Valuers and Asset Management Email: [email protected] Depreciation Why it’s time to think a little...
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Transcript of Valuers and Asset Management Email: [email protected] Depreciation Why it’s time to think a little...
Valuers and Asset Management
Email: [email protected]
Depreciation Why it’s time to think a little
differently
SA LGFMG ConferenceMarch 2009
David Edgerton FCPA
Valuers and Asset Management
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Outline
• Background• Prescribed Requirements• Comparison of Methods• Condition Assessment?• Material Misstatement?• Implications
Valuers and Asset Management
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Background• 2005 Inquiry into Financial Sustainability had
concerns with Depreciation• Three papers commission June 2008– Costing of Assets (Feb 2009) – Depreciation (Feb 2009)
• Object to provide a Technical Resource• Consistent with NAMS AIFMGs
Valuers and Asset Management
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Prescribed Requirements6 "Depreciation“ is the systematic allocation of the depreciable amount of an asset over its
useful life. 6 "Depreciable amount“ is the cost of an asset, or other amount substituted for cost, less its
residual value.43 Each part .... shall be depreciated separately.50 Allocated on a systematic basis over its useful life.51 The residual value and the useful life of an asset shall be reviewed at least at the end of each
annual reporting period60 The depreciation method used shall reflect the pattern in which the asset's future economic
benefits are expected to be consumed by the entity.61 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.
Valuers and Asset Management
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Key Issues• High Level– Relationship with future funding requirements– Allowable Methods (AASB 116 & UIG 1030)
• Specific Level– The Pattern of Consumption– Useful Life– Residual Value– Depreciable Amount
Valuers and Asset Management
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Allowable Methods• Must comply with all aspects of AASB 116 and UIG 1030• UIG Interpretation 1030 -
– Depreciation is calculated by reference to the “depreciable amount”– Appropriate consideration is given to technical and commercial
obsolescence– Maintenance and Capital expenditure are separably identified and
accounted for in accordance with AASB 116.– The “renewals annuity” method is not used – Depreciation is calculated separately for each component.
Valuers and Asset Management
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Useful Life• Be Careful with formulas !– Useful Life = Age + RUL (Remaining Useful Life)
Year
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Age 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
Method A Method B Method C
20,000
15,000
10,000
5,000
-
25,000
50,000
45,000
40,000
35,000
30,000
WDV
Method A Method B Method C WDV $25,000 36,667 40,000 %Error (37.5%) (8.3%) - Depreciation $625 $333 $1,000 %Error (37.5%) (66.7%) -
Valuers and Asset Management
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Comparison of MethodsStraight-Line Condition Based
Depreciation Consumption Based Depreciation
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.
Factors Used: Physical Condition 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.
Factors Used: Holistic and Component Specific Factors 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.
Valuers and Asset Management
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Straight-Line v Advanced SLAM (Consumption Based Depreciation)
1
3
4
5
60
2
100
Cost to renew back to 100 = 60Therefore Residual = 40
Unacceptable LoSMUST be Closed
Very HighHigh
Adequate
Adequate ?
Barely Adequate
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Condition Assessment?
• Must relate to factors that drive the consumption or
• Indicate the level of remaining service potential
• Don’t Assume !
Valuers and Asset Management
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Example: Be CarefulStraight-Line
1 100.00%1.5 87.50%
2 75.00%2.5 62.50%
3 50.00%3.5 37.50%
4 25.00%4.5 12.50%
5 0.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
1 1.5 2 2.5 3 3.5 4 4.5 5
Straight-Line
Straight-Line
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Material Misstatement?
• Depreciation as % of Total Expenses• What if calculation > 10% ?• Depreciation is – allocation of the Depreciable Amount as an expense– over the useful life
• Sustainability Assessments?
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Single Asset Comparison
• Do you “expense” too much depreciation via the Statement of Financial Performance?
• Is this a “true and fair view”?
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Portfolio Comparison• SL v Advanced SLAM (Consumption Based Depreciation)
• Not just a timing difference
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Summary of Prescribed Requirements6 "Depreciation“ is the systematic allocation of the depreciable amount of an asset over its
useful life. 6 "Depreciable amount“ is the cost of an asset, or other amount substituted for cost, less its
residual value.43 Each part .... shall be depreciated separately.50 Allocated on a systematic basis over its useful life.51 The residual value and the useful life of an asset shall be reviewed at least at the end of each
annual reporting period60 The depreciation method used shall reflect the pattern in which the asset's future economic
benefits are expected to be consumed by the entity.61 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.
Valuers and Asset Management
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Implications
• Compliance with AASB 116• Audit Evidence• Asset Management Planning• Material Misstatement• Corporate Governance• Public Accountability