It is often difficult to determine the most appropriate method of depreciation for long-lived assets that don't have a market value, so it's probably not all that surprising that it leads to some "interpretation"!
I've been discussing this subject with John Comrie (one of the principal authors of the Australian Infrastructure Management Manual).
Accounting standards require that the depreciation method utilised reflect the pattern of consumption of an asset's value, and IPWEA's Australian Infrastructure Financial Management Manual discusses the options and argues that the straight-line method of depreciation is often the most suitable (See Section 12.10).
Annual depreciation expenses will also depend on the useful life estimates of assets. This item has also been enthusiastically discussed in this forum as useful life is also often difficult to reliably predict. Useful life is the period an entity expects to hold and utilise an asset. Accounting standards require that estimated remaining useful lives of assets be reviewed annually and the asset register updated as appropriate.
Detail to guide determining and reviewing useful life estimates can be found in IPWEA Practice Note 12, Useful Lives (and, also more concisely in AIFMM Section 12.9). Ultimately suitable depreciation methods and useful life estimates are up to councils. Auditors determine whether they believe the methods and estimates utilised are reasonable and appropriate for financial reporting.
[This is an extract from the minutes of a board meeting in the offices of the White Star Line in Liverpool around the start of WW1]
"…….and can we satisfy the loss adjusters as the total cost of the claim and submit it to the auditors before the closing of the annual accounts? Mr Beresford, I'm told there is still one outstanding item. As Chief Accountant, perhaps you would explain it to the Board?"
"Thank you, Mr Chairman for the opportunity to bring this final, essential matter forward for scrutiny by the assembled members. You will recall, sirs, that there was talk that someone was rearranging the ……"
He was forcibly interrupted by the Managing Director who spoke…
"I really must scotch this stupid rumour which has gotten around. What actually happened was that one of the stewards had ascertained that there were not going to be enough life jackets to go around. Being a resourceful soul, he liberated a number of the deckchairs and tossed them overboard to act as flotation devices. However well intentioned, it was actually of little use as the sea was so cold that no one survived for more than a few minutes in the freezing water."
"Yes, sir," continued the accountant, "but that's not the issue. In order to finalise the insurance claim, we need a complete valuation of all of the assets which were lost in the disaster. Everything else is accounted for and agreed with the loss adjusters but they are refusing to sign off the deckchairs as some of them were tossed overboard and hence, being made of wood, did not sink with the ship. They are saying that, under the terms of the policy, they are not responsible for flotsam and jetsam; the chairs having being thrown overboard and hence jetsam. International law would appear to support their case."
"But what's the problem?" enjoined the MD. They only cost about ten pounds each and there can't have been more than a hundred!"
"But we don't know how many were lost and if any were picked up when the rescue vessels attended after the sinking – the auditors are asking us to justify our claim for their total write-off and I will need the Board's approval to ……………………"
Further discussion did not reach a solution but it may be noted that many years later, around the dawn of the new century, a single deckchair with the name of the Line and of the Ship went, at auction, for just over $30,000.[from 'Hoggrills End' by Stilovsky and Schrodinger]
Hi David,I think that Fair Value (Carrying amount) should be depreciated over the remaining useful life. Frankly, I think that answer B is correct and your answer will be A for the following question. I would like to get other people's feedback on this.Assuming a component of an infrastructure asset is revalued on 30 June 20XX. The summary of revaluation is as follows:
What is the estimated annual depreciation expense for the following financial year? A. (GRC - RV)/UL=($367,537.50 - 0)/75 = $4,900.50 B. (FV - RV)/UL=($238,531.84-0)/28.13=$8,479.62Regards,Bataa
Whilst of interest, this topic has moved from the original question that was posed. All AYM posters are reminded of the rules of AYM regarding courtesy and professional respect for other posts and to deal with the issues. AYM is also a non-commercial peer-to-peer service offered by IPWEA to benefit the industry and is not a platform for anyone to promote their own product, service or system. As the AYM owner and moderator, the following are IPWEA's final comments on this topic which will now be closed. No further posts or correspondence will be entered into.
IPWEA advises readers that they should refer to AIFMM and IIMM to develop an asset accounting policy and procedures manual that is independent of the opinions of service providers and vendors. In particular, readers are referred to the provisions of section 11 of AIFMM which is consistent with the views of the recent report by the NSW Audit office. This report observed that:
"Our experience at the State level shows that the preparation of annual financial statements benefits from review by independent audit committees. Councils are not currently required to have an audit, risk and improvement committee and consequently 53 councils do not have an audit committee. For those councils with an audit committee, 55 per cent play no role in the review of financial statements. Amendments made to the Local Government Act 1993 by the Local Government Amendment (Governance and Planning) Act 2016 will require all councils to appoint an audit, risk and improvement committee. Under transitional provisions, councils will not be required to comply until March 2021, six months after the next ordinary election."
NSW Auditor-General's Report to Parliament | Report on Local Government 2017 | Executive summary
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