Asset Valuations and associated reporting of depreciation and fair-value have started to face more intense scrutiny. Many auditors are now asking for justification of methodologies and validations of critical assumptions. Almost all states are now depreciating assets using fair-value methods.
Our expertise and back-ground in asset management provides a unique advantage for assisting councils with fair-value based valuations and compliance with accounting standards.
Critical Assumptions for Fair-Value
The most critical assumptions for asset valuations under local government guidelines are:
Estimates and determination of useful lives.
Calculation of remaining life based on asset assessment criteria – condition, functionality, legislative and other compliance etc.
Determining appropriate residuals.
Application of appropriate unit rates.
Impairment testing methods.
Market Value or Replacement Cost method.
Asset Management Frameworks, based on ACEAM Step-Watch methodology, provide the fundamental basis for defendable valuations. Clients using the Step-Watch facilitation have developed a corporate life cycle decision model for both engineering and accounting purposes. The model that determines the engineer’s future funding programs is the same life cycle model that computes the accountant’s fair value and depreciations.
Contrary to the popular myth that engineers and accountants cannot co-exist; our methods have proven that the two disciplines in fact rely on the same set of information.
Sample Life Cycle Model for Depreciation and Fair-Value Computations
The Hard Questions are not always hard
Our philosophy with Fair-Value is simple but robust – Do not use a sledge hammer to kill a fly!
The first principle is that asset management is an input and asset accounting is an output.
The second principle is that the rate of consumption of the service potential is a function of the asset management practice, not a hypothetical outcome of age based degradation.
The third principle is that not all pipes last 80 years, not all facilities last 100 years and not all roads last 60 years – if they did, we would not have to re-assess condition or service potential every 3-4 years.
And finally, without appropriate componentisation, using an asset management framework, any computation of useful life or standardization of depreciation methodology is fictitious.
All critical assumptions can be justified and all hard questions can be answered through good asset management frameworks. The absence of a corporate framework built on asset management science is often the main reason for ‘un-defendable valuations’. The following issues are common:
Do I need to componentise and if so what are the components?
How do I compute unit rates – do I use green-field or brownfield?
Is the pattern of consumption of my infrastructure and plant - a straight-line, a curve, a combination or something different?
How do I determine appropriate residuals?
If I use age based methods, how do I justify the risk of impairment?
Any organisation that looks for these answers outside its own environment and framework of practice is looking at the wrong spots. The answers lie within – within the asset management framework which is the decision framework upon which Council:
Assesses its infrastructure.
Sets its service levels.
Measures the asset’s remaining service potential – straight-line basis, life cycle basis or age basis.
Plans capital and maintenance work.
Allocates funding and budgets for renewals, expansions and upgrades.
Determines which assets are at the end of life and why.
Straight-line vs Consumption Pattern of Depreciation
What services do we provide?
We have learnt and recognised from years of experience that whilst it is easy to develop formulae for depreciation and fair-values, there is a long way to go in local government to adopt a corporate practice of how to treat accounting transactions. Our methods enable Councils to adopt the most appropriate in-house method, based on local skills, data and knowledge. Our key elements of local government accounting practice are:
Development of valuation methods for infrastructure assets.
Development of remaining life and consumption models for computing fair-value.
Design, testing and validation of business processes for each material transaction, so that end of year re-conciliation is defendable.
Corporatising business process rules – what will the engineers do and what will the accountants do to get it right on the 30th of June.
Review of existing methods and diagnostics.
Pre-audit reviews to avoid audit risks.
Development of unit rates and useful lives.
Application of asset management frameworks to enable asset accounting outcomes.