Asset Management

Spray Seeal Renewal

  • 1.  Spray Seeal Renewal

    Posted 22 November 2013 17:34
    Hi Folks Can I get some thoughts from anyone involved in roads asset management about how I should view the asset accounting aspects of capital expenditure to renew a two coat spray seal. The roads engineers inform me that the usual practice is to clean the road surface and apply a single coat seal. I want some feedback on whether engineers believe the seal has been brought back to new condition and could be assumed to have the same useful life as the original two coat seal (assuming the pavement is still sound) or is it now a seal that is never as good as the original and should have a WDV of somewhere less than the original seal. Do others agree that the replacement cost should stay the same as the cost of what you would replace it with has not changed. So is it correct to think that a replacement of a seal only occurs when the road is reconstructed or the seal is removed with a profiler and replaced with another two coat seal. The reseal is a capital treatment to the existing two coat seal. Now I want some feedback on how I see it for capex processing..stick with me here.. If we say then that (i need to assume a position to post this question sorry) a single coat reseal restores the condition of the current two coat seal, do others agree with my take on it that we are really adding value to the current written down value of the two coat seal by the amount of capital expenditure (accountants view). Is this a fair representation of the written down value (it might represent a condition score of say a 1 or 2 in a 0-6 regime with WDV being 75 or 85 % of the RC) until a condition assessment is conducted as part of the next full revaluation. How do others feel about this approach and how does your Council treat reseal capital expenditure. My suggested approach means for a reseal there is no disposal unless the capex is greater than the difference between WDV and RC most reseal treatments will not reset the condition or WDV back to new (reseals cost about half the value of two coat seals and I am assuming treatment is done on a poor condition seal) the remaining useful life will be some amount less than the original useful life I would really appreciate some feedback about how others approach this and what engineers think about the financial values representing what happens in the field (everyone in asset managements goal I believe). Regards ------------------------------------------- Bruce Janke Maintenance Planner Bundaberg Regional Council BUNDABERG QLD -------------------------------------------
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  • 2.  RE:Spray Seeal Renewal

    Posted 24 November 2013 02:05

    Here at Boorowa we have treated seals in the following way:
    Crc is the full cost of initial 2 coat seal
    Wdv is the wdv for the full 2 coat seal less accumulated depreciation
    Seal is given a residual value (have nominally chosen 50%) recognising that the renewal treatment is a single coat and costs approx half of the original 2 coat.
    Obviously if the pavement is due for renewal prior to next seal renewal seal treatment will be a full 2 coat, hence the asset (seal) at this point will be given no residual.

    May not be the perfect way of accounting for seals however I believe it reflects what practically happens with the seals and if we treat seals in this way we are correctly accounting for future expenditures.

    In terms of useful lives of seals it depends on the seal type as to whether the reseal will have a reduced or increased useful life.
    For example you might assume a 2 coat 10/7 seal might have a 11 year useful life and a 14mm reseal might have a 13-15 yr useful life. Useful life will be dependent upon a number of factors including binder type, aggregate size, climate etc (I am not a tech expert on seals but this is my understanding?).

    I am a firm believer that how we account for road assets should be as closely aligned as possible to how we treat them and spend money on them in practice rather than trying to come up with "standards" across the industry.

    Asset conditions could be standardised but there will always be variations in useful lives due to climate/materials/construction techniques.

    Common methodology in terms of condition assessments, how we each calculate our unit rates etc is a good idea though.

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    Anthony McMahon
    General Manager
    Boorowa Council
    BOOROWA NSW

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  • 3.  RE:Spray Seeal Renewal

    Posted 25 November 2013 01:10
    Two coat seals are obviously a bit different to a primerseal and a final seal, but I have always thought it makes sense to roll up the value of the primerseal into the value of the pavement, and treat only the final seal as a separate component.  Final Seals and Reseals are typically of similar value, so you can do away with the need for a residual value against the road surface.

    So in the case of a two coat seal why not make the replacement cost of the surface equivalent to the cost of a reseal, and assign the difference in value between the two coat seal and a reseal to the value of the pavement?  It simplifies things by eliminating the need to muck around with meaningless unrecognisable residual values, and aligns better with your future renewal options.  Win win.

    Regards,    


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    Wayne Eddy
    Strategic Asset Planning Coordinator
    City of Whittlesea
    BUNDOORA MDC VIC
    wayne.eddy@whittlesea.vic.gov.au
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  • 4.  RE:Spray Seeal Renewal

    Posted 25 November 2013 17:33
    Hi Wayne Yes I see your angle. That makes a lot of sense to me. We need the accounting side of asset recoginition as uncomplicated as possible. Thanks to all that responded. It is helpful to see how others deal with these matters. Interesting to see how many different interpretations though so I am not sure how effective sustainability indeces and benchmarking is. A topic for another day. Also given the variations I wonder how auditors agree on what complies to the Accounting Standard and what doesn't. Seems awfully open to interpretation to me. Cheers ------------------------------------------- Bruce Janke Maintenance Planner Bundaberg Regional Council BUNDABERG QLD -------------------------------------------
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  • 5.  RE:Spray Seeal Renewal

    Posted 25 November 2013 23:33
    I agree with Wayne regading the treatment of prime coat seals.

    There may be a difference in language between NZ and Aust with respect to 2-coat seals. In NZ two coat seals will typically be (say ) a grade 4 chip on sprayed bitument followed by another coat of bitumen and a grade 6 chip. For these of surfaces the whole layer should be treated as one. because that is how it performs.


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    George JasonSmith
    AECOM NZ Ltd
    Christchurch

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  • 6.  RE:Spray Seeal Renewal

    Posted 26 November 2013 07:02
    Hi George

    Appreciate the feedback. So are you suggesting we recognise the seal (two coats) as a component. Then we should have a 60% residual and depreciate the amount approx equal to the reseal cost due about every 10 years. There would be no disposal as such just an increase to the carrying amount (WDV) and Remaining Useful life (Condition) when processing.

    Regards

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    Bruce Janke
    Maintenance Planner
    Bundaberg Regional Council
    BUNDABERG QLD

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  • 7.  RE:Spray Seeal Renewal

    Posted 24 November 2013 06:44
    Hi Bruce

    It's a while since I did any 'tarspray' (as we call it) but your question is fundamental to the way we treat assets in AM. Firstly distance (no, divorce) yourself from the accountants. Their position is not in the real world and their only objective is to provide enough income for the future replacement/refurbishment.

    How you treat the refurbished asset depends on how you have recorded that asset in your inventory. If you have a simple data set, where the road is a single entry for each section between nodes, then your objective is to return it to it's 'as new' (grade 1) or 'good' (grade 2) condition? You don't have to wait for an inspection to change the grading so do it as soon as the work is complete.

    If you have a more sophisticated model, where the surface is recorded separately from the road base, formation and the kerb/channels, then only the gradings concerning the surface will change (you said that the base was OK). So the surface was written down according to the CGs and PGs and now it's 'as new'.

    Obviously the latter approach is preferred to the former.

    regards
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    Peter Styles
    Kingsbury

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  • 8.  RE:Spray Seeal Renewal

    Posted 25 November 2013 01:11
    Bruce

    Try not to read too much into what is going on.

    A reseal replaces the seal coat/s underneath it, whether it is a single or two-coat seal. It will have aits own life, dependaent on the size of the chip and thwhether it is two or single coat (traffic volume is also a factor but that affectewd the original seal too).

    In theory the replacement cost should reflect what is going to be replaced with, but in practice this can get a bit too confusing as you are unlikley to replace a Grade 5 tecturising coat with another one. It is generally safer to value it as the type it is

    The answer to your removal question is, in my view, that it is always replaced. by a complete reseal. Basecouse may revert to sub-base if overlaid or it can be removed.

    In essence the reseal restores the level of service but it does not restore the worn-out seal, it replaces it

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    George JasonSmith
    AECOM NZ Ltd
    Christchurch

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  • 9.  RE:Spray Seeal Renewal

    Posted 27 November 2013 01:19

    The practice I have been instructed on is if you put a new seal on a road it is a new asset and can be valued as such, if it's a two coat or primer-final seal the whole of the works need to be included in the value of the seal. As for the old seal, normally a residual value will be given to it and when you reseal you should write off the non residual value and add the residual value to the value of the seal. 

    This practice does not seem to be consistent; even though this residual was determined it was never added to the new value! When I attempted to write off the old seal non residual values finance had a conniption and went into cardiac arrest over the amount being written off!

    If the old seal is being replaced, surely then it has reached the end of its useful life and has no value (or does it?). I agree with Wayne, we shouldn't bother with any residual value mainly because you don't know what its value or contribution to the road condition is worth. I disagree however with rolling the primer seal into the pavement; I would roll it into the final seal. I know that sometimes the primer seal doesn't go down or is done in the following years so to reflect the sealed status of the road it is best recorded as such. Managing this process would mean three class of seal, 'Primer Seal', 'Final Seal' and 'Primer and Final Seal'. When you put a final on a primer you reclassify the seal and its associated costs to that of primer & final. You can make up the type combinations depending on the type used. The same for a two part seal. This way you can easily report on what types of seals you are using and then do the analysis on their performance. It also allows you to identify any primer seals requiring a final seal. When you do a reseal you can write off the Primer & Final seal and just use Seal.

    Then again I am often confronted with the argument that resealing is just programmed maintenance and doesn't have to go through this process! And I am more focussed on the Current Replacement Cost because that what I use to forecast expenditure, but that's just me!


    A definitive standard practice would be a good move.

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    Ashley Bishop
    Asset Management Officer
    Benalla Rural City Council
    BENALLA VIC

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  • 10.  RE:Spray Seeal Renewal

    Posted 27 November 2013 06:40
    Hi all I agree with Wayne and George that the 1st coat / primer seal should be part of the value of the pavement component. However, this assumes that a 2nd coat / final seal is applied "soon" after to make up the seal component. As George suggests there are some differences in terminology between NZ and Australia (having worked in both countries) and there is also common confusion about what a "two coat" is. I will try and explain... The two coat seal that George refers to (also sometimes referred to as a double seal in Australia) is when two layers of bitumen and two layers of chip/stone/aggregate go down at the same time. If the 2nd coat is instead done months later it is known as a 2nd coat seal (or final seal), but it does not constitute part of a two coat seal...unless each of those 1st coat and 2nd coat seals are actually two coat seals in themselves under the previous definition (just to add to the confusion). In this case the 1st coat (or primer) would be part of the pavement and the 2nd coat (or final seal) would be valued as a seal and subsequently replaced by a reseal. This means that the 1st coat (or primer seal) is depreciated over the life of the pavement. This is valid because when you next do work on the pavement is also the next time when you would require a 1st coat (primer) seal. Post-reseal the seal layer underneath (the 2nd coat or previous reseal) is now redundant in terms of replacement cost, because if you were to reproduce the road you wouldn't put 3+ seal layers back straight away just because they are there now. Therefore, I would recommend no residual value on the surface component. I hope that makes sense. Happy to hear any further views. ------------------------------------------- Damien Douglas Senior Asset Management Engineer Opus International Consultants Osborne Park WA -------------------------------------------
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  • 11.  RE:Spray Seeal Renewal

    Posted 28 November 2013 03:16
    I agree with Ashely's statement "If the old seal is being replaced, surely then it has reached the end of its useful life and has no value".  The question of residual value is a clasic red herring that seems to be confusing a lot of people. Try thinking of it as "salvage value; can you sell it at the end of its life and get something sor it? if No it has no residual value.(to the accountants).

    If you are able to get "value" by, say, putting on a thinner base course or a reduced sray of bitument, then that should be reflected in the "optimised replacement cost" or unit rate. It may also affect the expected life of that asset. The opportunities for obtaining residual value for most local authority / infrastructural assets are very few, with some notable exceptoons such as cabling, heavy rail etc.

    Because a prime-coat is only applied to a base couse it is reasonable to include it in the base course; after all it has the same life too. Two-coat seals, as discussed in my previous response to this subject, should be regarded as an indivisible item and treated as outlined above.

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    George JasonSmith
    AECOM NZ Ltd
    Christchurch

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  • 12.  RE:Spray Seeal Renewal

    Posted 29 November 2013 16:51
    I'm not sure why this discussion has arisen over the sealing of a highway. All refurbished asset will have a residual value which has to be written off when they are renewed. ------------------------------------------- Peter Styles Kingsbury -------------------------------------------
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  • 13.  RE:Spray Seeal Renewal

    Posted 03 December 2013 22:13
    This discussion once again highlights the differing views out there and also highlights that few engineers actually have the expertise, techncial knowledge and experience to fully understand the complexities and nuances of both the various accounting standards and valuation standards.

    Some statements have been made "as fact" when in reality such approaches may be what was once done (for simplicity) but no longer satisfy the requirements of the changed accounting standards. Just as engineering practices and theory have evolved so have the accounting standards.

    For example the statement about having to write-off the residual is incorrect. Likewise trying to establish a common set of default useful life and residual value assumptions goes completely against the intent of the standards. Financial reporting exists for those outside the organisation and is an essential element of the accountability and transparency framework. The figures must reflect relaity and provide a true and fair view.

    The best guidance can be found in the CPA Australia valuation and depreciation guide (note that this is the major accounting body and the best source for accounting interpretation). The guide is free and can be downloaded from the CPA Australia website.

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    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

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  • 14.  RE:Spray Seeal Renewal

    Posted 03 December 2013 22:41
    Hi David,

    I wonder if there is a difference between being able to understand the complexities and nuances of the various accounting standards, and seeing the value in them?  When I suggest there is a simple way of doing things, it is because I don't see any great value in complicating things unncessarily, unless there is a very good reason to do so.  If because of their complexities and nuances accounting standards are open to interpretation let's interpret them in a way that best serves the people managing assets.

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    Wayne Eddy
    Strategic Asset Planning Coordinator
    City of Whittlesea
    BUNDOORA MDC VIC
    wayne.eddy@whittlesea.vic.gov.au
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  • 15.  RE:Spray Seeal Renewal

    Posted 04 December 2013 22:16
    Hi Wayne, I warned Bruce this would be an interesting discourse.

    I liked the point about simplicity and understanding and feel that all this valuation, residual and depreciation stuff is best left to the accountants and is why one of them needs to be in the asset management group as a staff member.

    Do you have an accountant in your group? and I wonder if anyone else has one. (I might post this one)

    For me, as far as I am convinced the only values I need are the current relacement cost as that is what is used to calculate future CAPEX and the renewal liability.

    Ironic how the mispelling of seal (seeal) represents the dissonance!

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    Ashley Bishop
    Asset Management Officer
    Benalla Rural City Council
    BENALLA VIC

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  • 16.  RE:Spray Seeal Renewal

    Posted 05 December 2013 00:56
    Wayne (and others)

    I'm not sure that non-accounting professionals have any real need to understand accounting standards.  I'm sure they have enough on their plate to understand and apply the professional standards they work under.  Having said that, the concepts of asset value, residual value, useful life and depreciation are relatively simple and I would like to illustrate this through the following simplified example.

    During the 2013/14 financial year the Shire of Anywhere designs, contracts out and constructs a two-part bitumen seal road at a gross cost of $1,000,000.  The gross costs includes the design, contracting out, contract and contract supervision costs.  The allocation of the gross cost to the components of the road are as follows:
    • two part bitumen seal - $200,000
    • road pavement - $600,000
    • earthworks - $150,000
    • road drainage - $50,000

    Dealing with each of the components in turn:

    Two part bitumen seal - it is assessed, at the time of construction, that the useful life of the component is 20 years based on an intervention at 20 years where the bitumen will be overlayed with a single coat seal and that the value of the remaining bitumen seal is expected to be 40% of the constructed value.  The value of the asset is $200,000 of which 40%, or $80,000, is the expected residual value.  The amount to be depreciated is $120,000 ($200,000-$80,000) which provides an annual depreciation of $6,000 ($120,000/20).  

    If, 10 years out from the construction, the council's policy on bitumen seals changes and it decides that it will no longer overlay existing
    two coat seals with a single coat of bitumen, but will replace the remaining bitumen with a two coat seal 30 years from the original construction, then the original accounting estimates of useful life and residual value need to be revisited and adjusted, with a consequent change in the depreciation rate.  In 2013/14 dollars the residual value will be $0, the useful life is 30 years and the annual depreciation will be $6,666.67 - necessary adjustments will need to be made to the current value and accumulated depreciation.

    Based on the original assumptions, the reseal carried out in 60 years time will have a residual value of $0 if the Council continues with its intent to replace the road pavement at 80 years.

    Road Pavement - it is assessed, at the time of construction, that the useful life of the component is 80 years and that the value of the material to be reused in it's reconstruction is 30% of the original cost.  The expected residual value is $180,000 ($600,000*0.3) and the depreciable amount is $420,000 ($600,000-$180,000), with annual depreciation of $5,250 ($420,000/80).

    Earthworks - the cuttings have been cut and the valleys filled in and it won't need to be done again!  Council's policy is to treat earthworks as a non-depreciable asset.

    If, in 50 years time, a new road on a completely new alignment is constructed then the value of the earthworks would be written-off.  Alternatively, partial reuse of the old alignment would see the value of the parts of the old alignment reused being retained in the financial statements.

    Road Drainage -  it is assessed, at the time of construction, that the useful life of the component is 100 years and that none of the drainage components will be reused.  The residual value is $0, the depreciable amount is $50,000 and the annual depreciation is $500 ($50,000/100).

    Should the Council, at 80 years, decide that it is more cost-efficient to replace the road drainage in concert with the reconstruction of the road then the remaining value of the existing road drainage will be written-off.

    Wayne (and others), I'm sure this is all covered in IPWEA's IIMM and Australian Infrastructure Financial Management Guidelines but I have tried to present this as simply as I can to assist everyone to understand that this stuff is not rocket science.  What is important is that accountants must work with their engineering and technical staff to help them understand the basic information that is needed to produce financial statements that present financial information fairly.  As I have said in another post - we are trying to present the reality, not some idealised or budgeted view of the finances and reality can be a challenge to accept at times.


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    David Hope
    Principal Consultant
    Skilmar Systems Pty Ltd
    Beaumont SAau

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  • 17.  RE:Spray Seeal Renewal

    Posted 05 December 2013 01:35
    David,

    Your explanation below of treating the seal is exactly the same as how I have previously described it on this post so good to see we a agree on that note.

    I actually was concerned about your comment below that "I'm not sure that non-accounting professionals have any real need to understand accounting standards."
    Your comment is why there is often such a divide in the way engineers and accountants perceive things because neither makes enough effort to understand the others realm.
    To me anyone that is involved in any way with service delivery from infrastructure assets should have at least a basic understanding of accounting standards and principles, at least a basic understanding of engineering principles and 'how stuff work's in the real world' and a good understanding of what is important to the community receiving services from the assets.

    I would personally like to think that a strong knowledge of accounting and engineering was possible for everyone, however I am not sure this is realistic.

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    Anthony McMahon
    General Manager
    Boorowa Council
    BOOROWA NSW

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  • 18.  RE:Spray Seeal Renewal

    Posted 06 December 2013 19:13
    Hi David,

    In your valuation example below where have or would you account for risk?

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    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW

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  • 19.  RE:Spray Seeal Renewal

    Posted 08 December 2013 15:16
    Interesting discussion. I have one fundamental disagreement and that is your application of residual value. In my view, when an infrastructural asset has reached the end if its useful life and cannot be sold it has no residual value. Full stop! If there is some benefit from the "dead" asset then that should be reflected in the construction cost and expected life of the subsequent layer. ------------------------------------------- George JasonSmith AECOM NZ Ltd Christchurch -------------------------------------------
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  • 20.  RE:Spray Seeal Renewal

    Posted 08 December 2013 17:47
    The way in which David Hope has illustrated how to apply the concept of Residual Value is correct under the accounting standards. What concerns me the most is that when an accounting expert provides insight in how to interpret the accounting standards they are met with a very strong and quite antagonistic disagreeent. This I would suggest is contrary to the rules of this forum.

    I will go back to my earlier statements about some(not all)  sections of the engineering community showing no or limitied respect for the other professions and not acknowledging that there might actually be a bit of complexity and nuance involved in both the accounting and valuation professions. The accounting standards have evolved considerably over the past 20 years and unfortunately many (and especially non-accountants) seem hell bent on ensuring the practices that were adopted 30 years are maintained despite the changes in the accounting standards. NZ is an interesting example where there has been regular discussion about moving from the IFRS standards tot he IPSAS standards. With the recently released exposure drafts published by the IPSASB I would suggest there may now be considerable discussion with NZ about whether the move to IPSAS is a wise choice given the significant proposed changes to accountign concepts and disclosures.

    My advice is that when an accounting expert provides insight or guidance on an accounting standard and you feel quite strongly that they are wrong or that you should do it in a completely different way that you first consider whether they would have more or less expertise in the area and whether you are basing your argument on a specific sentance within a single accounting standard or whether or not you firstly know about the relationship with other accounting standards. and overall intent

    The value of these forums is of course to have robust discussion so that you can better understand issues and we can all learn from each others experiences and expert knoweldge. However due respect should be provided to those who actually have expertise (backed by appropriate qualifications and experience) in the area rathar than just making statements to the effect that just disagree.

    To get this right we need a multi-discipinary approach which leverages off the expertise and knowledge of each profession. Engineers may know more about asset lifecycle, design and condition but the accountants and specialised financial reporting valuers will know more about the interpretation of the accounting standards and how to convert the engineering data into financial reporting valuations, depreciation and disclosures.

    There is always roomfor professional disagreeent. Lets be honest ... accounting, valuation and even engineering is not black and white and we sholuld always be encouraging innovation and striving for continuous improvement. By default this means being williing to explore the benefits of alternative approaches.
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    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

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  • 21.  RE:Spray Seeal Renewal

    Posted 09 December 2013 00:33
    Hi George,

    I agree, an interesting discussion. Your comment below appears to be supported by the relevant accounting standard AASB 116

    "53 The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount."
     
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    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW

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  • 22.  RE:Spray Seeal Renewal

    Posted 10 December 2013 04:45
    An interesting debate.

    I agree that once a seal has reached it's useful life, it then requires the full replacement cost of the reseal to replace it. As we are only depreciating the depreciable component (ie the cost of the reseal), then it is that component that matters. That is, how much do we need to put aside to ensure we replace the asset when required.

    Whether a seal is cracked and no longer protecting the pavement under it, or the stone is polished and the friction requirements are no longer met, either way the seal is at the end of its 'useful life' and requires the full depreciable amount to replace it, whether it is overdue by one, two or more years, it still requires the full replacement of a reseal. Leave it too long though, then higher Mtce costs, or worse still a failed and much more expensive road pavement (potentially with a much reduced useful pavement life) will result.

    We've seen artificial residual amounts being applied to a seal, just because it still exists, despite it having exceeded its useful life and no longer performing its function. This is not useful.

    Also, account for it as above, you have the backlog of renewal works that should have meaning to both accountants and engineers.

    More focus on the replacement cost rather than the initial capital cost is the way to go to get meaningful long term financial plans

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    Warren Sharpe
    Director
    Eurobodalla Shire Council
    MORUYA NSW

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  • 23.  RE:Spray Seeal Renewal

    Posted 11 December 2013 21:24
    Warren's reply has my 100% support ------------------------------------------- George JasonSmith AECOM NZ Ltd Christchurch -------------------------------------------
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  • 24.  RE:Spray Seeal Renewal

    Posted 10 December 2013 06:02
    I'm somewhat perplexed. In my travels, and at home, I've never come across an AMS system where the valuation process was subject to accounting standards. In my experience with valuers (RICS), who I have entrusted only with the valuation of land and buildings, I have never come across one who knew what AM was, let alone understood it. The last one thought it was about managing his stocks and shares.

    The 'valuation' process in AM is very similar to that used in 'current cost accounting' which was popular in the high inflation period of the 1970s but it was abandoned by the accounting profession shortly afterwards (as being too complicated). The most important aspect of our valuation process is that it should reflect the asset's condition and what it does rather than just its age; also it should be consistent, year on year, in order to provide a trend of appreciation/depreciation. If your AM valuation has been made subject to accounting standards then I can only express my sympathy.

    I'm not a religious but I often find the Bible a great source of inspiration: Jesus said "Render unto Caesar that which is Caesar's and render unto God that which is God's".

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    Peter Styles
    Kingsbury

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  • 25.  RE:Spray Seeal Renewal

    Posted 10 December 2013 07:23
    And therein lies the problem....... the valuations are required to be done in accordance with the accounting standards. This means that the concepte as apllied muet comply with standards and not what you think suits. However i absolutely endorse the comments that they need to reflect the actual condition and not be based on age. To apply the accounting standards correctly will result in figures that reflect the asset management reality.

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    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

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  • 26.  RE:Spray Seeal Renewal

    Posted 16 December 2013 00:31

    David Edgerton notes in the previous post below, when referring to the valuation of an asset, that "...I absolutely endorse the comments that they need to reflect the actual condition and not be based on age."

    This may be interpreted by some readers as implying that the carrying amount of an asset reflects its condition, and that depreciation expense and the accumulated depreciation amounts have been directly determined from the assessment of an asset's condition.

    The carrying amount of an asset, whether measured by the cost method or the fair value method, more correctly represents the future economic benefits embodied in the asset, not condition. The future economic benefits are those benefits expected to be recovered by the entity over the useful life of the asset including the value of the residual at the end of this useful life. The carrying amount of an asset at any point in time is measured by deducting the depreciation previously expensed (accumulated depreciation), from the cost or fair value of the asset in question.

    Depreciation is the process of systematically allocating the future benefits to be consumed by the entity over its useful life and is not a method of valuation. Hence, depreciation is not the difference between measures of condition at two points in time. In fact, condition based depreciation is explicitly forbidden under Australian Accounting Standards (UIG 1030).

    However, the condition of an asset is a consideration when determining if an asset is capable of delivering the future economic benefits (as reflected in its carrying amount). Condition will be a consideration in the assessment of useful life, the residual value and may impact the pattern of consumption of future economic benefits.

    Hence, the condition of an asset can affect the variables used to determine the depreciable amount of an asset, but will not directly determine the carrying amount of any asset.

    If an asset is considered impaired because of its condition, the value of the asset will be written down by the amount of the impairment as an expense. This is accounted for separately from the factors impacting the amount of depreciation expense for the period.

    We need to be careful with use of the term "condition" in the context of the requirements of Australian Accounting Standards when accounting for assets.

    Jim Dixon and John Howard

    Authors, Australian Infrastructure Financial Management Guidelines


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    John Howard
    Jeff Roorda & Associates
    SPRINGWOOD TAS

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  • 27.  RE:Spray Seeal Renewal

    Posted 16 December 2013 22:10
    Interesting comments and no doubt based on what I am about to say will also draw lots of comments. Those who know me will understand that I have always encouraged robust discussion and the expression of alternative views. This is because this is where real learning occurs  and ultimately leads to new and innovative ideas and solutions.

    Firstly I am in full agreement and support whole heartedly the comments made by John and Jim that reinforced what I have always stated.... and that is that the condition along with other relevant factors (such as obsolesence) need to be considered when determining the level of remaining service potential. I also reinforce that condition alone should not be used to determine the value of an asset. This is because other factors may also play a part in determining the level of remaining service potential. Likewsie age alone should not be used.

    The use of condition alone is a common mistake made by many asset management systems (such as pavement management systems and enterprise systems) by basing their valuation and depreciation calculations entirely either on asset condition or age and a theoretical useful life. Some of these systems also fail to accomodate some of the more complex nuances of the accounting standards.

    While I support some of the comments there however are some aspects of John's and Jim's comments that I beleive are either techncially incorrect or misleading. It firstly needs to be acknoweldged that the accounting standards set out a range of concepts and requirements and do not specify any particlar method to determine the valuation or depreciation. While John and Jim may favour a particular approach there are a range of alternative methods and formulas applied by different consultants and different systems that undertake the calculations using methods very different from John's and Jim's preferred methods. Personally I am dissppointed that the AIFMG tends to promote a single approach rather than acknowedging the wide range of alternative practices adopted across the sector and jurisdictions. This is one reason why the CPA Australia guide to valuation and depreciation provides details on a wide cross section of alternative approaches. The CPA guide does not recommend any particular approach but does reinforce the need to satisfy the requirements of the relevant accounting standards.

    It is misleading to suggest that condition is not relevant to the determination of the Fair Value and should only be used as a consideration for determining useful life, residual value, etc. This approach may fit their particular paradigm but one thing we have learned from history is that paradigms are constantly challenged and this is where real learning and innovation is born. As previously noted there are many different ways to approach valuation and depreciation and there is no only one way. In reality, for most infrastructure assets, the condition of the asset will most likely be the key indicator of the level of remaining service potential. This might for example inlcude the measurement of roughness, rutting and cracking in a road surface. Of course there will always be exceptions where the asset is deemed to be subject to a level of obsolescence. Ultimately it is up to the entity to base the assessment of the level of remaining service potential on the factors that they consider provide the most relevant insight. This most likely will include condition as well as functionality, capacity, utilisation, obsolesence, etc.

    Their statement that depreciation is the allocation of the asset's service potential over the asset's life is correct. However....  AASB13 provides that when the Cost Approach (commonly referred to as Depreciated Replacement Cost) is used that allowance needs to be made for the amount of future economic benefit already consumed. As a consequence the valuer needs to consider essential depreciation concepts in determining how much of the asset's total service potential has been consumed to date. To suggest that depreciation has nothing to do with valuation is misleading. In all my career I have never witnessed a Depreciated Replacement Cost method which does not calculate the Fair Value without reference to the depreciation concepts and in fact this is the process as described in both the AIFMG and CPA Australia guide to valuation and depreciation.

    Despite the statements made Australian Accounting Interpretation 1030 (previously known as UIG1030) does not outlaw the use of condition based methods. This interpretation highlights five practices which would remedy a depreciation methodology as non-compliant. One of this is the use of the Renewals Annuity method which at the time was commonly referred to as Condition Based Depreciation. In fact AASB116 has always required that the valuation and depreciation take into consideration wear and tear (which of course is condition). Additionally the new AASB13 Fair Value Measurement standard specifically requires that the valuer adjust for condition. Given this I find it incredible that anyone could argue that condition should be used directly in the valuation of an asset. Such an approach would be a direct breach of AASB13.

    Also the statement that Fair Value is determined by the gross less depreciation previously expensed is incorrect. The purpose of the valuation exercise is to measure the level of remaining service potential which is shown as the Fair Value. The difference between the Fair Value and the Gross is the amount of accumulated depreciation. This figure however will typcially be different to the amount of depreciation previously expensed through the profit and loss account. This is partly due to the changing value of money but also because depreciation is only an accounting estimate which we acknoweldge can never be correctly estimated 100% of the time. Any differences in the change in value is then recorded as either a revaluation increment or decrement. Part of this adjustment is to reflect previous under or over depreciation. In other words ... the amount of accumulated depreciation (which is the difference between the gross and the Fair Value) does not equal the amount of the depreciation previously expensed.... it represents the difference between the currently assessed level of remaining service potential and the gross.

    So as not to be misquoted or considered to be misleading I want to confirm -
    • I do not support not have ever supported the view that the Fair Value should be determined solely by condition. I have always argued that the condition of an asset is only one of the factors that should be considered when determione the Fair Value using the Cost approach. This is why my firms own approach uses a Consumption Based approach which is significantly different to many of the common condition based approaches.
    • Just as condition should not be used as the only factor.... the use of age should also not be used as a sole indicator and should only be considered appropriate if there is a directl link between age and the level of remaining service potential. For some assets this is appropriate but for others it is very difficult to argue any relationship. The entity needs to make this assessment.
    • AASB13 specifically requires that the Fair Value be determined after adjusting for condition. To suggest condition is not to be used would be in direct conflict with the Australian Accounting Standards
    • Australian Interpretation 1030 does not prohibit the use of condition based depreciation methods (other than the renewals annuity method). Rather than just accept this or contrary statements I suggest you download and read the actual text.
    • The valuation process requires the determination of the level of remaining service potential which in turn determines the level of accumulated depreciation. This is undertaken to adjust for both the changing value of money as well any previously under or over depreciation expense. Consequently you need to determine the value first and then depreciate..... not depreciate first to determine a theoretical value.
    • While I may prefer to use a particular method this does not mean that I believe there is only one appropriate approach. I have seen the approaches used by many other consultants and I have no issue with many of them. However as a former auditor who specialses in this techncial area I also have come across many approaches which in my view do not comply with a number of key aspects of the standards and as a result I beleive should not be supported or promoted. Ultimately it is the responsibility of the auditor to determine whether or not valuation or depreciation calculations have been determined in material compliance with the standards.

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    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

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  • 28.  RE:Spray Seeal Renewal

    Posted 18 December 2013 03:23
    So to return to the original issue. 1. I am about to reseal a road, what do I do with the valuation allocated to the old seal after I reseal it? 2. If I use a two part seal, what happens to the valuation of the first part when the second part goes down (now or a year later) 3. What happens to the 'two parts' valuation when I reseal it? After all the discussion a simple answer must be available! ------------------------------------------- Ashley Bishop Asset Management Officer Benalla Rural City Council BENALLA VIC -------------------------------------------
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  • 29.  RE:Spray Seeal Renewal

    Posted 19 December 2013 06:19
    Ashley

    The response provided by David Hope is correct. Essentially you need to consider the difference between the replacement cost (gross) and the cost to renew asset at one of the future renewal points. However this assumes you will renew the asset's service potential back to 100%. In reality this may not be the case and therefore you need to adjust for any difference. For example if the gross replacement cost is $100 and the cost of renewal at the point where the asset is consider no longer available for use (end of useful life) is $30 but only restores the asset back to 90% capacity then the Residual Value is $60. This process is inherently imbedded into a range of pavement management systems where the Residual Value is effectively determined by estimating what the WDV will be in 3 or 5 years. While some may not agree to this approach the reality is that these systems and other methodologies have applied this asset management approach to valuation for over 20 years. This approach used to be commonly referred to as the SLAM (Straight Line Asset Management) approach which was documented by Qld Audit Office in the late 1990's in their Better Practice Guidelines.

    Please also note that when an asset is re-lifed through renewal the accounting standard does not require the write-off of the relevant component. The wording in AASB116 is quite specific and only requires "that part that was replaced" to be written-off. When interpreting accounting standards we are required to work on the basis of substance over form. This means that even though you may have followed a well accepted process or interpretation of a concept..... if the result does not make sense .... then it is wrong and you need to revisit your underlying approach and methodology. This aspect of the standards seems to be missed or not well understood by many non-accountants. For example.... if the asset above is written down to $60 and we end up spending $40 doing the renewal (rather than $30) and we subsequently assess the resulting capacity as = 95% then the final gross should be $100 and WDV $95. However typcially the $40 would have been capitalised resting in a Gross = $140 and WDV = $100. To remedy the difference AASB116 requires that the "part that was disposed" to be written off. While there are a range of different journals that could be processed to achive this the easiest way is simply to do a revaluation at the end of each year.

    These issues are well covered in the CPA Australia guide to valuation and depreciation of public sector assets and is freely available from CPA Australia as a download. It should be acknowedged that IPWEA has some differing views to CPA Australia on how to interpret some aspects of the accounting standards. Professional differences will no doubt lead to more healthy debate. However I would suggest that it would seem strange to go against the advice provided by the leading accounting body on accounting standards. I don't think too many engineers would place much faith in accountants telling engineers how to interpret engineering standards.

    While the discussion on the various accounting requirements and concepts is fantastic I do however wonder why engineers want to be so concerned with asset valuation and depreciation and some of the associated accounting concepts like Residual Value and Useful Life. This point has also been made by a number of other contributors.The figures produced are for financial reporting and should never be used as an input to any asset management plan. The AMP should focus on the alternative asset management strategies available and their subsequent impact on the future lifececyle cost optimised against the level of service. Clearly neither valuation or depreciation has anything to do with these. The valuation can assist with providing information about existience, specification, condition, lifecycle information, etc. However these are only part of the inputs to the asset management framework. Certainly the repalcement cost for valuation is significanty different than the replacement costs that asset managers need to budget for future renewal work..... yet we seem to be constantly confusing the diffeent concepts.

    The role of the valuation and depreciation is to help people both internal and external to the organisation to assess the performance of the asset management strategy by monitoring the impact in both value and consumption over the years. A good strategy should maintain the value and reduce the level of consumption when compared to a poor or non-existent strategy (in simple terms .... extend the useful life of the asset). If a different strategy makes no impact on the consumption of the asset then there seems no point in doing asset management ! Clearly this does not make sense and is why the accounting standards specifically require you to assess the pattern of consumption of the asset's service potential.

    I know that some engineers are trying to use a very literal interpretation of the definition of Residual Value in AASB116. However this is only one interpretation and this approach tends to go against the over-riding intent of the a range or other standards and the general accounting conceptual framework. When reading the Australian Accounting Standards (based on the IFRS standards) you also need to take into account the concepts that have been imported via the AUS paragraphs that have their genesis in the International Public Sector Standards (IPSAS). Accounting is not black and white (as some believe) but involves extensive professional judgement when dealing with these types of complex issues.

    I guess my advice is be aware of the accounting standards but leave the interpretation and implementation of the various requirements up to those who have the appropriate qualifications and experience. The question that you have asked should be dealt with by your accounting and valuation experts and not thrust upon the engineering/asset management staff. If they don't know the answer then this perhaps suggest they need some professional assistance.

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    David Edgerton
    Director
    Fair Value Pro Pty Ltd
    Brisbane QLD

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