Asset Management

Intouch - How to determine the useful life of assets

  • 1.  Intouch - How to determine the useful life of assets

    Posted 22 February 2018 05:31
    A better title for the article might be:

    Why accounting standards apply to accounting and why asset management standards apply to asset management.

    Allen Mapstone hits the nail on the head when he states; 

    "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." 

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    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    02 9025 3788
    solutions@liquidpacific.com
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  • 2.  RE: Intouch - How to determine the useful life of assets

    Posted 22 February 2018 21:15
    ​I have a way for determining what budgets are needed to any future tear without the new for vauation, depreciation or remaining life. If my Sustainability Index for Roads was used instaed of say the Asset Sustainabilit Index, we would save a lot of time and money, that would be better use on rrehabilitating our road network. The susatianaility would still be reported to the community but it would be based on what the individual community is willing to fund.

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    Greg
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  • 3.  RE: Intouch - How to determine the useful life of assets

    Posted 22 February 2018 21:39
    ​Maybe it is time to ditch "Useful Life" and replace it with something else like "Depreciable Life" and "Serviceable Life" creating a delineation between the two?


  • 4.  RE: Intouch - How to determine the useful life of assets

    Posted 25 February 2018 16:10
    I would have thought that the concept of 'useful life' as set out in accounting standards was pretty straightforward.  The technical definition in AASB 116 is:
    " Useful life is:
    (a) the period over which an asset is expected to be available for use by an entity; or
    (b) the number of production or similar units expected to be obtained from the asset by an entity."

    Unless you are using a machine to manufacture things, for the sake of the argument we can forget (b), although the use of hours or kilometres as a definition of useful life to the entity fits with (b).

    If we focus on (a) there is only one useful life and it is not what accountants want or what engineers want -  it is the estimated time which the asset will provide use for the entity.  It will not be the same for all entities but will vary dependent on a range of factors not the least of which is the service standards negotiated between the entity and its customers, but including things like climate, topography and maintenance standards.It is an estimate and accounting standards require the regular review of 'accounting estimates' so that when the estimate changes it is accounted for.

    More importantly, it is meant to reflect the perceived realities facing the entity, even if those realities change over time, e.g. a change to service standards, not what accountants or engineers want but a corporate perspective of the usefulness of the asset.

    It is a simple concept and discussions on its meaning are not helped by creating false tensions between accountants and engineers or other professionals.  There needs to be a working together to achieve the estimate of useful life then monitoring and reviewing the estimate to refine it as necessary.  We definitely don't need new definitions of the concept


  • 5.  RE: Intouch - How to determine the useful life of assets

    Posted 25 February 2018 17:41
    Well said, David.  I reckon your spot on.  There is a clear definition, and there is no reason why finance and engineering shouldn't be using the same useful lives.

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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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  • 6.  RE: Intouch - How to determine the useful life of assets

    Posted 27 February 2018 23:17

    Hi,

    It's great to see a robust discussion on this matter and some valuable comments. I generally stay fairly silent on AYM, however I have been quoted in this one, so I'm happy to add a few more thoughts.

    I agree with David Hope's comments "that the concept of 'useful life' as set out in accounting standards was pretty straight forward.  The technical definition in AASB 116 is:

    " Useful life is the period over which an asset is expected to be available for use by an entity".

    David also mentioned the units of production, and as he suggested this is not all that commonly used for infrastructure.

     IPWEA has prepared a detailed PN12 see link.

    The discussions around this topic have been regular. The IPWEA has seen this matter as being significant and prepared a specific practice note on the issue. I'd encourage everyone to consider this and have added the link to the IPWEA Bookshop description of the practice note.

    https://www.ipwea.org/publications/bookshop-old/ipweabookshop/pn12

    Asset managers and finance people should use same useful life

    We should be using the same useful life. Note: there is a link between the Useful Life and the Level of Service. So, if we wanted to consider "options" for differing service levels then this is likely to impact useful life.

    Useful life should reflect the best estimate of how long an entity will retain asset.

    …. And don't forget Useful lives of all assets are required to be reviewed annually.

     

    Regards

    Allen Mapstone | Director Strategic Asset Management

    IPWEA Australasia | NAMS Canada




  • 7.  RE: Intouch - How to determine the useful life of assets

    Posted 27 February 2018 23:54
    I want to add one little comment to clarify accounting standards requirements. Useful Life is used to determine depreciation expense. This is required to be calculated for each part of the asset that has a different useful life. As such it is not calculated for the asset but for the short life and long life parts of each component. Refer AASB Residual Value decision. The short life relates to period between renewals and long life to the assets overall life. Note that useful life is not linked to the calculation of Fair Value. That is driven by AASB13 which does not refer to useful life or depreciation.

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    David Edgerton. FCPA
    Director APV Valuers and Asset Management
    Director Asset Valuer Pro
    David@assetvaluer.net. David@apv.net
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  • 8.  RE: Intouch - How to determine the useful life of assets

    Posted 25 February 2018 16:09
    There are a number of issues around this subject which need clarification.

    Firstly, there are differences between the approach of the accountant and the asset manager because they are using asset lives for different purposes. The accountant uses it simply for the accounts in order to collect income which is (supposedly) set aside for the eventual replacement of the asset - it has little meaning in the real world other than that. The asset manager, however, is concerned to monitor the asset and keep it under review both in terms of its condition and its performance so that it can continue to give service to the company or utility that it serves. The main problem comes when they try to agree on how to arrive at the current value of the asset for the company accounts and, in this case, the accountants' straight-line depreciation is sadly lacking. A simple matrix using condition condition and performance grades can suffice.

    Secondly there is the issue of land and buildings; simply keep them separate as they, unlike other assets, will generally appreciate.

    Thirdly, there is the issue of how much detail to put into things. As Goldilocks is want to say.....too much detail and the wood gets lost for the trees and too little, then the task is meaningless. In order to clarify matters we need to differentiate between assets with a relatively short life and those which last much longer. in the forefront of this debate is, for instance, the difference between pipelines - with a life of 50 to 80 years and pumps and motors with a life of say 10 to 15 years. This means that assets need to be broken down to a level where these differences can be reflected in the AMS. Plant level is too crude and individual items are too detailed. For plants, the process level is about right but for elongated assets such as roads and footpaths then they need to be broken up at natural nodes or at intervals of say 1km at a time.

    My own methods, based on those of the UK water industry, differ somewhat from the extensive manuals and procedures evident in Antipodea but they are considerably simpler. PM me if you want more details.


  • 9.  RE: Intouch - How to determine the useful life of assets

    Posted 25 February 2018 19:42
    Hi Guys
    Just a quick point on accounting vs "engineering" lives and depreciation. The accounting measure of depreciation is the consumption of the "economic value" of an asset over time. What the engineers tend to be interested in is the physical "value" of an asset.

    Its easy to explain the difference using a theoretical road asset. At the time of construction, the road is ascribed a certain "value" that both the engineer and accountant agree with. Lets say that the road cost $20m, lasts 20 years and can take 20 million trips. The road is only replaced when it ceases to provide the defined standard of service. Lets say Im the first car to use the road, then I probably experience a level of servcie well above that defined by Council. Nonetheless, it is just 1 trip and the "economic" value of that one trip is $1 ($20m cost price/2m trips). Twenty years later and Im the last car to use the road then I also recieve the minimum standard of service (i.e I get from "a" to "b" safely and relatively efficiently). The economic value of that trip is the same $1 (red line in the graph below)

    From an engineering point of view, the roads physical value tends to degrade very slowly at first and then rapidly at the end (green line in the graph below). The asset managers job is to determine the most cost effective intervention point to maintain servcie standards. In my crude illustration below Im assuming this happens at the end of life but the reality could be an early intervention (particualrly for critical assets).

    My point here is that both measures are "valid". The economic measure of value is correct from a business context (i.e the accountants arent trying to "cook the books" - there is a legitimate method in their approach). The physical value is also relevant from a forward cost (and prcie path) perspective. The accounting fraternity have tried to combine the two concepts using estimates of "fair value" but this tends to get hung up at audit due to technicalities.



  • 10.  RE: Intouch - How to determine the useful life of assets

    Posted 26 February 2018 20:58
    Hi Asset Mates

    Just a reminder that IPWEA's latest Practice Note is No 12: Useful Life of Infrastructure - Asset Management and Financial Management Guidelines, authored by leaders in the industry. (IPWEA Bookshop - Institute of Public Works Engineering Australasia).  Directly relevant to this thread.

    Also we will be launching the new companion Practice Note 12.1: Impacts of Climate Change on useful Life of Coastal Assets at the upcoming Sustainability in Public Works Conference (Sustainability in Public Works Conference | 14-15 May 2018, Novotel Brighton Beach, Sydney).  This new PN is in conjunction with NSW Northern Beaches Council


  • 11.  RE: Intouch - How to determine the useful life of assets

    Posted 27 February 2018 16:58
    Whilst reference material is a good start, I suspect Mr Alan Mapstone, Director Strategic Asset Management IPWEA and NAMS is also an industry expert and when industry experts start to discuss in an open forum issues that are reflected in the industry, then it may be a better course of action to listen to those voices and address the issues.

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    Martin Burns
    National Director of Valuations
    Liquid Pacific
    North Sydney NSW
    02 9025 3788
    solutions@liquidpacific.com
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