David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value Accounting and Asset Management NSW LG Professionals Finance Conference (May 2016)

First some History Accrual accounting adopted in mid 1980’s Valuation identified many did not know – – What assets they had – Where they were – What condition they were in – The extent of future renewal costs Asset Accounting was the catalyst for improved Asset Management

However …. As valuation was only real data - Accounting was used as key input to initial asset management plans Plans based on ‘high level accounting estimates’ rather than detailed planning Simple … but easy to get it totally wrong For example – estimated RUL and Depreciation Expense used to develop AMP

But what is ‘Asset Management’ Many definitions In simple terms – – Provide an appropriate Level of Service – Over long-term – In most cost effective manner

Involves Understanding what services are required Negotiating with community – – Level of Service – At appropriate cost and risk Optimising ‘Whole of Lifecycle Cost’ through – – Different Intervention Points – Different Treatments – Different Levels of Service – Non-Asset solutions

NSW IP&R Framework Achieving good results Focus on Levels of Service and optimising asset renewal and treatments Note: Asset Valuation and Depreciation are NOT inputs to this process

The paradigm has now flipped.. But many still caught in old ways Valuation and Depreciation is – – an ‘output’ which provides users with information about an entity’s performance – Not an ‘input’ to the asset management plan However data gathered from valuation (details, location, condition, etc) are inputs to AMP

Integration is essential Asset Accounting to reflect AM reality (consistent with recent AASB decisions) Also need to adjust accounting to reflect changes in concepts and standards For example – AASB13 change to definition and concept – ASB136 DRC v CRC – Residual Value Decision

End result - Many stull applying outdated or non-compliant approaches Valuation based on DRC rather than CRC Using ‘depreciation expense’ to determine ‘Fair Value’ Not based on factors that ‘market participants’ would use (condition, obsolescence, etc) Depreciation Not fully componentising Not splitting out ‘short-life’ from ‘long-life’ Not reflecting variability in ‘Useful Life’ due to changes in strategy or practices.

Valuation and Depreciation (AASB and IVS) In the context of the cost approach, depreciation refers to adjustments made to the estimated cost of creating an asset of equal utility to reflect the impact on value of any obsolescence affecting the subject asset. This meaning is different from the use of the word in financial reporting or tax law where it generally refers to a method for systematically expensing capital expenditure over time.

We still focus on meaningless information The ever-changing AMP will determine when an asset is to be ‘renewed’ – Not consistent for similar assets – Period between ‘interventions’ can change from year- to-year for specific assets – As result Useful Life, Short-Life and Long-Life are highly variable Accounting ‘Useful Life’ used only to ‘allocate the depreciable amount of the asset over an extended period’ – no role in AMP

RUL Does not even exist in accounting standards Irrelevant to determination of ‘Fair Value’ AASB May 2015 decision & Australian Interpretation 1030 – – Depreciation Expense MUST be based on the Depreciable Amount – Therefore MUST use ‘Useful Life’ – Fair Value / RUL can produce erroneous results note that Depreciation for valuation different and not linked to financial reporting

The Big Challenge Updating ‘well bedded old school practices’ to ensure – – Compliance with new standards and concepts – Results reflect ‘Asset Management Reality’ Ensuring accounting and asset management systems keep up to date with ever changing standards and concepts Achieving ‘integration’ while ensuring Asset Management reality drives the financial reporting (not vice versa)

Guidance

Questions David Edgerton FCPA Web: Mob: Work:(07)