Asset Management

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  • 1.  How to value found infrastructure assets

    Posted 24-06-2021 09:59
    Hi all,

    I am seeking for the advice about the method to value the 'found infrastructure assets' according to the relevant Australian Accounting Standard, for example, found pipe assets. Our current practice is to add its replacement cost based on the fair value and calculate the accumulated depreciation based on the assumed install date (if it's unknown), valuation date and the useful life with the straight line depreciation method. Is this the correct method? Can I find this information from the relevant IPWEA practice note?

    Thanks in advance
    Ning



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    Ning Huang
    Glenorchy City Council
    GLENORCHY
    Australia
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  • 2.  RE: How to value found infrastructure assets

    Posted 30-06-2021 16:50

    Hi Ning,

    From my experience working in (and with) local government, 'found infrastructure assets' or existing assets not previously recognised is an all too common occurrence.

    The organisation's I have worked at invariably treat 'found assets' as contributed (or donated) assets in accordance with the Australian Accounting Standard: 'AASB 13 Fair Value Measurement'.

    When recognising an asset at fair value, an entity (i.e., in your instance, council) must determine whether a market value exists.  If it doesn't, and for most local government infrastructure it doesn't, then it would normally make an estimate based on replacement cost and the estimated share of a 'new' asset's useful life that remains.

    The asset should initially be recognised at its current value (e.g., 50% of new replacement cost if say 50% through its estimated useful life) rather than 100% of replacement cost and then reduced in value by (say) 50% and recognising a loss on revaluation.  It's effectively similar to acquiring a second-hand asset.

    Under the above suggested treatment the annual depreciation would potentially be the same for the found asset (with a shorter remaining useful life) as it would be for a new asset (with a longer useful life) assuming application of straight-line depreciation.

    Further information can be found in Para 15.1 of AASB 116.  Guidance on measuring fair value for contributed/donated assets is discussed in Section 12.7.4 of IPWEA's Australian Infrastructure Financial Management Manual (2015 edn.). 

    Hope this helps.



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    Steve Verity | IPWEA Australasia
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  • 3.  RE: How to value found infrastructure assets

    Posted 30-06-2021 20:55
    Hi Ning,

    I agree with Steve's advice, however not so with his interpretation of the meaning of 'recognition'.

    As we treat the term for valuation purposes, recognition is not to be taken in its literal meaning and in the ordinary sense of its application, rather recognition relates to the transaction which passes  to the entity either an asset or a liability. If an  asset is 'discovered' by council and is deemed to be council's, then a past transaction must have occurred to enable council to make that claim and council, whether they are aware of it or not, have received the economic benefits of that asset since the transaction took place.

    One would assume the benefits already received from the asset should be reflected in accumulated depreciation (which would assist council if it funds renewals from depreciation) and, as the asset has already passed its initial recognition stage, the value should be its fair value, measured by direct reference to market evidence, or in its absence, a cost based deprecation replacement value.

    The accounting standards are not specific but do imply the above;

    AASB 13
    When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, 

    AASB 116 
    An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment

    The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts  and the depreciation charges and impairment losses to be recognised in relation to them.

    For the treatment of accumulated deprecation, we have seen the following in a council's Asset Valuation Policy:

    Where assets are identified that have not been previously recognised due to error, e.g. during asset verification, this is treated as the corrections of an error under AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. The error provisions require that the error should  be corrected by making the entry that should have been made at the time the error occurred.



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    Martin Burns [Designation]
    National Director of Valuations
    Liquid Pacific
    North Sydney
    [Phone]
    solutions@liquidpacific.com
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  • 4.  RE: How to value found infrastructure assets

    Posted 01-07-2021 10:51
    Hi Ning,

    We certainly have the issue of finding assets as our systems and maturity in the Asset Management space continually improves.

    We deal with it by valuing the asset at fair value current replacement costs and then determine the remaining useful life to calculated the accumulated depreciation and written down value at this point in time.

    For example, you find a large box culvert running under a historic building.  Approx. 4m by 2m about 130m in length and never been recognized on the book.  The replacement value of this is say $1,000,000.   It is assume to be a 100 year useful life but based on inspection it is assumed that has only 10 years remaining useful life.

    Hence, replacement value $ 1m.  Current  Written Down Value $ 100,00,   Accumulated Depreciation $ 900,000 and Depreciation will be 10,000 pa.  $ 100,000 current value over 10 remaining years.

    The above scenario just happened to us!

    regards

    David

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    David Collins
    Adelaide Hills Council
    Manager Sustainable Assets
    WOODSIDE
    Australia
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  • 5.  RE: How to value found infrastructure assets

    Posted 01-07-2021 16:23
    Hi Ning,

    Just to answer the question in your specific circumstances, there may not actually be anything wrong with what you do currently, depending on how I interpret what you are saying.

    In the circumstances, there is no market value for a pipe in the ground currently being used so you should:

    1. Establish the Current Replacement Cost of the pipe section, using current unit rates for the pipe category x the dimension of the pipe section concerned.
    2. Establish a Total Useful Life (TUL) for that pipe in its environment (use evidence from other similar pipes in the area)
    3. Establish either the Remaining Useful Life (RUL) of the pipe from a current inspection report,  or otherwise establish the historical Expired Useful Life from construction records.  Either way, TUL = EUL + RUL
    4. Calculate the Accumulated Depreciation of the pipe, based on the Expired Useful Life x Current Replacement Cost.
    5. Recognise the Asset in the register showing both the Current Replacement Cost and the Accumulated Depreciation of the asset.  This gives a carrying value of the asset equal to the net of the two figures (or sometimes called Written Down Value). 
    6. In this way you are recognising the asset at Fair Value (Written Down Replacement Cost in the circumstnaces)
    7. The other side of the accounting entry goes to Retained Earnings (to address the prior period error under AASB 108).

    Going forward, make sure you set up all these parameters correctly in your fiannce asset register to ensure future depreciation expense is based on the Written Down Value / Remaining Useful Life.

    Hope this helps.

    Adam

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    Adam Thomas
    Proven Intelligence
    Australia
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  • 6.  RE: How to value found infrastructure assets

    Posted 02-07-2021 13:53
    I have watching this discussion and holding off till now. I just want to clarify that the valuation needs to be Current Replacement Cost rather than Depreciated Replacement Cost which was removed from the standards in 2013.

    AASB B9 clarifies that the adjustment from Replacement Cost to Current Replacement Cost not an adjustment for depreciation and is not based on useful life or RUL. In accordance with paragraph 11 it is based on an adjustment for general obsolescence and condition.

    If you are unsure of how you do this i suggest you read CPA Australia's guide on the valuation and depreciation of public sector assets.

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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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  • 7.  RE: How to value found infrastructure assets

    Posted 05-07-2021 10:45
    Hi Ning,

    David raises some good points but they are accounting rather than valuation principles and the article he refers to is not supported by the valuation industry.  A better reference for valuation would be the International Valuation Standards

    https://www.ivsc.org/standards/international-valuation-standards

    Have a nice weekend

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    Martin Burns [Designation]
    National Director of Valuations
    Liquid Pacific
    North Sydney
    [Phone]
    solutions@liquidpacific.com
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  • 8.  RE: How to value found infrastructure assets

    Posted 05-07-2021 10:45
    Just to clarify, David is referring to para B9 of AASB 13.

    In the circumstances of a buried pipe, as mentioned earlier, an adjustment based on current condition (to determine obsolescence under para B3) is recommended. CCTV or similar can be used to establish the condition to determine obsolescence for the purposes of the calculating the carrying value.

    This value should then be recorded for the asset in gross terms (ie both Gross value and Accumulated Depreciation) and a remaining useful life determined for depreciation. In this way, the register maintains the full replacement cost necessary for renewal planning information, etc.

    If current CCTV is not availalble, other assumptions will have to be made to determine remaining useful life and accumulated depreciation, based on construction dates, standard lives and and deterioration curves,.

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    Adam Thomas
    Proven Intelligence
    Australia
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