However:
Component A
Component B
Replacement Cost
Short-Life
Long-Life
Total
Variance
3,000
Cost of Renewal
25,000
15,000
775
950
1,725
-22.5%
-52.5%
-42.5%
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Different Approach
= Different Results
Traditonal APV Traditonal Straight-Line
(Consumption Based) (no split & standard UL)
Straight-Line
(split & standard UL)
Straight-Line
(split & tailored UL)
Buildings
1,328,438
1,706,734
1,179,427
984,381
Roads
5,550,968
9,480,961
6,372,157
5,250,801
Water & Sewerage
3,214,552
3,933,271
3,391,687
2,807,050
10,093,958
15,120,966
10,943,271
9,042,232
Total
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If Currently Adopt RVs …
• Need to reassess split between short-life and
long-life parts
• Need to reassess short UL
• Need to depreciate the long-life part (not
previously depreciated)
• Long-Life UL may be greater than service life
of the greater asset
• Consider materiality
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Issues and solutions
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Assumptions
• Split between short & long?
– If not done – then do
– If used RV – adopt as default
• Useful life long?
– Detailed discussions with asset managers
– Long life – 150, 200, 300 ???
• Useful life short?
– Is it fixed or a normal range?
– What will be impact of improved asset management?
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Registers
• Do you need to increase lines in asset
registers?
• What would you call them?
• Do you need separate AMS and FAR?
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Valuations v Depreciation
• Are they linked ?
• Should they be?
• Potential errors if so
– Valuations grossly under-stated or
– Depreciation grossly over-stated
• Impact on KPIs?
• Even if valuation done recently…. Depreciation
expense may no longer stack up !
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Questions / Discussion
David Edgerton FCPA
Email:
David@apv.net
Web:
www.apv.net
Mob:
0412 033 845
Work:
(07) 3221 3499
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