David Edgerton FCPA Director Quality + Expertise + Flexibility + Innovation = Confidence & Real Value Implications of AASB’s Residual Value Decision

Outline Background and context Key points of the decision What it means Issues and solutions

Background and context Oct 2014 Question to AASB Assets subject to renewal – Recognition that ‘value is preserved’ and ‘costs saved’ through recycling – Different practices adopted – Was there need to change definition of RV? AASB – Tentative Decision (Feb 2015) – Final decision May 2015

AASB Research and Outreach Board identified two approaches View One (RV = zero) View Two (RV = cost saved through recycling)

View One Comp 1 Comp 2

View Two Depreciable Amount Residual (non-depreciable) Residual Value

Key points of the decision RV is the amount received as consideration when control is relinquished. Therefore likely to be nil or insignificant

However - Assets need to be appropriately componentised If components renewed – split into short and long life components and depreciate separately Furthermore – Components do not have be physically identifiable

In addition Subject to materiality: OK to use RV as the separate component and using blended depreciation rates Concept of depreciation is different for valuation than for financial reporting – valuation and depreciation expense are not linked

For example: 20m dredged channel Fair Value ADAD Replacement Cost Long Short ValuationDepreciation

What it Means

If Current Assume Zero RV Does not mean your depreciation expense is correct ! Most likely over-stated Need to consider whether you need to split between short-life and long-life components

Example

Different Approach = Different Results

If Currently Adopt RVs … Need to reassess split between short-life and long-life parts Need to reassess short UL Need to depreciate the long-life part (not previously depreciated) Long-Life UL may be greater than service life of the greater asset Consider materiality

Issues and solutions

Assumptions Split between short & long? – If not done – then do – If used RV – adopt as default Useful life long? – Detailed discussions with asset managers – Long life – 150, 200, 300 ??? Useful life short? – Is it fixed or a normal range? – What will be impact of improved asset management?

Registers Do you need to increase lines in asset registers? What would you call them? Do you need separate AMS and FAR?

Valuations v Depreciation Are they linked ? Should they be? Potential errors if so – Valuations grossly under-stated or – Depreciation grossly over-stated Impact on KPIs? Even if valuation done recently…. Depreciation expense may no longer stack up !

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