1. Valuers and Asset Management Email: David@apv.net Depreciation Why it’s time to think a little differently SA LGFMG Conference March 2009 David Edgerton FCPA

2. Valuers and Asset Management Email: David@apv.net Outline Background Prescribed Requirements Comparison of Methods Condition Assessment? Material Misstatement? Implications

3. Valuers and Asset Management Email: David@apv.net Background 2005 Inquiry into Financial Sustainability had concerns with Depreciation Three papers commission June 2008 – Costing of Assets (Feb 2009) – Depreciation (Feb 2009) Object to provide a Technical Resource Consistent with NAMS AIFMGs

4. Valuers and Asset Management Email: David@apv.net Prescribed Requirements 6"Depreciation“ is the systematic allocation of the depreciable amount of an asset over its useful life. 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.

5. Valuers and Asset Management Email: David@apv.net Key Issues High Level – Relationship with future funding requirements – Allowable Methods (AASB 116 & UIG 1030) Specific Level – The Pattern of Consumption – Useful Life – Residual Value – Depreciable Amount

6. Valuers and Asset Management Email: David@apv.net Allowable Methods Must comply with all aspects of AASB 116 and UIG 1030 UIG Interpretation 1030 - – Depreciation is calculated by reference to the “depreciable amount” – Appropriate consideration is given to technical and commercial obsolescence – Maintenance and Capital expenditure are separably identified and accounted for in accordance with AASB 116. – The “renewals annuity” method is not used – Depreciation is calculated separately for each component.

7. Valuers and Asset Management Email: David@apv.net Pattern of Consumption

8. Valuers and Asset Management Email: David@apv.net Useful Life Be Careful with formulas ! – Useful Life = Age + RUL (Remaining Useful Life)

9. Valuers and Asset Management Email: David@apv.net Residual Value

10. Valuers and Asset Management Email: David@apv.net Depreciable Amount

11. Valuers and Asset Management Email: David@apv.net Putting it all Together

12. Valuers and Asset Management Email: David@apv.net Comparison of Methods

13. Valuers and Asset Management Email: David@apv.net Straight-Line v Advanced SLAM (Consumption Based Depreciation) 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

14. Valuers and Asset Management Email: David@apv.net Condition Assessment? Must relate to factors that drive the consumption or Indicate the level of remaining service potential Don’t Assume !

15. Valuers and Asset Management Email: David@apv.net Example: Be Careful

16. Valuers and Asset Management Email: David@apv.net Material Misstatement? Depreciation as % of Total Expenses What if calculation > 10% ? Depreciation is – allocation of the Depreciable Amount as an expense – over the useful life Sustainability Assessments?

17. Valuers and Asset Management Email: David@apv.net Single Asset Comparison Do you “expense” too much depreciation via the Statement of Financial Performance? Is this a “true and fair view”?

18. Valuers and Asset Management Email: David@apv.net Portfolio Comparison SL v Advanced SLAM ( Consumption Based Depreciation) Not just a timing difference

19. Valuers and Asset Management Email: David@apv.net Summary of Prescribed Requirements 6"Depreciation“ is the systematic allocation of the depreciable amount of an asset over its useful life. 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.

20. Valuers and Asset Management Email: David@apv.net Implications Compliance with AASB 116 Audit Evidence Asset Management Planning Material Misstatement Corporate Governance Public Accountability