Depreciation of Infrastructure Assets & Resource Allocation Decision ...

“DEPRECIATION OF
INFRASTRUCTURE ASSETS”
& Resource Allocation Decision
Making
Dr John Sing
Director – Corporate Services
Noosa Council

OBJECTIVES
General:
To determine the purpose of accounting for
the depreciation of IA’s

OBJECTIVES Cont
Specific:
1) Review fin. accounting requirements
2) Consider the need to depreciate
3) Develop a framework for IA depreciation
4) Examine the ‘conflict/problem’ faced by
accountants, engineers & asset managers
5) Offer a solution to the conflict/problem

1) FIN. ACCOUNTING REQUIREMENTS
External requirements
IA Accounting
Pol. & Proc.
IA Accounting
Information
Resource providers
Recipients of G&S
O’sight/review gps
Management
Internal requirements

2) DEPRECIATION
REQUIREMENT(S)
Mandatory
Aust Accounting standards
Prescribe traditional methods
– Systematic allocation of cost concept
– Relies on:
» estimating useful life & residual
value of the IA
Prescribe ‘backward looking focus’

MANDATORY REQUIREMENTS
Issue
Financial Accounting
Requirement
AAS4
Method
S/L, R/B, U/U, S/D
Concept
“Allocation of Cost”

IA’S S DEFINED
According to supply & demand
characteristics ie:
– a) ‘composite asset’ where life extended by
replacement of components and;
– b) demand for the service makes it desirable
Implies ‘maintenance’ of infrastructure to
ensure service provision

ALTERNATIVE PURPOSE(S) FOR
CHARGING DEPRECIATION
Asset management
Full cost pricing & recovery
Therefore essential to determine:
– The funding required to support
renewal/reinstatement of any loss in service
potential?

MANAGEMENT REQUIREMENTS
Adopting a method that:
Tracks more closely the pattern of
consumption
Views depreciation as a ‘measure of
consumption’
Is arguably more relevant and reliable for
‘allocation decisions’
Is ‘forward looking’

2001
2012
2013
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Estimated Renewals Expenditure
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
$000’s
Ren.
Exp
Annu
1999
2000

ALTERNATIVE APPROACH
Function of advanced asset management program
Based on life-cycle cost analysis
Not just a ‘wish list’ for maintenance
ie Produce an optimised list of renewal activities
Subject to ‘engineering’ audit

3) IA DEPRECIATION
FRAMEWORK
PURPOSE
Requirement Objective
Full Cost Pricing
Internal
Asset Man.
Consumption
or loss in
service pot.
Cell 1
#
CONCEPT
Allocation of
cost
Cell 2
External
AAS4
Cell 3 Cell 4
#

4) CONFLICT/PROBLEM
Fin. Accounting requires accounting for
what has happened in the past
Man. Accounting requires forecasting what
is to happen in the future
Therefore:
Determining 2 ‘depreciation’ measures on
the one IA

5) WHAT WE NEED
A ‘tool’ that enables the 2 measures to be
determined (easily)
Use this tool as the basis for comparing
backward measure with forward measure
(ie.. S/L V Renewals annuity)
The ability to objectively determine the
amount of ‘depreciation’ to be
funded/unfunded.

NSC Example
“AIM 21” is a microsoft based application
that provides Noosa Council with a unique
solution for dealing with this conflict.

Overview
“AIM 21” solution:
Based on asset class and catchment basis
Draws ‘engineering’ and ‘accounting’
information together
Produces a comparison of book deprn. with
renewal annuity based concept
Enables level of funding/unfunding of depn.
to be objectively determined

Asset Enquiry – Graphical

Conclusion
Given that:
– depn. . means different things to different ‘economic
decision makers’
As accountants we need to be mindful of these
differences
Expected to produce relevant and reliable
information
Ultimate aim is to ensure IA’s are appropriately:-
– Managed in an operational sense and;
– Monitored in a financial sense.

Questions and further discussion

TTWSB Draft Financial Plan
Inputs Sheet
Na viga tion Pa ne l
Go to Financial Plan
Go to Graphs
Go to CapX Program
Go to Loans Schedule
"Solve" Button
Go to "Tax"
Ca se Be ing Mode lle d
Population Growth Medium 2 High = 1; Medium = 2; Low =3
Consumption Growth Rate Medium 2 High = 1; Medium = 2; Low =3
Globa l Inputs
W a te r D e ma nd Inputs
CPI (Indexation) CPI 2% Current Equivalent Population (EP) - Townsville T OW NSPOP 90,413
Starting Year for Analysis YEAR 2000/01 Current Equivalent Population (EP) - Townsville 2000-05 2005-10 2010-15
Weighted Average Cost of Capital WACC 9.0% T _LOW POP 1-4 0% 0% 0%
Forecast Debt/Equity Ratio D ER AT IO 100% T _MED POP 1-4 1.5% 1.5% 1.5%
Dividend Payout Ratio (Years 5 onward) DPR 65% T _HIGHPOP 1-4 3% 3% 3%
Current Loan Balance LOANBAL $ 8,782,284
Interest on Current Loans LOAN INT 6.40% Current Equivalent Population (EP) - Townsville T hPOP 50,000
Current Loan Term (Years) T ERM 11 Current Equivalent Population (EP) - Townsville 2000-05 2005-10 2010-15
Interest on NEW Loans N EWINT EREST 8.00% T h_LOWPOP 1-4 1% 1% 1%
Loan Term (New Loans) N EW T ER M 20 T h_MEDPOP 1-4 2.5% 2.5% 2.5%
Subsidy on New Works (DAM) SUBSID Y 1 50% T h_HIGH POP 1-4 3% 3% 3%
Subsidy on New Works (OTHER) SUBSIDY 40%
Subsidy on Replacement Works SUBSID YOLD 0%
Interest on Cash and Investmants (Revenue) IN T ER EST REV 3% Assumed Consumptionm (L/EP/day) - Townsville 2000-05 2005-10 2010-15
% Depreciation Funded DEPRECIAT ION 100% LOWGRO1-4 600 600 600
Total Length of Mains (km) MAIN S - MED GR O 1-4 912 870 870
Interest on surplus cash SURPLUS 3% H IGHGRO 1-4 1000 1000 1000
Effective Tax Rate (1999-2000) T AX1 36%
Effective Tax Rate (2000-01) T AX2 34% Assumed Consumptionm (L/EP/day) - Thuringowa 2000-05 2005-10 2010-15
Effective Tax Rate (2001- ) T AX3 30% T hLOWGRO1-4 500 500 500
T hMED GR O 1-4 588 625 625
T hH IGHGRO 1-4 750 750 750
Va ria ble Inputs 0 0 1
Year Yr 2000 2001-05 2005-10
Results
Internal rate of return (20 years) 12.7%
Forecast Growth in Charges NA 5.0% 0.0%
Growth in Other Revenue (rentals etc) 0.0% 0.0% 2.0%
Growth in Community Service Obligations NA 2.0% 2.0%
10.39392 Growth in Expenses 5.6% 3.0% 3.0%