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Capitalisation

  • 1.  Capitalisation

    Posted 10 July 2019 17:37
    Hi All

    Just wondering, do you think capitalised maintenance should increase your replacement cost? How do you treat Capitalised  maintenance in valuations, do you run a valuation every year? Etc...

    Cheers
    Renee
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  • 2.  RE: Capitalisation

    Posted 11 July 2019 23:07
    Hi Renee,

    Good question.

    In terms of valuation, every asset's market value is determined on the assumption there is a standard maintenance requirement and associated  costs with providing that maintenance during the lifetime of the asset. This is intended to ensure the owner obtains the utility the asset specification promised to deliver. These maintenance costs are normally factored into the sale price (your replacement cost) of the asset and therefore normal maintenance should not be capitalised when estimating a replacement cost for an asset (otherwise you will double counting).

    It is when the asset's maintenance costs vary from the expected that it impacts an asset's market value. Where an asset incurs maintenance costs  to maintain its normal or expected service delivery over and above the expected, then the market value of the asset is diminished. The reduction in the asset's market value may be worked out by the present value of the future liability of the additional maintenance costs. It is rare the opposite occurs.

    There is also consideration as to the difference between capital expenditure on an asset and maintenance costs. However the principle is the same, if additional capital expenditure (renewal) is required to maintain the asset over and above the expected during the design life of the asset, then the asset market value may be diminished (on a case by case basis).  However, if you enhance the service capacity or extend the design life of an asset through capital expenditure then there is potential you have enhanced the  market value of the asset (beware of over-capitalisation). But only by increasing an asset's service capacity by way of modification to the asset's original specification would the replacement cost (i.e. the purchase price as new) increase.

    Unfortunately valuation, like many professions is layered with theory and there are always exceptions to the rule. however it always helps to understand concepts by applying them to a real world situation. Think of the above in terms of motor vehicle.





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    Martin Burns
    National Director - Valuation
    Liquid Pacific
    North Sydney NSW 2060
    www.liquidpacific.com
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  • 3.  RE: Capitalisation

    Posted 11 July 2019 23:08
    Hi Renee
    Please note that Council needs to differentiate between capital renewal, new & upgrade and maintenance expenditures. Please check Council capitalisation policy and valuation policy too.
    1. If you renew (If capitalised maintenance expenditure is renewal) asset with similar asset with modern equivalent asset (no increase in capacity) then it will sustain the current levels of service and written down value will be same as replacement value, however, it would not increase the replacement value. For an example, if you replace current 150mm AC pipe with 150mm PVC pipe ($5,000) then during revaluation or annual update of valuation  process, the new replacement value will be same $5,000 (current).
    2. If your capitalised maintenance expenditure is capital upgrade then certainly it would increase the replacement value which will be combination of current replacement (renewal) plus additional value (new capital). For an example, if you replace current 150mm AC pipe (e.g. $5,000) with 250mm PVC pipe ($7,500) then during revaluation or annual update of valuation  process, new replacement value will increase to $7,500 which is equivalent to (current) plus $2,500 (additional).
    Again please note that in Victoria the financial reporting purpose valuation is based on greenfield basis (which means valuation does not recognize the current replacement cost for renewing in the same environment but consider if you are replacing assets with no urban environment which is equivalent to new subdivision {e.g. 150mm installation cost in new subdivision is $150/m whereas when you are renewing 150mm in urban area such as CBD area it might cost $250/m but financial valuation will recognise $150/m only although in real world it is costing $250/m) whereas in other states and New Zealand it is based on brownfield approach that is what is required for renewal purpose.


    Hope this will help you.

    regards
    Amar Singh ISO55001 CAMA
    Principal AM Consultant
    +61 451 447 359
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  • 4.  RE: Capitalisation

    Posted 11 July 2019 23:08

    Hi Renee,
                     Please see below my responses.

    Capitalisation

    • As per the NSW Government requirement, work related to asset improvements, upgrading work to assets, refurbishment work and new capital funded project outcomes can only be capitalised.
    • Any asset maintenance outcome has to be treated as expenses and not to be capitalised
    • During capitalisations the agency is expanding the asset base with new assets. This will trigger new operational and maintenance cost for the agency.
    • The replacement cost of asset or asset component will increase subject to asset type or the facility.

    Valuations

    • In general during valuation exercise the life time of the capitalised assets are reviewed by the valuer using various techniques which may include site/asset inspections, consultations with asset management /maintenance team, desktop analysis and consultation with the industry professionals etc.
    • As per the NSW Government requirements land and building assets require valuation for every 3 years and infrastructure assets require valuations for every 5 years. 

    Regards Selva

    Selvaratnam Vasanthan (Selva)

    Asset Management Coordinator

    Sydney Olympic Park Authority

    P: 9714 7866
    M : 0416191249    

    Selvaratnam.Vasanthan@sopa.nsw.gov.au

    Level 8, 5 Olympic Boulevards, Sydney Olympic Park, NSW, 2127

    sydneyolympicpark.com.au



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  • 5.  RE: Capitalisation

    Posted 14 July 2019 17:42
    HI Selva,

    You make some some good points, however in relation to your comment;

    NSW Government requirements land and building assets require valuation for every 3 years and infrastructure assets require valuations for every 5 years. 

    NSW TTP 14-01 states;
    Consistent with AASB 116, agencies must assess at each reporting date whether there is any indication that an asset's carrying amount differs materially from fair value. Where any indication exists, the entities' asset (and class) must be revalued. This requires consideration of external and internal sources of information, including consideration of relevant price indices. Agencies must review an asset's useful life and residual value at least at the end of each annual reporting period (AASB 116 para 51). Agencies should document their annual assessment of fair value, useful lives
    and residual values including reasons why the agency concluded carrying value was not materially different to fair value.

    And;

    For 2014/15 and subsequent financial years, this Policy requires agencies conduct a comprehensive revaluation:
    at least* every 3 years for Land and Buildings, (except infrastructure and land under infrastructure) where the market or income approach
    is the most appropriate valuation technique for that asset under AASB 13

    at least* every 5 years for all other classes of property, plant and equipment.

    This will help ensure agencies revalue their assets frequently enough to ensure the carrying amount of the asset does not differ materially from fair value (AASB 116 para 31).

    * Emphasis ours.

    The Australian Standards Board have advised Accounting  Standards trump Government policy and under accounting standards it is a requirement of the reporting entity to revalue their assets  when the carrying amount is materially different from the assets fair value.

    The obligation therefore falls to the reporting entity (not WoG or the Treasury of the State) to ensure the existing value of assets in their financial statements does not differ materially from the fair value of the assets at the time of reporting.

    We have clients in the Sydney region that have recently experienced land value increases upwards of 40% yet have not undertaken any revaluations, even though they are fully aware of the movement. This means they are  potentially in violation not only of Australian Accounting Standards but the NSW Treasury Policy.

    And, what a lot of entities fail to comprehend is many fixed assets have value relationships which dictate a cap on the value of 'property'. If land values go up by 40% building values may drop proportionally. This economic concept underpins the definition  of highest and best use.



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    Martin Burns
    National Director - Valuation
    Liquid Pacific
    North Sydney NSW 2060
    www.liquidpacific.com
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  • 6.  RE: Capitalisation

    Posted 14 July 2019 22:42
    Hi Renee

    Be careful adding capitalised maintenance costs to your valuations.  A solution which has been applied in relation to road pavement refurbishment work is to partially dispose of a portion of the capital value and then apply the capitalised expense.  The amount of disposal is a value judgement based on how much of the original asset was disposed.

    If you simply add this cost to your values, you will end up with inflated values that do not represent the true asset cost.

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    Andrew Grant
    Assets Specialist

    Queanbeyan-Palerang Regional Council
    Tel: 02 6285 6221
    Mol: 0429 130 039
    Web: www.qprc.nsw.gov.au
    Mail: PO Box 90 Queanbeyan NSW 2620
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