Depreciation: Why it's time to think a little differently

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18 Νοε 2013 (πριν από 3 χρόνια και 4 μήνες)

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Valuers and


Asset Management

Email:


David@apv.net

Depreciation


Why it’s time to think a little
differently

SA LGFMG Conference

March 2009

David Edgerton FCPA

Valuers and


Asset Management

Email:


David@apv.net

Outline


Background


Prescribed Requirements


Comparison of Methods


Condition Assessment?


Material Misstatement?


Implications

Valuers and


Asset Management

Email:


David@apv.net

Background


2005 Inquiry into Financial Sustainability had
concerns with Depreciation


Three papers commission June 2008


Costing of Assets (Feb 2009)


Depreciation (Feb 2009)


Object to provide a Technical Resource


Consistent with NAMS AIFMGs

Valuers and


Asset Management

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David@apv.net

Prescribed Requirements

6

"Depreciation
“ is the systematic allocation of the depreciable amount of an
asset over its useful life.

6

"Depreciable amount“
is the cost of an asset, or other amount substituted for
cost, less its residual value.

43

Each part
.... shall be depreciated separately.

50

Allocated on a
systematic basis
over its useful life.

51

The residual value and the useful life of an asset shall be reviewed
at least at
the end of each annual reporting period

60

The
depreciation method used
shall reflect the pattern
in
which the asset's
future economic benefits are expected to be consumed by the entity.

61

The
depreciation method applied to an asset shall be reviewed
at least at the
end of each annual reporting period and...... the method shall be changed to
reflect the changed pattern.


Valuers and


Asset Management

Email:


David@apv.net

Key Issues


High Level


Relationship with future funding requirements


Allowable Methods (AASB 116 & UIG 1030)


Specific Level


The Pattern of Consumption


Useful Life


Residual Value


Depreciable Amount

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Asset Management

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Allowable Methods


Must comply with all aspects of AASB 116 and UIG 1030


UIG Interpretation 1030
-


Depreciation is calculated by reference to the “depreciable
amount”


Appropriate consideration is given to technical and
commercial obsolescence


Maintenance and Capital expenditure are separably
identified and accounted for in accordance with AASB 116.


The “renewals annuity” method is not used


Depreciation is calculated separately for each component.

Valuers and


Asset Management

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Pattern of Consumption


Valuers and


Asset Management

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Useful Life


Be Careful with formulas !


Useful Life = Age + RUL (Remaining Useful Life)


Year
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Age
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
Method A
Method B
Method C
20,000


15,000


10,000


5,000


-


25,000


50,000


45,000


40,000


35,000


30,000


WDV

Method A

Method B

Method C

WDV

$25,000

36,667

40,000

%Error

(37.5%)

(8.3%)

-

Depreciation

$625

$333

$1,000

%Error

(37.5%)

(66.7%)

-


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Asset Management

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David@apv.net

Residual Value


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Depreciable Amount


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Putting it all Together


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Comparison of Methods


Straight
-
Line

Condition Based
Depreciation

Consumption Based Depreciation

Factors Used:

Age only


Typically uses Actual Age
plus RUL to calculate a Total
Useful Life.


WDV is then determined by
RUL/Total Life


Residual.


If applied
correctly this
method is

good

for assets
with a short and predictable

Useful Life
. However, in
practice it is often incorrectly
applied resulting in material
misstatement.


Care needs
to be taken to ensure the
critical assumptions reflect
the asset lifecyc
le.


Factors Used:

Physical Condition



Typically a degradation
profile is created based
on a model that
correlates the physical
condition to an estimated
total life cycle. Most
commonly used with road
pavements.

Factors Used:

Holistic and Component
Specific
Factors


Considers factors such as functionality,
capacity, utilization, obsolescence, etc
at the whole of asset level. Then takes
into account the physical condition and
repair and maintenance history of the
asset to determine the level of
remain
ing service potential. A Matrix is
created to link the level of service to
the valuation and depreciation.


Valuers and


Asset Management

Email:


David@apv.net

Straight
-
Line v Advanced SLAM

(Consumption Based Depreciation)

1

3

4

5

60

2

100

Cost to renew back to 100 = 60

Therefore Residual = 40


Unacceptable LoS

MUST be Closed


Very High

High

Adequate

Adequate ?

Barely

Adequate

Valuers and


Asset Management

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Condition Assessment?


Must relate to factors that drive the
consumption or


Indicate the level of remaining service
potential


Don’t Assume !

Valuers and


Asset Management

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Example: Be Careful


Straight-Line
1
100.00%
1.5
87.50%
2
75.00%
2.5
62.50%
3
50.00%
3.5
37.50%
4
25.00%
4.5
12.50%
5
0.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
1
1.5
2
2.5
3
3.5
4
4.5
5
Straight
-
Line
Straight
-
Line
Valuers and


Asset Management

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Material Misstatement?


Depreciation as % of Total Expenses


What if calculation > 10% ?


Depreciation is


allocation of the Depreciable Amount as an
expense


over the useful life


Sustainability Assessments?

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Asset Management

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Single Asset Comparison


Do you “expense” too much depreciation via
the Statement of Financial Performance?


Is this a “true and fair view”?

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Asset Management

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Portfolio Comparison


SL v Advanced SLAM (
Consumption Based Depreciation)


Not just a timing difference


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Asset Management

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Summary of Prescribed Requirements

6

"Depreciation
“ is the systematic allocation of the depreciable amount of an
asset over its useful life.

6

"Depreciable amount“
is the cost of an asset, or other amount substituted for
cost, less its residual value.

43

Each part
.... shall be depreciated separately.

50

Allocated on a
systematic basis
over its useful life.

51

The residual value and the useful life of an asset shall be reviewed
at least at
the end of each annual reporting period

60

The
depreciation method used
shall reflect the pattern
in
which the asset's
future economic benefits are expected to be consumed by the entity.

61

The
depreciation method applied to an asset shall be reviewed
at least at the
end of each annual reporting period and...... the method shall be changed to
reflect the changed pattern.


Valuers and


Asset Management

Email:


David@apv.net

Implications


Compliance with AASB 116


Audit Evidence


Asset Management Planning


Material Misstatement


Corporate Governance


Public Accountability