Blogs

 

How to determine the useful life of assets

By intouch * posted 21-02-2018 15:43

  

Various state audit offices have flagged their concern at the lack of uniformity among councils when it comes to determining the useful life of assets.

In a roundtable discussion, we asked a panel of industry experts to share how they think local governments should be approaching this tricky topic.

According to Allen Mapstone, IPWEA’s Director of Strategic Asset Management, although many organisations are working hard to break down the internal silos between accountants and engineers and collaborate on asset management, it can all fall apart when it comes to useful life.

Screen_Shot_2018-02-21_at_2_39_53_PM.png“I think it’s because of an under-appreciation of the role and how the financial reporting works and the role of forward planning,” he said.  

“Useful life often becomes the topic in the middle where that disconnect happens and I think it’s an area where heaps of progress could be made if we realise that we don’t have to actually have a one number that’s called 'useful life'.

“There’s a useful life based on how long we actually use an asset that we use for depreciation discussions, but there’s maybe another discussion around a useful life that the technical people want.”

For Jeff Roorda, General Manager Strategic Asset Management with TechnologyOne, there is one key question every organisation should be asking themselves early on.

“The question is: do our useful lives make sense? If we have a useful life that says this asset lasts this long, is that true? How long it will really last will depend on our risk tolerance, how much we can afford and what service levels we want,” he said.  

“It’s just asking the question: are the useful lives connected to what’s actually going on for our customers? If the answer is no, fix it. You can only answer that question by having finance and audit and planning and strategic planners all sitting around the table asking that question.”

Engineer and economist John Howard pointed to Tasmania, where the audit office has pushed for componentisation of assets.

“The Tasmanian Audit Office issued their infrastructure financial accounting report in 2013, which recommended assets subject to planned optimum renewal methods be componentised to recognise the different useful lives estimated for each part of the asset,” he says.

“In 2015, there were four councils who hadn’t adopted that out of 29 and in 2016, there were three out of 29.”

“In Tasmania, it’s been driven largely by the auditors saying, ‘This is what you should be doing', which I think overcomes a lot of the resistance.

“What we’re doing should reflect how the assets are performing and if they are performing with different lives, we need to recognise it. In doing that, it’ll give you better information in terms of your asset planning on what you need to replace and what’s it going to cost, then it’ll also improve the quality of your financial report. I think there’s a benefit there for everyone in doing appropriate componentisation.”

John Comrie, from JAC Comrie, pointed out that the accounting standards don’t require full componentisation, leaving the onus on auditors and asset managers.

“Accounting standards effectively allow a weighted average. If you’re accounting for depreciation and the weighted average is within, say, plus or minus 10% of a full componentisation, the auditors are going to say, ‘That’s reliable, that’s an accurate estimate of depreciation,’” he said.

“You need a good auditor to say, ‘That complies but you might get better value out of more componentising,’ and you’re going to need the asset managers to say, ‘Yes, that’s what we want.’

“If the asset managers don’t say that, the finance people will take the shortcut – and bear in mind, many of the systems that councils currently use don’t lend themselves to greater componentisation. Councils are busy, the systems don’t help, the auditor will say, ‘You just have to determine a reliable weighted average, everyone’s fine.’ The engineer doesn’t depend on the finance information for decision making purposes so they don’t get anywhere. That’s the reality.”

Giving a New Zealander’s point of view, economist and accountant Brian Smith there’s usually wasn’t a problem components for most networks, such as roading, transportation and reticulation assets.

“The areas where it’s most tricky is in parks and recreation assets and also with treatment plants,” he said.

This is an excerpt from a roundtable discussion published in IPWEA's inspire magazine. Read the full story here. 

Want to learn more about useful life?

Practice Note 12: Useful Life of Infrastructure Assets provides practitioners with the necessary principles and procedures to understand how useful life is used in asset and financial management and reporting of infrastructure assets. Visit the IPWEA bookshop to learn more. 
0 comments
57 views