1. www.apv.net David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value Valuation and Depreciation of Road Infrastructure

2. www.apv.net Agenda Background Materiality and Risk Accounting Standards Practical Issues Integration: Valuation and Asset Management AASB 13 Final Thoughts

3. www.apv.net Background

4. www.apv.net Some of our WA clients

5. www.apv.net Legislative 30 June 2015 All assets to be at Fair Value – Land – Buildings – Infrastructure – Parks – Plant

6. www.apv.net Accounting Standards AASBs (13, 116, 136, 5) Australian Interpretations (1030, 1050) IFRIC 1, 4 IFRIC 12 / IPSAS 32 Service Concession Arrangements

7. www.apv.net Auditing Standards Key outcome is that auditors need to ensure valuation and methodology – – Is sound and makes sense – Complies with all relevant accounting standards – Undertaken by expert with relevant knowledge and expertise – Can be supported by sufficient and appropriate audit evidence – Supported by appropriate report and disclosures

8. www.apv.net Road Infrastructure Sealed Roads Unsealed Roads Bridges Kerb Stormwater Footpaths / Cycle ways TMDs Traffic Signals What else?

9. www.apv.net Landfills ? Complex accounting and valuation issues IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

10. www.apv.net Materiality and Risk Most material figures Highly subjective Non-compliant or overly simplistic approaches Significant impact on KPIs & Sustainability Measures

11. www.apv.net Remember This is not an engineering exercise ! Nor is it a ‘market valuation’ exercise It is – – Valuation – Based on Accounting Standards Essential to have right expertise with right experience

12. www.apv.net Most councils will - Use overly simplistic approaches Based on poor in incorrect assumptions That do not reflect asset management reality Resulting in materially incorrect results

13. www.apv.net Typically - Fair Value significantly under-stated Depreciation Expense (following years) significantly overstated KPIs make asset position and asset management performance look worse than actual

14. www.apv.net Simplistic v Reality

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16. Time for Reflection What have you done so far? Have you covered off ALL your asset classes? Are you well prepared? Have you used overly simplistic approaches? Will you ‘over depreciate’ ?

17. www.apv.net Overview of Accounting Standards AASB13 about the valuation AASB116 & others about specific asset types Fair Value and depreciation concepts are critical Disclosure – – Now critical – Major part of the output

18. www.apv.net Fair Value Definition “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (Exit Price)

19. www.apv.net Three techniques Market Income Cost – Typically used for road & infrastructure – Note differences between Cost (AASB13/116) and Depreciated Replacement Cost (AASB136)

20. www.apv.net AASB13 Process

21. www.apv.net AASB116 Process

22. www.apv.net Specific requirements AASB116 6 "Depreciable amount“ is the cost of an asset, or other amount substituted for cost, less its residual value. 43Each part.... shall be depreciated separately. 50Allocated on a systematic basis over its useful life. 51The residual value and the useful life of an asset shall be reviewed at least at the end of each annual reporting period 60The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. 61The 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.

23. www.apv.net Concepts in simple terms

24. www.apv.net Concepts for cyclical maintenance assets

25. www.apv.net Critical Methodology Issues Future Economic Benefit – What does the asset provide? – drivers of consumption? Replacement Cost (existing v proposed) Depreciable Amount – Residual Value and Useful Life Pattern of Consumption Accumulated Depreciation (% RSP)

26. www.apv.net What is WDV & Depreciation Expense ? GCRC = $100,000 Actual Age = 40 years Original assumptions Useful Life = 45 years Residual Value = nil Current condition assessment RUL = 30 years Assume Pattern of Consumption is constant

27. www.apv.net What if you also knew ? Asset was renewed 10 years ago ? Expect to renew asset back to as new in 5 years time at cost of $50,000 ? After the renewal in year 30 the level of RSP was assessed as = 80%

28. www.apv.net Possible outcomes…. But only one is correct!

29. www.apv.net Actual Data Depreciation = 10,000 / 5 years = 2,000 p.a

30. www.apv.net Example: Common Mistakes

31. www.apv.net Practical Issues Segmentation Componentisation

32. www.apv.net Inputs & Valuation Hierarchy Valuation Hierarchy based on – Lowest level of input Unless input is insignificant Need to – Identify ALL significant inputs Classify as level 1, 2 or 3 Technique DOES NOT determine hierarchy

33. www.apv.net What are the inputs? (observable or unobservable) Asset design, location and specification Condition (and Scoring methodology) Componentisation / Segmentation Replacement Cost (Unit Cost) – what level? – How developed? Component level details (NOT at asset level) – Residual Value – Pattern of Consumption – Useful Life Future Use / Obsolescence?

34. www.apv.net Component Assumptions AASBs mandate that depreciation be applied at component level AASB13 requires these disclosures at component level Whole of asset depreciation assumptions are ‘inappropriate’

35. www.apv.net Is ‘Useful Life’ an input ?

36. www.apv.net What is ‘Pattern of Consumption’ ? What factors drive the consumption of service potential? Do the factors and their impact change over time? Is consumption impacted by asset management practices? Is consumption ‘constant’ or something else?

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38. What is the Residual Value ? Scrap value at point of ultimate disposal? Cost saving from renewal ? Definition is ‘an amount’ which can be either Need to reflect asset management reality

39. www.apv.net APV Consumption Based Approach 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

40. www.apv.net APV Consumption Based Approach

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42. Integration Valuation and Asset Management

43. www.apv.net Confusion Objectives Terminology Basic Concepts

44. www.apv.net Driven by Desire for – – Efficiency (use one set of figures) – Simplicity over Quality and Accuracy Blinkered Views / Culture Poor practices through – – Regulation – Old School / Outdated Practices

45. www.apv.net Outcome Asset Management Capability being held back Valuation and Depreciation materially misstated Learning and development being stunted Wastage and Inefficiency Questionable Strategic Decisions Erroneous KPIs Lack of real accountability Poor Corporate Governance

46. www.apv.net Objectives Strategic Asset ManagementAccounting The Goal of Asset Management is to meet a required level of service in the most cost effective way. Must include “Whole of Lifecycle Cost” To provide general purpose users with information that enables them to make informed decisions about scarce resources. Need to produce Optimised Model that incorporates – Level of Service Lifecycle Costs Cost of Acquisition Maintenance Operation Costs Renewal / Upgrade (CAPEX) Key Information provided in financial statements – Fair Value (% of RSP) Depreciation Expense (rate of consumption of the service potential) Disclosures (so can interpret the information)

47. www.apv.net Objectives The financial statements are about reporting information about the level of remaining service potential of “what actually exists” and the estimate of how much will be consumed over next 12 months. It has nothing to do with future lifecycle costs (renewal, upgrade, maintenance or operational)

48. www.apv.net Terminology: Depreciation What it is Isn’tNotes Quasi-estimate of future funding needs Future funding needs are about actual lifecycle costs. Depreciation is neither a cost of acquisition, maintenance, operational, renewal, upgrade or disposal cost. Way to measure whether an entity is sustainable Sustainability is about whether you will be able to continue to afford future funding needs. Depreciation has nothing to do with this. The allocation of the Gross Cost of an asset over the useful life It is about allocating the “Depreciable Amount” NOT the entire asset. Some assets have extremely high Residual Value Estimate of what service potential will be consumed in next 12 months i.e. estimate of loss of wealth

49. www.apv.net Basic Concepts (Valuation) ConceptCommon Mistakes Gross Current Replacement Cost GCRC of what will replace with rather than what exists. No adjustment for diff in utility. Irrelevant debate over Greenfield and Brownfield Residual Value & Depreciable Amount Theoretical scrap (that will never happen) rather that actual Asset Management reality Just assume zero Residual Value (easy) Pattern of Consumption Just assume everything is constant (straight-line) despite Asset Management reality Useful LifeNot linked to Asset Lifecycle Theoretical guess based on theoretical scrap Use of Relevant Factors Rely on age alone rather than consider the relevant factors Determination of WDV No consideration of actual condition or holistic factors

50. www.apv.net AASB13

51. www.apv.net What is it about? GFC and Sovereign Debt Crisis Valuation = Subjectivity Need for greater information Greater Risk = Greater Disclosures

52. www.apv.net Key Aspects of AASB13 NOT about the Asset Focus on HOW the valuations were made IS about the methodology

53. www.apv.net Asset Classes Probably the biggest issue Totally missed by many ! All disclosures by ‘Asset Class’ ‘Asset Class’ defined by paragraph 94

54. www.apv.net Asset Classes 94 An entity shall determine appropriate classes of assets and liabilities on the basis of the following: (a) the nature, characteristics and risks of the asset or liability; and (b) the level of the fair value hierarchy within which the fair value measurement is categorised. The number of classes may need to be greater for fair value measurements categorised within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity.

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56. Disclosures General Disclosures (policies and reconciliations) For each ‘Asset Class’ – Valuation Techniques and Inputs – If level 3 For each level 2 input (no disclosures) For each level 3 input – Where did it come from – How was it evaluated – Quantitative info (eg. min and max) – How reliable is it (sensitivity +/- %) – Impact ($) on Fair Value Measurement

57. www.apv.net Techniques and Inputs (for each asset class) Market / Income/Cost (or combination!) High level overview of process – Segmentation – Componentisation – Condition scoring process Identify and disclose ALL inputs Classify each input as level 1, 2 or 3

58. www.apv.net Final Thoughts Understand Auditors Expectations Doing Fair Value requires much more than some calculations (calc is only 25% of work) Easy to get key concepts wrong – Understate value – Overstate Depreciation Expense Be wise about your implementation options Integration: valuation and Asset Management

59. www.apv.net What can APV do? National experts in local government infrastructure valuation Over 25 years experience Experienced engineers for infrastructure Proven methodology and results Full carriage right through to audit sign off No need to worry !

60. www.apv.net ISO9001 Quality Management Results to date

61. www.apv.net Valuation Timeframe Final Audit review and Sign Off Finalise accounts Audit review of valuation Final Valuation Report Council quality assurance review Draft valuation report Inspections and valuation preparation Confirmation of assumptions Council to provide asset listing and other data APV appointed and work scheduled Council to assess proposal and awarded contract APV to prepare proposal Council goes to market Council gets data and prepares Oct Aug - Sept Oct Nov Dec Dec - Feb Mar Mar / Apr May Jun Aug Sept

62. www.apv.net Questions David Edgerton FCPA Email: David@apv.net Web: www.apv.net Mob: 0412 033 845 Work:(07) 3221 3499