Ask Your Mates Open Forum

Capital or Maintenance

  • 1.  Capital or Maintenance

    Posted 14 August 2019 02:17
    Hello all,

    There is a bit of debate occurring around the financial treatments (Capital or Maintenance) for road reseals and resheeting.  If the road asset has been split into layers (ie Foundation/Sub-Base/Base/Surface, then the argument is that this is a separate asset and therefore, when reseal/resheet occurs, the existing asset is disposed and replaced with a new asset.

    However, if the road is consolidated into a single asset, the counter augment is that a reseal/resheet does not alter the life of the asset and therefore should be treated as a maintenance item (similar to painting a building).

    I would be interested to here how others view this issue.  Is there real value in creating assets for each layer of road?  Is this activity capital or maintenance?

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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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  • 2.  RE: Capital or Maintenance

    Posted 15 August 2019 01:08
    Hi Andrew,

    Separate assets need to be created for each layer of the road as each layer (ie Foundation/Sub-Base/Base/Surface) has a different Useful Life for accounting purposes and is depreciated at different rates.  The average Useful Life for our Sealed Roads Surface assets is 24 years and the annual depreciation rate is 4% (being 1/24th), and our Sealed Roads Formation assets have an unlimited Useful Life and are therefore not depreciated.

    If you replace the surface of the road and cannot dispose of the old surface, then you would potentially be overstating your assets.  If you treat the reseal costs as a maintenance cost then your Infrastructure Renewals Ratio reported in Special Schedule 7 will be understated.

    Karen Terrey
    Strategic Asset Accountant

    Blue Mountains City Council
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  • 3.  RE: Capital or Maintenance

    Posted 15 August 2019 01:10
    Hi Andrew,

    I dont know what Asset System you are using but we are currently using Assetic MyData, which allows you to have the road as 1 Asset with 4 different components (as below)

    A reseal is usually is just to replace seal lost through normal wear and tear.  We have workshopped this and agreed that without removing any seal, we would dispose of 40% of the seal component, then add the cost of the seal to the Surface component.  If we were doing an overlay, the disposal component would be more, as there is tining (grooving) involved - removing more of the surface.  When the road is rehabilitated is where a full surface disposal is applied.  As MyData uses a Service Potential Index (where on the useful life degradation curve the road sits (0 new - 6 disposal), the SPI adjusts towards a better score which is applied to the useful life of the Asset.  As the surface protects the other components and extends the useful life, it is definately capital.

    Resheeting in North Queensland is deemed in some Councils as a capital treatment.  I personally believe it is maintenance, but I was the only accountant in a room full of engineers when we workshopped.......I conceded.  As we have both tropical and savanah aride areas, we lose product to erosion or dust, but can be easily retrieved through grading and recompacting back into the road.  Therefore our disposal of the pavement is alot less than you would think.  Depending on the condition of the road we would dispose of between 40-60% of the pavement component, then we apply the resheet costs to the pavement.  Again Capital.

    I am a big fan of the 1 Asset - many component application.

    Hope this helps.


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    Libby Humphrey Asset Coordinator - Whitsunday Regional Council.
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  • 4.  RE: Capital or Maintenance

    Posted 15 August 2019 01:11
    Hi Andrew,

    I would say it is always Capital if it is over the capitalisation threshold. Even if you are have a single asset you are still increasing the average useful life of that asset so I don't believe it should be treated as a maintenance expense. The only issue is that you are not recognising any disposal / partial disposal. My opinion on that is if you are revaluing assets on a regular basis then not recognising asset disposals should be acceptable as in most instances the DRC of the disposed section should be zero or very low as it would be near the end of its useful life. ​So the overall impact of not recognising the partial disposal would not be material. Because when your revaluing assets you are not getting a 100% accurate value you are only getting ball park value by using a general unit rate anyway not recognising partial disposal and then revaluing  in 2 or 3 years max will still keep the asset value in the same realms.

    I think for a road seal as one asset is to high but broken down to smaller lengths say intersection to intersection but not any lower than that, but the same concept would still apply but if you did actual dispose of the whole asset then you could recognise that as a disposal.

    If there are any auditors reading this I would be interested in their thoughts on not recognising disposals?

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    Cheers,

    John.

    John Wunhym
    City of Perth
    Financial Asset Management Officer
    john.wunhym@cityofperth.wa.gov.au
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  • 5.  RE: Capital or Maintenance

    Posted 15 August 2019 17:29
    ​Andrew,

    According to standard accounting principals, if the work adds value to the overall asset AND extends its useful life, the work would be categorized as a Capital investment.

    Also, I'm not sure I'd agree with the statement suggesting that a reseal/resheet does not alter the useful life of the asset. If this work is NOT performed, the base would deteriorate at a faster rate and compromise levels of service.

    This seems analogous to a building or facility. Typically, a building asset is considered one asset. You wouldn't consider the roof, envelop, or foundation as separate assets as they all need to be working together as one unit to deliver the appropriate level of a service. Again, if a roof repair is required and the costs meet the required threshold, I would consider this as Capital work seeing as the building could be compromised and its useful life could be reduces as a result of not performing the required upgrades/repair.

    Hope this provide some insight.


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  • 6.  RE: Capital or Maintenance

    Posted 18 August 2019 18:41
    ​Hey Kris,

    I agree reseal/resheet is capex. However I just wanted to note that there a lot of local governments componentising buildings based on different useful lives. Roof cladding and foundations with different life etc.

    It's an interesting debate about what is the right level of information required to give accurate values for financials and condition/performance for planning. As well as the practicality of being able to structure the asset register to record the information versus the costs and benefits. Anyway that's probably a discussion for another day.

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    Cheers,

    John.

    John Wunhym
    City of Perth
    Financial Asset Management Officer
    john.wunhym@cityofperth.wa.gov.au
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  • 7.  RE: Capital or Maintenance

    Posted 19 August 2019 18:48
    Hi John,

    You're absolutely correct. ​If you're working within your specific accounting guidelines, then the level of granularity would depend on how detailed and sophisticated your asset management program and associated asset registers are. If breaking assets into multiple components adds value to your decision making and development of an accurate capital plan, and you have the resources/tools to manage those details effectively, then its hard to argue against those facts.

    I'd say do what works for your organization as long as they're willing to support the effort thought staffing and the necessary tools.
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  • 8.  RE: Capital or Maintenance

    Posted 18 August 2019 18:41

    Hi Andrew,

    This is my spin.

    The International Infrastructure Management Manual talks about Core and Advanced levels of asset management and the differences in both approaches. The choice of which approach an organisation takes on can impact the organisations ability to achieve the potential benefits realised through thorough asset management practices particularly when it comes to delivering services to community expectations in the most efficient way. 

    Basic Asset Management ideology suggests that a seal/asphalt surface or a paved road surface is a valid component of a road. Equally clear is that the pavement (base and/or sub base layer/s ) are also  valid components of the road, and the same with the subgrade or the roads Formation. Each layer performs a different function, has different characteristics, most definitely different lives and their individual value is of material significance. Hence, we have Seal Designs and Pavement Designs in road construction.

    The argument that not maintaining the seal does not alter the life of the Road lacks merit. Engineering principles suggest all evidence to the contrary with respect to this argument. 

    The analogy that "painting a building is like resurfacing a road" is misleading. If you paint the roof of a building, the covering (Roof Sheeting) is the asset component, not the paint. 

    An appropriate analogy would be that the seal/surface of a road is like the roof sheeting of a building. If you don't  repair/maintain the roof sheeting then the roof structure, ceilings, floor coverings and floor structure of the "Building" would deteriorate at an accelerated rate and would all need replacing allot sooner than if it was adequately maintained. 

    Pothole patching is equivalent to Painting a building. Resurfacing/sealing a road is like replacing the roof sheeting of a building. 

    Essentially, for many organisations, it is easier to account for asset disposals, renewals and asset recognition on a "Road" approach, than it is to account for individual road components. It can also be less beneficial to the organisation when trying to align long term asset renewal programmes with community expectations in an efficient and economically sound manner. 

    From my point of view, the benefits of financially componentising road assets are: 

    • Depreciation. In particular the formation of the road is non-depreciable, thus beneficial to separate that out.
    • Componentisation provides a more accurate profile of how your assets are being consumed. This is why we don't rehabilitate the road pavement when the seal is looking a bit dodgy.
    • There are a number of AM systems that either integrate an Asset Register and a Capital Value Register or Use one as both. A componentised and integrated CVR/AR can solve the financial accounting complexities of asset disposals and acquisitions producing realistic asset consumption accomplishments and optimal asset replacement programmes.
    • Componentisation allows for service levels set by the community to be implemented more accurately. Like, "we will undertake reseals when the condition of a Collector road seal reaches 6/10 and a residential road reaches 7/10. However we will undertake pavement rehabilitation when the pavement reaches a condition of 7/10 for collector roads and 8/10 for residential roads".

    Regards

     



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    Andrew Lockwood
    Orange City Council
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  • 9.  RE: Capital or Maintenance

    Posted 18 August 2019 18:42
    Hi Andrew,

    A reseal is a replacement of the top surface that extends the life of the road and is capital expenditure.  Patching is maintenance.
    A reconstruction or the building of a new road is the only time the rest of the road layers are touched.

    Hope this helps, Rachel.
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