2011 Roads Conference DAY 1 - Session 2 - John - Local ...

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Nov 18, 2013 (3 years and 9 months ago)

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DEPRECIATION

...
IS IT
OF ANY RELEVANCE TO
AN ASSET MANAGER OR
JUST ACCOUNTANT
MUMBO JUMBO?


Presented by John Comrie 25 Aug 2011

ROLE OF ASSET MANAGER


identifying infrastructure related needs to meet
prioritised and
affordable

community service
levels


Involves planning for and
optimised
maintenance regime and asset
renewal/replacement timing

to minimise whole
of life costs and achieve desired
service
standards


2

Depreciation


Simply involves assessing and recognising as
an expense the rate of consumption of assets
(rather than full cost at time of acquisition)


Assets are things that provide economic
benefits over more than 1 year


Roads are assets


Local governments have
lots

of assets


3

SA Local Government 2006 Infrastructure Asset Stock

Storm water Drainage
-


($1.5B)

15%

CWMS (STEDS)
-

($0.2B)

2%

Gravel Roads
-

($1.0B)

10%

Other

-

($0.1B)

1%

Bdgs
-
($1.6B)

16%

Parks
-

($0.1.B)

1%

Footpaths/Bikeways

-

($0.6B)

6%

Bridges
-

($0.2B)

2%

Sealed Roads
-

($4.7B)

47%

Depreciation


Calculating depreciation involves assessment
of an asset’s;


Current replacement cost


Useful life


Current remaining useful life


Residual value @ end of useful life


Depreciation is approximately 25% of average
council’s total operating costs


5

Depreciation


Amount, method and rate of depreciation is to
a large extent irrelevant to asset manager


Asset management responsibility unchanged
regardless of whether depreciation recognised
or not


(up until mid
-
1990’s accounting requirements
didn’t provide for recognition of depreciation of
local government infrastructure)

6

Asset management needs
money


Assets are long
-
lived. Expenditure needs
associated with providing service from assets
will vary between years


In order for funds to be provided when
required for asset management need to base
service levels on affordability

7

Service level affordability


cannot be determined by considering historic
asset management outlays or projected
available budget cashflow capacity or expected
immediate needs for asset management


8

Service level affordability?


only simple, practical way of assessing is by
looking at an under
-
lying trend
accrual
accounting

projected operating result over at
least a 5 year and preferably a 10 year period



Accrual accounting operating result is operating
revenue less operating expenses (including
depreciation)

9

Service level affordability?


If revenue generated to offset depreciation
expense then will (all other things being equal)
have sufficient cash to renew assets when
required


Even though asset management cashflow needs
will vary between years

10

Service level affordability?


If a council bases service levels and revenue
generation on ‘cash costs’ then will struggle to
accommodate increased maintenance and
asset renewal as assets age

11

Service Level Affordability


Where unable to financially sustain current standards of
service from assets and not practical to generate
additional operating revenue then
no choice

but to;


plan to reduce the range and level of service from
assets to achieve long
-
run service level affordability


Involves reviewing needs and priorities (eg
establishing road hierarchy and varying service levels
accordingly)

12

Resolving Asset Management
Funding Gaps


Even if service levels are affordable long
-
term
there may though be a cash flow gap in any
year between revenue generated and outlay
needs


If so then need to use existing financial
assets/increase borrowings to accommodate
asset management needs

13

I&AMP and LTFP


Long
-
term financial plan should be based on
achieving financial sustainability and
affordable service levels


Infrastructure and Asset Management Plan
should be based on minimising whole of life
asset costs and affordable service levels


Financial projections in both documents need
to be consistent

14

Forecasting Renewal Needs


I&AMP renewal/replacement projections should
be based on each asset’s economic life


Useful life for accounting purposes should be
based on same (and reviewed annually)


Asset manager and CFO should work
collaboratively to determine useful lives


15

Mumbo Jumbo?


Depreciation not of direct relevance to asset
manager


But is vitally important to Council in determining
revenue raising and service level decisions


Recognising and generating revenue to offset
depreciation enables


Service levels to be sustainable


Equitable revenue raising over time


Helps ensure funds available when optimally
required for asset management


16

Measuring depreciation


Is hard to reliably determine (replacement
cost, rate of asset consumption, remaining
useful life, residual value) all uncertain


Soundly based estimate is sufficient


Is much better than ignoring altogether which
is what historically did

17

Improved Asset Management
Performance


Various previous studies identified that SA councils were
substantially under
-
funding asset management


Asset renewal outlays have increased from estimated
$55m in 1998/99 to $275m in 2008/09 (ie by about 3.5
times after adjusting for inflation)


Has been achieved because councils have on average
generated revenue to offset depreciation (Operating
result improved from
-
17% to breakeven)

18




Thank You

19