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.
Dealing with each of the components in turn:
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