Local Government Asset Accounting Manual Update No. 4

Department of Local Government
Local Government Asset Accounting Manual
Update No. 4 July 1999
Asset Accounting Manual - Foreward
FOREWORD
PURPOSE OF THE MANUAL This Manual has been prepared with the intent of providing councils with guidance on the identification, classification, measurement, depreciation and reporting of assets. This information will be essential for all councils as they implement the requirements of AAS 27. The Manual should be read in conjunction with the Code of Accounting Practice and Financial Reporting (Code) issued to councils in September, 1992 (latest Update No. 7 issued June 1999) both of which are prescribed standards per clause 21 of the Local Government Financial Management Regulation. Together, these resource documents provide comprehensive information to facilitate implementation of the Standard. Councils should be aware, that the Manual and the Code are designed to provide a framework to assist councils in making good financial and management decisions. They do not, and cannot, be expected to contain all answers to all questions. It is recommended therefore, that councils refer to all available data, both internal and external, when considering asset management and accounting issues. Councils should consider: 1. 2. Industry Best Practices to assist in making decisions to achieve optimum benefits. Legislative requirements specified in the Local Government Act 1993 and the associate Local Government (Financial Management) Regulation as well as any other external legislative requirements. The technical guidelines included in the Manual and the Code which provide a framework for councils to understand and resolve issues such as determination of control, materiality concepts etc. Applicable Australian Accounting Standards and Statements of Accounting Concepts issued by the Australian Accounting Research Foundation. Other resource materials which provide information either of a technical nature or of asset management principles generally. Councils internal accounting procedures manual which should incorporate local policies and procedures detailing the accounting treatment of issues which do not fall within the framework provided in the Manual or the Code. Specific circumstances which prevail in the council along with councils pre-determined goals and objectives as they relate to asset management & accounting.
3.
4.
5.
6.
7.
Where requirements of any technical document available to councils or other externally imposed legislation differs from the requirements under this Manual, the foregoing requirements would apply in addition to, and not, in lieu of, the requirements of this Manual.
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Asset Accounting Manual - Structure
STRUCTURE OF THE MANUAL The Manual has been structured into 11 Sections and 9 Appendices. Each section has the following format: 1. 2. 3. 4. Accounting Standard Framework Discussion Worked Examples
The numbering of topics throughout the Manual is prefixed firstly by the chapter number, followed by the above format number. Thus the number 1.2.1 refers to chapter one, framework topic one. Similarly, the number 4.3.4 refers to chapter four, discussion topic four. Appendices are tabled at the end on the Manual. Reference to accounting standards provide the background to the relevant topics in each Section and stipulates the professional accounting guidelines which should be followed. Adherence to the accounting standards has been prescribed in legislation through both the Local Government Act 1993 and the Local Government (Financial Management) Regulation 1993. The accounting standards provide broad guidelines which reporting entities must follow to ensure consistency in reporting and adherence to generally accepted accounting principles. However, these principles provide for a number of options to achieve the stated objective. For example, Australian Accounting Standard AAS 27 requires that local governments depreciate non-current assets. AAS 4 provides alternatives methods for depreciating assets i.e. straight line, reducing balance etc. The framework has been developed within the requirements of the applicable accounting standards and the local government legislation to provide general guidelines and policy directives for resolving the majority of important asset management and accounting issues that will confront councils. Where a framework is not provided, councils must utilize sound management judgment in adopting best practices which provide optimum benefits. Wherever the framework restricts or specifies a certain practice which goes beyond generally accepted accounting principles, those practices should be adhered to. The requirements specified in the framework are in addition to and prevail over the more generally defined standards. All major issues are identified in the framework and further expounded in the discussion of each Section of the Manual. Councils may find that in most instances, the framework will satisfy most of their operational questions. However, the discussion is available to provide more detail and also various worked examples are provided in the Manual for additional clarification. Various cross references exist within the Manual between topics and these have been identified to assist the user to focus on related issues. References, where applicable, are also made to the various appendices at the end of the Manual.
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Asset Accounting Manual - Structure
ASSET ACCOUNTING MANUAL - STRUCTURE
Section 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Introduction Planning & Implementation Asset Control and Ownership Asset Classification and their Use Capitalisation Principles and Materiality Recording of Assets General Valuation Principles Specific Asset Valuation Components Depreciation and Useful Life Asset Management Issues Reporting in the Financial Statements
Page 101 201 301 401 501 601 701 801 901 1001 1101
Appendices 1. Summary of relevant Australian Accounting Concepts, Australian Accounting Standards and the Local Government Accounting Regulations Glossary of Terms References and Further Reading Indicative Useful Lives Water and Sewerage Assets Indicative Useful Lives for Councils Non-Current Assets Guidance on Asset Classifications Accounting for Drainage Assets Accounting for Roads Annual Reports by Councils (LGA s.428) (A detailed table of contents follows)
A101 A201 A301 A401 A501 A601 A701 A801 A901
2. 3. 4. 5. 6. 7. 8. 9.
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Asset Accounting Manual Table of Contents
ASSET ACCOUNTING MANUAL - TABLE OF CONTENTS
Section 1. INTRODUCTION 1.1 1.2 1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 1.3.7 1.3.8 1.3.9 1.3.10 1.3.11 Accounting Standard Framework Discussion Australian Accounting Standard AAS 27 Accounting Standards Definition of local government assets Benefits of accounting for non-current assets Topics in this Manual Planning for implementation Systems considerations Leased assets Level of asset recording Internal accounting procedures manual Application of the manual to other entities
Page 101 101 102 104 104 104 105 106 107 108 108 108 108 109 109
2.
PLANNING FOR IMPLEMENTATION 2.1 2.2 2.3 2.3.1 2.3.2 2.3.3 Accounting Standard Framework Discussion Background Determination of strategy Implementation issues
201 201 202 203 203 203 204
3.
ASSET CONTROL AND OWNERSHIP 3.1 3.2 3.3 3.3.1 3.3.2 3.3.3 3.3.4 3.4 Accounting Standard Framework Discussion Background Definition & recognition of assets Vesting of land Determination of control Worked example
301 301 302 304 304 304 305 305 311
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Section 4. ASSET CLASSIFICATION AND THEIR USE 4.1 4.2 4.3 4.3.1 4.3.2 4.3.3 4.4 Accounting Standard Framework Discussion Method of classifying assets Asset Functions Asset Types Worked example
Page 401 401 402 404 404 404 408 417
5.
CAPITALISATION PRINCIPLES AND MATERIALITY 5.1 5.2 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6 5.3.7 5.4 Accounting Standard Framework Discussion Background and conceptual framework Distinction between capital and maintenance expenditure Level of disaggregation of assets Concept of materiality Determination of capital or recording thresholds Treatment of aggregate assets Recording of minor assets Worked example
501 501 502 504 504 504 506 508 510 511 512 512
6.
RECORDING OF ASSETS 6.1 6.2 6.3 6.3.1 6.3.2 6.3.3 6.3.4 6.3.5 6.3.6 6.3.7 6.3.8 6.4 Accounting Standard Framework Discussion Identification and recording of existing assets Recording of assets acquired after 1st January, 1993 Assets partially acquired at 1st January 1993 Treatment of costs of construction and other major contracts Disposal and scrapping of assets Private contributions to asset construction/acquisition Council contributions to asset construction/acquisition Asset register Worked example
601 601 603 605 605 609 610 610 611 613 613 613 614
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Section 7. GENERAL VALUATION PRINCIPLES 7.1 7.2 7.3 7.3.1 7.3.2 7.3.3 7.3.4 7.3.5 7.3.6 Accounting Standard Framework Discussion Background The Concept of Deprival Value & Valuation Methodologies Recoverable amount test Other factors in the valuation process Heritage assets Land under roads
Page 701 701 703 705 705 705 708 709 710 711
8.
SPECIFIC ASSET VALUATION COMPONENTS 8.1 8.2 8.3 8.3.1 8.3.2 8.3.3 8.3.4 8.3.5 8.3.6 8.3.7 8.3.8 8.3.9 8.3.10 8.4 Accounting Standard Framework Discussion Revaluation of assets Application of general valuation principles Land Land improvements Roads Buildings Other structures Plant and equipment & office equipment Furniture and fittings Other assets Worked example
801 801 803 806 806 806 809 810 811 812 813 813 814 814 814
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Section 9. DEPRECIATION AND USEFUL LIFE 9.1 9.2 9.3 9.3.1 9.3.2 9.3.3 9.3.4 9.3.5 9.3.6 9.3.7 9.3.8 9.3.9 9.3.10 9.3.11 9.3.12 9.4 Accounting Standard Framework Discussion Concept of depreciation Useful life Residual life Residual life and asset condition Future and deferred maintenance Aggregation of assets for depreciation purposes Reassessment of remaining useful life Depreciation of heritage assets Commencement of depreciation charges Renewals accounting Depreciation rates - Income Tax Assessment Act Depreciation methods Worked example
Page 901 901 902 904 904 904 905 906 906 907 908 909 909 909 909 909 911
10.
ASSET MANAGEMENT ISSUES 10.1 10.2 10.2.1 10.2.2 10.2.3 10.2.4 10.2.5 10.2.6 10.2.7 10.2.8 10.2.9 10.3 Framework Discussion Purpose Background Characteristics of asset management Asset acquisition Asset maintenance Asset condition levels Asset life and condition assessment Risk management factors Management Plans & Long Term Planning Worked example
1001 1001 1003 1003 1003 1003 1005 1007 1007 1009 1011 1012 1013
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Section 11. REPORTING IN THE FINANCIAL STATEMENTS 11.1 11.2 11.3 11.3.1 11.3.2 11.3.3 11.3.4 11.3.5 11.3.6 11.3.7 11.3.8 Accounting Standard Framework Discussion Purpose Asset register Disclosure in the financial statements Distinction between initial recognition and revaluation of assets Leased assets Accounting entries Annual summary of assets Extracts of sample financial statements
Page 1101 1101 1102 1103 1103 1003 1104 1105 1107 1108 1114 1114
Appendices 1. Summary of relevant accounting concepts, accounting standards and Local Government Accounting Regulations Glossary of terms Further reading and references Indicative Useful Lives - Water & Sewerage Assets Indicative Useful Lives for Councils Non-current Assets Guidance on Asset Classifications Accounting for drainage assets Accounting for roads Annual Reports by Councils (LGA s.428)
A101
2. 3. 4. 5. 6. 7. 8. 9.
A101 A201 A301 A401 A501 A601 A701 A801 A901
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Section 1 Introduction
SECTION 1 - INTRODUCTION
1.1
1.1.1
ACCOUNTING STANDARD
Application & Operative Date
For the purpose of this Standard, each local government is a reporting entity and is therefore required to prepare general purpose financial reports. This Standard: (a) applies to each local government in respect of its general purpose financial reports, in relation to its first reporting period that ends on or after 30 June 1996 and later reporting periods....(AAS 27, paragraph 3 June 96 Version).
1.1.2
Accounting standards & concept statements
The general purpose financial report of a local government shall be prepared in accordance with Australian Accounting Standards other than ... AAS 16 "Financial Reporting by Segments" and AAS 22 "Related Party Disclosures". To the extent that the requirements of this Standard differ from the requirements of other applicable Standards, the requirements of this Standard shall be applied (AAS 27, paragraph 13).
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1.2
1.2.1 (1)
FRAMEWORK
Legislative requirements Councils must prepare their financial reports in accordance with the requirements of the: Local Government Act 1993 Local Government (Financial Management) Regulation 1993 Australian Accounting Standards Prescribed Standards - Code of Accounting Practice & Financial Reporting - Asset Accounting Manual (S. 413 LGA 1993 Cl. 21 & 22 Reg.)
(2)
Councils must include in their Annual Report, a report which contains the following particulars:(a) A copy of the councils audited financial reports (Section 428(2a) LGA 1993) (b) A report on the condition of the public works (including public buildings, public roads and water, sewerage and drainage works) under the control of the council as at the end of that year, together with: (i) an estimate (at current values) of the amount of money required to bring the works up to a satisfactory standard; and (ii) an estimate (at current values) of the annual expense of maintaining the works at that standard; and (iii) the council's program of maintenance for that year in respect of the works. (Section 428(2d) LGA 1993)
1.2.2 (1)
Application of Standards
Ref: 1.3.1, 1.3.2
All Standards issued by the Australian Accounting Research Foundation, except for AAS 16 & AAS 22, must be adopted by councils in the preparation of financial reports. Reporting requirements apply to all councils including activities undertaken or controlled by them through associated entities such as commercial enterprises, joint ventures, committees of management etc.
(2)
1.2.3
Systems considerations
Ref: 1.3.7
Asset recording and reporting systems should be developed to ensure the efficient management and control of assets. Systems should be integrated, as far as possible, so that management, engineering and accounting needs are satisfied efficiently and without duplication.
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1.2.4
Internal accounting procedures manual
Ref: 1.3.10
Councils should develop an internal accounting procedures manual which incorporates policies on accounting for non-current assets.
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1.3
1.3.1
DISCUSSION
Australian Accounting Standard AAS 27
In 1990 the Australian local government sector was asked to comment on local government financial reporting and accounting techniques. The Standard was finalised in July 1991 and, as well as requiring local government financial reports to be prepared in accordance with professional Accounting Standards, it requires the general purpose financial report of a local government to include an operating statement, a statement of financial position, a statement of changes in equity, and a statement of cash flows. The statement of financial position must disclose the assets, liabilities and equity (community wealth) of the local government as at the reporting date. Four updates to AAS 27 have been issued. These occurred in September, 1993, August, 1994 June 1995 and June 1996. The amended standards were issued as a result of a limited review to address implementation issues. The most notable changes were the provision of additional guidelines for the recognition of assets as a result of the amalgamation of Local Governments within state jurisdictions, the removal of the mandatory status of Concept Statements and the extension to the transitional provisions in respect of Land Under Roads. 1.3.2 Accounting Standards
This manual contains procedures and guidelines on accounting for council assets including community assets in accordance with all relevant Australian Accounting Standards. The manual provides guidance in respect to assets acquired both prior to and subsequent to 1st January, 1993. Assets are defined as " future economic benefits controlled by the entity (council) as a result of past transactions or other past events". [AAS 27, paragraph 12] AAS 27 requires all assets, including those which yield their service potential or economic benefit over long periods of time (eg. buildings, monuments, roads, bridges, underground pipes and drains) to be recognised in the statement of financial position, provided they meet the criteria set out below. AAS 27 requires an asset of a local government to be recognised in a statement of financial position when, and only when, the following recognition criteria are satisfied: (a) (b) it is probable that the or future economic benefits embodied in the asset will eventuate; and it possesses a cost or other value that can be measured reliably." (AAS 27, paragraph 33)
Assets which are acquired after 1 January, 1993 are to be initially recognised at their cost of acquisition. Assets acquired prior to 1 January 1993 which have not been recognised in financial statements must be identified at current cost. AAS 27 allows these assets to be recognised at their written-down current cost identifying separately, their current cost and accumulated depreciation. However, in many cases, there may be no recording to enable ready identification of assets such as roads, drains, bridges, etc.
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The Standard recognises the inherent difficulties in recognising such assets and allows a transitional period which effectively ends on 30th June, 1997 for practical and implementation issues to be addressed and resolved. The transitional provisions in AAS 27 permit councils not to recognise certain assets in the Statement of Financial Position until the commencement of the first reporting period ending on or after 1st July, 1996. The transitional period for all assets other than Land Under Roads ended with the recognition of Drainage assets as at 30th June 1997. Transitional provisions in respect to Land Under Roads have an extended application date of the first reporting period ending on or after 30 June 2000.
A number of other Australian Accounting Standards relevant to non-current asset accounting are also referred to in this manual. These standards are equally applicable to councils. 1.3.3 Definition of local government assets
Council manages and controls operating assets and community assets, which include heritage assets and infrastructure assets. Operating assets are those assets utilised in producing and delivering goods and services to the public and include land and buildings for administrative purposes, motor vehicles, EDP equipment, plant, electrical fixtures and fittings, staff amenities, equipment and telephones and data communications systems. For the purposes of this manual, community assets are those acquired or constructed by councils to meet the needs of the communities they serve and not the direct needs of the councils themselves, in contrast to operating assets which are those assets used directly by councils to provide services. They provide the basic services or economic structure which communities require or expect in order to carry out their normal business, private, community and recreational pursuits. Infrastructure assets includes all non-current assets that comprise the public facilities that provide essential services and enhance the productive capacity of the economy. In respect of local government they embrace such assets as roads, bridges, drains, footpaths, kerbing and guttering, pavements, sea-walls, levee banks and other major public works, water supply and sewerage works including underground piping, parks and gardens and playing fields. Heritage assets are intended or required to be preserved for the duration of their physical lives because of their unique historical, cultural geographical or environmental significance. Heritage assets include monuments, museum collections and historic buildings. 1.3.4 Benefits of accounting for non-current assets
Benefits of recording the acquisition and usage of infrastructure and other non-current assets relate to proper management of the councils' resources. Good management of the council's affairs involves making resource allocation decisions and, in doing so, achieving a balance between short term benefits to ratepayers and longer term benefits to current and future generations of ratepayers. Recording and reporting infrastructure and other non-current assets will improve information for decision making and enable councils to provide information to demonstrate to ratepayers and other
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users how assets are being managed, whether those assets are being properly maintained, whether they are being sold to provide funds for short term use, the extent to which rate revenue is being used to acquire further longer term assets and whether resources are being deployed and maintained in the manner intended . All of these issues are important to ratepayers in order to assess council performance. Accounting and reporting of community and other non-current assets will also assist with the asset management strategies of council engineers.
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1.3.5
Topics in this Manual
A table of contents is provided at the front of the Manual for ease of reference. The following flow chart provides an overview of the methodology process of the contents of the Manual.
Section Appoint Implementation Team Develop Strategy for Implementation Establish Ownership and Control of Assets Determine Asset Classifications Record Physical Inventory of Assets
Capitalisation Principles and Materiality 5, 6, 10 Asset Condition
Determine Valuation Components Determine Unit Costs for Components Apply Unit Costs to Asset Components Determine Useful Life and Residual Life of Assets Calculate Written Down Current Cost or Amount Recognise Assets Determine Disclosure in Financial Statements
Asset Condition
9, 10
9, 10
6, 11
11
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1.3.6
Planning for Implementation
Section 2 of the Manual discusses planning for implementation by councils. This is the first Section which users should read after the introduction (Section 1) as it provides useful guidance on the development of a successful strategy for the non-current asset accounting. This is important given that councils do have limited resources. Although this section was originally developed for the first time implementation of AAS 27 and recognition of non-current assets, it serves an ongoing use in understanding the full cycle of asset management and accounting for non-current assets. 1.3.7 Systems Considerations
Most companies in the private sector report assets under the traditional descriptions of land, buildings, plant and equipment, furniture and fittings, etc. Councils acquire buildings or land for many different purposes, such as for administration, recreation, community needs, waste management, transportation, etc. In order that the requirements of AAS 27 are met, councils will need to be able to produce information on assets by nature or type and by functional categories. Councils will therefore need to have systems in place to meet these challenges. There are currently available standard computer packages to meet the basic accounting needs for recording the acquisition and progressive depreciation of non-current assets, although they are not specifically designed to cover the somewhat unique aspects of some local government assets. There are also available various Pavement Management Systems and Building Management Systems to assist engineers in basic management of road assets and other non-current assets, including condition assessment and projected costs for adequate maintenance. Efficient management dictates that accounting and engineering needs for asset control and management should be merged. Computerised systems that achieve this will undoubtedly be developed but are not likely to be currently available. 1.3.8 Leased Assets
In accordance with AAS 17 "Accounting for Leases", councils will be required to recognise in their statement of financial position those assets and total obligations including finance charges under finance lease. Assets which are subject to an operating lease will not require recognition in the statement of financial position, however, there are certain disclosure requirements under noncancellable operating leases with a lease term more than one year. Councils will also be required under AAS 17 to meet certain accounting and reporting requirements where they are acting as lessors and either own or control assets for which they receive lease rental payments. 1.3.9 Level of Asset Recording
The benefits of recognising assets in council's financial reports has to be balanced against the costs arising from the exercise, which will be affected by the degree of detail required to properly record and value those assets. Australian Accounting Standard AAS 5 "Materiality defines the concept of materiality and specifies how it should be applied in the preparation and presentation of financial statements.
Information is deemed to be material if its omission, non-disclosure or misstatement would cause the financial statements to mislead users of the statements when making evaluations or decisions. This concept is developed in section 5 of the manual. This section of the manual requires councils to use judgment in determining the level at which they should commence recording assets. Decisions on this issue will directly impact on the level of resources councils will need to commit to the task of recording assets on hand at 1st January, 1993. Similarly, accounting policies will need to be developed to determine the level at which to commence recording of assets acquired from 1st January, 1993. As the practical difficulties experienced in recording assets acquired prior to 1st January, 1993 are not expected to prevail with newly acquired assets, development of materiality levels in this case should be a less difficult exercise. 1.3.10 Internal accounting procedures manual
The Local Government Code of Accounting Practice and Financial Reporting released in October 1992, and the Asset Accounting Manual, provide substantial guidance to local government in the development of practical and sound accounting policies in accordance with Australian Accounting Standards. In many commercial enterprises in the private sector, finance or accounting policy manuals are developed internally. These provide prescriptive guidance on a range of issues relevant to the enterprise and consistent with the requirements of Australian accounting standards. The key benefits of these manuals are that there is consistency in treatment throughout the entity and they provide guidance in cases where in-house expertise is not available. In view of the requirements of the Asset Accounting Manual and the Code of Accounting Practice and Financial Reporting, development of internal accounting manuals which incorporate the accounting and reporting of non current assets by councils is strongly recommended. 1.3.11 Application of the manual to other entities
This manual assumes that the accounting policies, treatments and disclosures explained in the following sections will apply not only to councils in their own right, but also to the other activities which they undertake or control through the various associated entities such as, commercial enterprises, committees of management, controlling authorities, etc. The manual imposes stricter accounting methodologies upon those entities than have been applied previously and it is therefore recommended that councils ensure that they understand the implications of this manual for accounting for non-current assets.
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Section 2 Planning and Implementation
SECTION 2 - PLANNING AND IMPLEMENTATION
2.1
2.1.1
ACCOUNTING STANDARD
Transitional provisions for recognition of non current assets
Certain Assets Transitional provisions for all assets other than Land Under Roads ended as at 30th June 1997. Land Under Roads From the beginning of the reporting period from which this Standard is first applied, until the end of the first reporting period on or after 30 June 2000, transitional provisions shall apply. During the transitional period, where a local government elects not to recognise land under roads as an asset in the statement of financial position, it shall disclose that policy in the summary of accounting policies. Where land under roads is first recognised in the statement of financial position, or its recognition is discontinued, during the transitional period specified in paragraph 115, the net amount of the resultant adjustments shall be adjusted against accumulated surplus/deficiency in the reporting periods in which the assets are first recognised or their recognition is discontinued. ...... (AAS 27,
paragraphs 115-117).
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2.2
FRAMEWORK
2.2.1 (1)
Planning for implementation
Ref: 2.3.2, 2.3.3
It is recommended that councils consider the following matters when planning for the recognition and reporting of non current assets.

implementation team timetable supporting systems identification and allocation of tasks physical resource requirements to complete the task of asset recognition within the established timetable. need to utilise specialist resources for specific functions (ie. valuation, insurance).
(2)

Councils should identify the:
(3)
It is essential that councils establish policies to cover the following:

the criteria for establishing asset control (refer section 3) the recording or materiality thresholds below which assets will not be recorded (refer section 5). Ref: 2.3.3.2
2.2.2
Asset recognition timetable
Councils must recognise Land Under Roads by 30th June 2000. Earlier recognition is allowed. NOTE : All classes of assets, except land under roads, should have been recognised as at the 30th June 1997.
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2.3
2.3.1
DISCUSSION
Background
The Local Government Code of Accounting Practice and Financial Reporting requires councils to record and report on assets acquired from 1st January, 1993. In addition, non-current assets on hand prior to 1st January, 1993 will need to be measured and reported by the end of the transitional period allowed by the Standard (AAS 27 paragraph 108 - 110 & 115 - 117). In effect, all material non-current assets should have been reported in the financial statements of councils by 30th June, 1997 with the possible exception of Land Under Roads which is due by 30th June, 2000. To meet these requirements, councils need to develop plans dealing with implementation issues and providing strategies which will enable them to comply with the Standard by the specified date. The development of such plans will greatly assist in the efficient introduction of the requirements of AAS 27. Major areas to be addressed for planning and implementation purposes are the recording and reporting of non-current assets on hand prior to 1st January, 1993 and the recording and reporting of assets acquired from 1st January, 1993. The major areas addressed in this section of the manual and to which councils will need to devote significant resources, are non-current assets. 2.3.3 Implementation issues
Effective implementation of AAS 27 as it affects the recognition and recording of non current assets will only be possible if councils prepare plans for implementation. As guidance it is recommended that the followings matters be included in the plan:

Implementation team Timetable Supporting Systems Identification and allocation of tasks
2.3.3.1 Implementation team The first step in the process will be to appoint an implementation team. Members of the implementation team should be multi-disciplinary and should include key financial and engineering personnel. The team should comprise senior personnel so that the team is able to direct others to provide information, assistance, etc. as required. The team will be a policy development body and will tend to direct others in terms of carrying out functions in the recognition process. A suggested Terms of Reference for the implementation team is shown below. Whilst the main functions of the implementation team occurred during the transitional period under AAS 27, they nevertheless apply to the ongoing financial management of councils assets. Terms of Reference for implementation team understand the need for recognition of non-current assets. gain a thorough working knowledge of the Asset Accounting Manual. establish key steps in the recognition process.
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determine a target implementation date for each asset category in the light of corporate objectives. establish resources available for the project. ensure accounting records currently in use will be able to record assets acquired on/after 1st January, 1993 as described in this manual and ensure adequate controls are in place to achieve this. consider computer system products available for asset recording and management purposes and make recommendations to General Manager/Council on acquisition if appropriate. determine the specific methodology for recording assets on hand prior to 1st January 1993. ensure all appropriate council personnel are aware of the new requirements for recording of assets. Determine personnel training requirements. recommend valuation bases for each category of assets. monitor the asset identification and recording process continually and ensure any impediments or bottlenecks are resolved. measure progress against an established timetable and amend the timetable if appropriate. consider the development and implementation of an internal asset accounting and management manual. ensure the General Manager and Council are kept informed of progress. establish criteria for determining asset control and recording thresholds as discussed in this manual.
It is recommended that councils establish multi-disciplinary teams to undertake the identification and measurement of their assets in the first instance, and asset management thereafter. 2.3.3.2 Asset recognition timetable It should be noted that councils will not be permitted to recognise components of an asset in stages or in piecemeal function. For example in recognising the value attributable to a Swimming pool complex in accounts, councils will be precluded from recognising only the land, buildings or the plant and equipment portion in stages with the intention of recognising the other components later on as this will distort the total cost of assets relating to the council's recreational function. Councils have to value the whole of the swimming pool complex and recognise the total cost in accounts in one financial year. In addition, it is essential councils set policy on the following: the criteria for establishing asset control (refer section 3). the recording or materiality thresholds below which assets will not be recorded (refer section 5).
2.3.3.3 Supporting Systems The initial establishment of inventory and the recording of newly acquired assets from 1st January, 1993 are tasks which will be carried out more efficiently by using supporting systems. Two key areas where it is expected that computer systems will be ultimately essential are the management of road pavements and financial recording and reporting.
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To the extent practicable councils should ensure that there is not a duplication of recording of information and that compatible systems are developed and/or acquired. Further comment on road pavement management systems is included in section 10 of the manual. The financial aspects of asset recognition are referred to in sections 6 and 11. It is expected that for councils which have acquired accounting systems, many will have access to some form of asset register already. In order to avoid duplication in recording information, councils need to consider the asset recognition process from both accounting and management aspects. An integrated asset register which suits both purposes is clearly more efficient than one that does not. 2.3.3.4 Identification and allocation of tasks It is essential that all steps in the recognition process be identified and that tasks be allocated to personnel with appropriate skills to carry out those tasks. It is not expected that all tasks will be identified until the implementation team has substantially completed its strategy. The strategy should be reviewed by all relevant sections of council operations so that there is clear understanding of the process and so that any tasks overlooked by the team are identified. Tasks should be matched to personnel carefully. Performance of personnel involved should be monitored so that any problems are identified and resolved at an early stage.
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Section 3 Asset Control and Ownership
SECTION 3 - ASSET CONTROL AND OWNERSHIP
3.1
3.1.1 (1)
ACCOUNTING STANDARD
Definitions "Assets" means future economic benefits controlled by the entity as a result of past transactions or other past events (AAS 27, paragraph 12). "Control of an asset" means the capacity of the entity to benefit from the asset in the pursuit of the entitys objectives and to deny or regulate the access of others to that benefit (SAC 4 paragraph 14).
(2)
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3.2
3.2.1
FRAMEWORK
Definition and recognition of assets Ref: 3.3.2
Councils must adopt the following criteria for the definition and recognition of assets: (a) assets provide service potential or future economic benefits controlled by the entity as a result of past transactions or other past events; and an asset shall be recognised in the statement of financial position when: (i) (ii) it is probable that the future economic benefits embodied in the asset will eventuate; and the asset possesses a cost or other value that can be measured reliably.
(b)
3.2.2
Determination of control over assets
Ref: 3.3.3, 3.3.4
Subject to evidence to the contrary, a council has control over an asset if the following three criteria is established:
council can deny or regulate access of others to the asset. the asset is held to meet the objectives of the council. council enjoys the majority of risks and benefits relating to the asset.
In determining control over an asset, council should also consider a number of other criteria including the following:

does the council have legal title to the asset? was the asset purchased by the council? is the absolute property right with the council? are there any restrictions on the use of the asset? is the asset vested in the council? is the asset vested in a Committee or other undertaking controlled by council? is the council required to make commercially realistic payments to another entity for the use of the asset?
This list is not exhaustive and councils should consider other local and external factors which will affect the determination of control over assets generally.
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3.2
FRAMEWORK (Contd)
3.2.3
Control over Roads and Crown Land (a) Roads
Ref: 3.3.3, 3.3.4
The Roads and Traffic Authority (RTA) is the controlling authority over the following road assets:

Vehicular trafficable area of State Roads and National Highways (including land under those roads and within the road reserve ) Bridges on State Roads and National Highways Bridges maintained by the RTA on Regional and Local Roads Traffic Signals on all Roads.
Local Governments are the controlling authority over the following road assets:

Non vehicular trafficable area of State Roads and National Highways (including footpaths and parking lanes maintained by Local Government Regional and Local Roads (including land under those roads and within the road reserve) Bridges on Regional and Local Roads (except those maintained by the RTA)
(b) Crown Land The Department of Land and Water Conservation (DL&WC) is the general custodian of all Crown Land. Before Crown Land can be recognised by local government control over the asset must be establised. The question that must be answered in the affirmative in determining if control exists is: Does the entity have the power to decide if the asset can or will be used, within the existing regulations for its use, to meet its objectives?.
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3.3
3.3.1
DISCUSSION
Background
Traditionally, councils have maintained records of revenue and expenditure for stewardship purposes. Although certain assets have been recognised as assets of councils others, including community assets such as roads, bridges and Crown Land under their control have not been recorded and recognised as assets. Records have generally not been maintained with respect to these assets. In addition, depreciation has not been charged on these assets. 3.3.2 Definition and recognition of assets
The first essential characteristic of assets is service potential or future economic benefits. Council assets such as roads, bridges, libraries etc. provide a means to meet local government objectives and therefore represent service potential or economic benefits. The second essential characteristic of assets is control over the service potential or economic benefits such that a council is able to enjoy the benefits and deny or regulate the access of others to the benefits. It is to be noted that this concept does not require an entity to own or possess an asset but it is necessary that the entity control or deny access to the "service potential or future economic benefits" embodied in the asset. It is this characteristic that is discussed in this section of the manual. The third essential characteristic of assets is that the transaction or other event giving rise to council control over the service potential or future economic benefits must have occurred. Although, in most cases, entities gain control of the benefits of assets by cash or barter transactions, this criteria does not limit the acquisition of assets to "exchange" transactions only, other assets gained by means of non-reciprocal transactions e.g. contribution and donations, grants etc are to be recorded likewise. (Refer SAC 4 paragraphs 15-30). In addition to these essential characteristics, assets have other characteristics such as: acquisition at a cost tangibility exchangeability legal enforceability
However, it is the essential characteristics which are fundamental to the definition of assets. Views have been expressed that an important characteristic of an asset is its realisability (i.e. potential to be sold in the market place). It should be noted however, that this is not an essential characteristic of an asset. An asset shall be recognised in the financial reports of a council when: (a) (b) it is probable that the service potential or future economic benefits embodied in the asset will eventuate; and it possesses a cost or other value that can be measured reliably.
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The term "probable" means that the chance of the service potential or future economic benefits arising is more likely rather than less likely .... (SAC 4 paragraph 40). Assets that cannot be measured reliably and would not therefore qualify for recognition will warrant disclosure in the notes in the financial report where knowledge of the assets is considered to be relevant to the users of the financial report in making and evaluating decisions about the allocation of scarce resources. 3.3.3 Vesting of land
In many cases land is vested in a council, that is, certain rights are transferred to the council. Where this has occurred, the absolute property in the land does not transfer to the council. However the vesting of land to a council effectively means that control over economic benefits in the form of property rights, rests with the council. Where land is vested in a council or the responsibilities normally associated with ownership (for example, maintenance of the land, responsibility for restricting access, etc.) rest with the council, the council has effective control over the economic benefits embodied in the land. In those circumstances, the council must record the asset in its financial records. Where land is vested in a Controlling Authority which is a reporting entity, it would be recognised in the financial report of the Controlling Authority. Where the council controls that Authority, the council is required to produce consolidated financial information which includes financial information on the Controlling Authority. If the council does not control the Authority, that financial information should not be included in the consolidated financial reports. Councils should also refer to AAS 19 for information on accounting for joint ventures. Where land or other assets are owned and/or controlled by a council and the land or other assets are leased to a third party, the accounting treatment for the asset should be determined in accordance with AAS 17 "Accounting for Leases". 3.3.4 Determination of control
The entity controlling an asset is the one that can, depending on the nature of asset, exchange it, use it to provide goods or services, exact a price for others' use of it, use it to settle liabilities, hold it, or perhaps distribute it to owners. An asset is specific to an entity in that it cannot at the same time be an asset of another entity, except in those circumstances where the asset is controlled indirectly through the entity by virtue of control of the entity by another entity. In these circumstances, the asset would be included in the financial report of the entity that directly controls the asset and in the financial report of the economic entity comprising the controlled and parent entities. The capacity of an entity to control the service potential or future economic benefits would normally stem from legal rights and may be evidenced by title deeds, possession, or other sanctions and devices that protect the entity's interests. However, legal enforceability of a right is not a prerequisite to the establishment of control over the service potential or future economic benefits, since an entity may be able to control the service potential or future economic benefits expected to flow from a particular item or activity in some other way. For example, the service potential or future economic benefits obtained from research and development activities may qualify as an asset where the entity is able to control the service potential or future economic benefits embodied in a particular product formula or production process merely by maintaining secrecy.
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Possession or ownership of an object or right would normally be synonymous with control over the service potential or future economic benefits embodied in the object or right. However, these are not essential asset characteristics. An entity may possess an object or right but not expect to enjoy the services or benefits embodied in it. For example, an agent may hold goods for sale on behalf of the principal. Conversely, an entity may not possess an object or right but expect to enjoy its services or benefits. Also, an entity may control an object or right but not own it. For example, under a lease agreement, control over the leased property owned by the lessor is transferred to the lessee (although the extent and duration of control will vary according to the terms of the agreement). Conversely, an entity may own an object or right but not control it. Some assets providing future economic benefits or service potential will not be controlled by the entity, because the entity cannot deny or regulate the access of other entities to the objects or rights in which the service potential or future economic benefits are embodied. For example, public highways represent service potential or future economic benefits to the entities that use them, but cannot qualify as assets of entities other than the entity or entities responsible for their operation. This is because the entities that use the highways are unable to control access to them by other entities. Similarly, general access to air or water does not qualify as assets of the entities that use them, even if the entities have incurred costs to help clean the environment. In order to establish whether a council controls an asset, the elements of what constitutes control must be reviewed closely on an asset by asset basis. As a guide, set out on the following page are a series of tests which can be applied on an asset by asset basis to establish whether control exists. Councils control an asset if questions 1,2 and 3 have been answered "Yes" subject to evidence to the contrary. A council may possess an object or right but not expect to enjoy the services or benefits embodied in it, in which case the council would not control the asset. In the case of restrictions on use of assets, these will need to be reviewed carefully before making a final decision on the question of control. In the final analysis, the substance of each position should prevail. The ultimate aim is to recognise all assets that a reporting entity brings to bear in the delivery of services/products to its community in accordance with council objectives. There may be other factors which can result in control being questioned. Hence the checklist on page 307 is a comprehensive, though not exclusive guide to indicators of control. 3.3.4.1 Control over Roads The road network can generally be classified as National, State, Regional and Local. Each of these classifications in turn include the land component and the structure which may be sealed or unsealed. The road category would also cover footpaths, bridges, culverts and car parks. (Refer 4.3.3.7 for further discussion).
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Description of asset .................................................................................. Yes No 1. Can the council deny or regulate the access of others to the asset? 2. Is the asset held to meet the objectives of the council? Does the council control the majority of the risks and benefits relating to the asset? Does the council have legal title to the asset? Was the asset purchased by the council? Is the absolute property right with the council? Are there any restrictions on the use of the asset? If yes, describe the restrictions.............................. Is the asset vested in the council? Is the asset vested in a Committee of Management or other undertaking controlled by the council (i.e. the council has the capacity to control the operating and financial policies of the Committee of Management)?
3.

4. 5. 6. 7.
8. 9.
10. Is the council required to make commercially realistic payments to another entity for the use of the asset? Conclusion This asset is controlled by the council Issues to be resolved Describe any outstanding issues which need to be resolved
.............................................................. .........................................................................
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The public authorities responsible for the construction and maintenance of roads have negotiated the implementation a system of road management based on the categories of state, regional and local roads. Under this system, management of the state road is with the Roads and Traffic Authority (RTA) and management of regional and local roads resides with councils with the RTA providing funding assistance for regional roads. Councils therefore must value as council assets all local and regional roads, inclusive of their component parts (ie. bridges) except for those bridges maintained by the RTA on regional or local roads. Councils should seek written confirmation from the RTA of these bridges to ensure that only council controlled assets are valued and reported. Control over traffic signals on all roads also resides with the RTA. All state roads, including their component parts (ie. bridges) and land under those roads are similarly controlled by the RTA and will be valued by that authority. For internal control purposes, councils should also maintain an up to date map of the road network highlighting the three distinct road classifications. This would also serve as a pictorial reference to road assets managed on various computer systems (ie. Pavement management systems). 3.3.4.2 Administration of Crown Land The status of Crown land is such that it is unalienated from the Crown and for which there is no title. In contrast, Freehold land is alienated and a title is issued to the owner. Consequently, the Department of Land & Water Conservation (DLWC) is the general custodian of all Crown land. Whilst being unalienated, however, Crown land can be made available to government entities in a number of ways. These include: a) Crown grant This refers to land which has effectively been alienated from the Crown and title granted to an entity. In these circumstances, the entity gaining title usually has unrestricted control over the land and can sell it to another entity. b) Reservation, dedication and vesting Crown land may be reserved, dedicated or vested for the activities of a government entity for either a temporary period or permanently. A temporary reservation only needs to be gazetted to be revoked whereas a permanent reservation requires an Act of Parliament. Reservations have the effect of transferring the day-to-day control to the receiving entity. c) Special arrangements Special arrangements may be made with a land department for a government agency to occupy a particular parcel of Crown land or to share a parcel of Crown land. These situations are commonly made to allow easements to being made available to utilities to run distribution systems across Crown land.
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d) Lease/Licence Crown land may be made available for use to any entity under a licence or lease arrangement. This is commonly made to the private sector as well as community organisations and government agencies. e) Historical access This refers to the situation whereby an entity has occupied or used Crown land prior to any formal arrangements being made. While the specific point at which control passed to the occupier cannot be determined, the use of the land has officially been sanctioned and recognised as reserved. There are three classes of Crown land held by local governments. These include: 1) Where a Reserve Trust is created under the Crown Lands Act and the Council is appointed to manage the affairs of the Trust. 2) Reserves for Public Recreation under Section 48 of the Local Government Act. 3) Crown land vested (fee simple) in Local Government as community land. Crown land held by local governments can be put to a range of uses subject to any conditions attached thereto. These may include: operational sites; conservation and wilderness; public open space; land under infrastructure; waterways; and unutilised land.
As Crown Land constitutes a significant input in the production of goods and services by many government agencies it is important that information about them is captured in the financial reports. The absence of Crown land holdings in the councils reports may restrict the usefulness of such reports by misleading users of those reports on resources controlled by the local government. However, how the information is reported should be determined after consideration of the costs and benefits of collecting data and its usefulness to users. Before Crown land can be recognised by local government control over the asset must be established. Ultimately, the question that must be answered in the affirmative in determining if control exists is: Does the entity have the power to decide if the asset can or will be used, within the existing regulations for its use, to meet its objectives? It should be noted that the local government does not need to exercise their controlling power for control to exist. Further, some restrictions in use of the asset does not, of itself, result in loss of control.
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A range of criteria should be assessed in the determination of control over Crown land. Whilst the determinants of control may be extensive, some determinants have higher degrees of control than others. Consequently, a selective list can be compiled to rank a range of control criteria. The following are recommended for consideration in this Manual: 1. 2. 3. 4. 5. 6. 7. Responsible for day-to-day control. Claim to proceeds on sale of land. Degree of restrictions placed on land. Length of tenure. Consideration paid for use of land. Subsidiary entity controls land. Other.
In addition to the above criteria local governments must also in assessing control, assess their ability to deny and regulate access to benefits which they enjoy from the asset. The following criteria are recommended in this Manual: 1. 2. 3. 4. 5. 6. Supervise activities Regulate activities Regulate hours Charge fees Restrict entry Other
Set out overleaf are a series of tests which can be applied to Crown Land to establish whether control by the local government exists.
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Valuation of Crown land is discussed in Section 8.2.2 of the Manual.
Land Use: Provide definition/description of location/use on Crown land Determination of Control Ownership Legal Right legal title cultural claim permanently vested/reserved/trusted temporarily vested/reserved/trusted lease/licence adverse possession of restrict or change access determine use improvements/structures on land easement right of access right to dispose ability to surrender to another entity right to dispose ability to surrender to another entity recurrent cost of occupation right to procedds from sale can charge another entity for use right to compensation entrance charges entity derives service from use capacity to gain service land surplus to or unrelated to needs deleted service potential of land
Regulate access economic benefit
to Production Potential
Exchange Service Potential Bear Risks
Cash Flow
Enjoyment
Consumption
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3.4
WORKED EXAMPLE
To clearly illustrate the practical application of each section of the manual, a worked example flowing through all sections of the manual will be developed at the end of each section. It will build on the concepts introduced in each section. We will use an outdoor swimming pool complex which the council has operated for many years. The complex is standard in that it is situated on one hectare of Crown Land within the council and consists of the following: dressing room, kiosk, pool entrance and administration room in one structure. a 50 metre eight lane pool, a diving pool, a learners pool and toddlers pool. water filtration, pumping and chlorination equipment connected to the pools by underground pipes. a solar blanket mounted on winding brackets at one end of the pool. a two meter wire fence enclosing the whole complex. substantial landscaping, lawns and trees surrounding the pools.
For the purposes of this example, the smaller items of equipment within the buildings and grounds will be ignored. It is necessary now to determine whether the complex (or any parts of it) is an asset of the council that is, does the council control the asset. As noted above the complex is situated on Crown Land. This raises the question as to whether the land on which the complex is situated is controlled by the council. As the council enjoys unrestricted and free use of the land, the land is clearly controlled by the council and should be recorded as an asset. If the council was required to make commercially realistic payments to the government for use of the land, it is likely that the land would not be an asset controlled by the council. However this is not the case. The assets situated on the land within the complex have all been acquired by the council (or constructed for it) and there is no doubt that these assets are controlled. Any assets on the site however, which have been acquired or constructed by the local swimming club, the use of which the council is not able to control, are not council assets as they are controlled by the swimming club. If however, the swimming club is simply using assets which were provided by the council, it is unlikely that the club will control those assets. Usage of assets does not necessarily dictate control. Refer to the following worksheet on the determination of control.
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DESCRIPTION OF ASSET: Outdoor Swimming Pool Land
Yes
No
1.
Can the council deny or regulate the access of others to the asset? Is the asset held to meet the objectives of the council? Does the council control the majority of the risks and benefits relating to the asset? Does the council have legal title to the asset? Was the asset purchased by the council? Is the absolute property right with the council? Are there any restrictions on the use of the asset? If yes, describe the restrictions Land vested in the council under the Crown Land Reserves Act

2.
3.
4. 5. 6. 7.
8. 9.
Is the asset vested in the council? Is the asset vested in a Controlling Authority or other undertaking controlled by the council (i.e. the council has the capacity to control the operating and financial policies of the Controlling Authority)?

10. Is the council required to make commercially realistic payments to another entity for the use of the asset? Conclusion This asset is controlled by the council Issues to be resolved Describe any outstanding issues which need to be resolved None
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Section 4 Asset Classification and their Use
SECTION 4 - ASSET CLASSIFICATION AND THEIR USE
4.1
ACCOUNTING STANDARD
4.1.1
Classification of assets in general purpose financial reports
Assets, liabilities, revenues and expenses shall be classified according to their nature or type in the general purpose financial report by way of note or otherwise. In addition, assets and liabilities shall be classified into current and non-current categories (AAS 27, paragraph 76). In respect of each broad function or activity of the local government, the general purpose financial report shall disclose: (a) by way of note: (i) (ii) the nature and objectives of that function/activity; and the carrying amount of assets which are reliably attributable to that function/activity; and
(b)
by way of note or otherwise: (i) revenues for the reporting period which are reliably attributable to that function/activity, with component revenues from related grants disclosed separately as a component thereof; and expenses for the reporting period which are reliably attributable to that function/activity (AAS 27, paragraph 86).
(ii)
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4.2
FRAMEWORK
4.2.1
Legislative requirements
All "public land" must be classified as either "community" or "operational". Reclassification of land from operating to community or from community to operating is permissible subject to specific requirements specified in the Act. (Sections 25, 26, 30, 34 LGA 1993). Note, classification of land into community and operating is not required for financial reporting.
4.2.2 (1)
Classification of assets Councils must classify assets into: function/activity nature/type
Ref: 4.3.1 - 4.3.3
(2)
All assets controlled by councils must be classified into functional activity based on their predominant use. There should be no cross classifications of components of a specific asset into different types or functions. Where the predominant use of an asset cannot be reliably attributed to a function the asset should remain in the Administration function.
4.2.3
Functions
Ref: 4.3.2
The functions required for disclosure (for NCP reporting and AAS 27 purposes) shall be determined at the discretion of the council. As a minimum, councils must disclose any business activities. These include (where applicable):

Water Supplies Gas Services
Sewerage Services Abattoirs
Other example functional classifications may include:

Administration Public Order and Safety Health Community Services and Education Housing and Community Amenities
Recreation and Culture Economic Affairs Mining, Manufacturing and Construction Transport & Communication
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4.2.4
Councils must classify assets for financial reporting purposes into the following types: Ref: 4.3.3

Plant and Equipment Office Equipment Furniture and Fittings Property Plant and Equipment Leased Land - Council owned (freehold) - Council controlled - Non-Depreciable Land Improvements - Land under roads (only if valued) Land improvements (Depreciable) Buildings Other structures Infrastructure - Roads Bridges and Footpaths - Non-Depreciable bulk earthworks ** - Storm Water Drainage - Water Supply * - Sewerage Assets * Other Assets - Heritage Collections - Library Books - Other: specify if material
**
Water Supply and Sewerage Assets reported under Infrastructure are those assets not elsewhere shown. Assets are to be allocated to types where possible and the balance in Water Supply and Sewerage Assets (eg. water and sewerage mains etc). Represents that part of the Infrastructure (roads, bridges and footpaths) that has similar characteristcs to land in that it has an indeterminate life and therefore is not depreciated.
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4.3
4.3.1
DISCUSSION
Method of classifying assets
When a council classifies an asset they should first consider the functions or activities the asset is used for. The second step is to then decide upon the assets nature or type. Assets should always be classified based on their most predominant use. If an asset is determined to be an infrastructure asset such as heritage building, all its components should then be classed under the heritage asset classification. There should be no cross classifications. This applies to all assets and function/activity classifications. 4.3.2 Asset Functions
AAS 27 does not specify functions with which assets need to be classified by, however Special Schedule No.1 within the Local Government Code of Accounting Practice and Financial Reporting does prescribe 12 functional areas for reporting purposes. Total assets are to be disclosed by the functions as determined by council. These should only be those relevant to the council. Functions which are irrelevant should not be reported. Councils may wish to consider amalgamating similar functions with minimal values in order to report on its major activities. The functions disclosed may include:

Administration Public Order and Safety Health Community Services and Education Housing and Community Amenities Water Supplies Sewerage Services Recreation and Culture Fuel and Energy Mining, Manufacturing and Construction Transport and Communication Economic Affairs.
The classification of assets by function should be based on the most predominant use. Therefore, if an asset is used for more than one activity it should be allocated to the activity where it is used the most. If primary use changes, the asset should be reclassified. The following table lists the functions and activities that may be used and provides examples of services within them.
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For further amplification of these functions refer to Appendix 4 included in this manual.
Function Administration Activity
Corporate Support Engineering Works Other Support Services Fire Protection Animal control Beach control Enforcement of local government
Examples
Public Order and Safety
- burning off - dogs, cats, domestic livestock
regulations (bye-laws enforcement)

Emergency services Other
- rescue operations, state emergency services, disaster control - citizenship ceremonies, house numbering, neighborhood watch, safety house, surf lifesaving
Health
Health Administration and Inspection Immunisation Food controls Insect/vermin control Noxious plants Health centres Other health services
- community health centres, child health centres, etc. - Nursing homes, European wasp, family planning, hospitals, medical clinics, Mothercraft nursing, preventative services, health hazards, X-ray programmes.
Community Services and Education
Administration Family day care Child care (includes child services) Youth services Other families and children Aged and disabled services
- crche, family/youth hostels, play centres. - home care, hostels (homes), domiciliary care, handicapped persons, home and community care, home handyman scheme, home nursing, house cleaning, senior citizens facilities.
Migrant services Aboriginal services Other community services Education
- citizens advice, citizenships, community aid/advice centre, drop in centres, crisis centre, disaster relief, halfway house, social work. - pre-schools and kindergartens school bus services
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Function Housing and Community Amenities
Activity
Housing Town planning Household garbage collection Household garbage disposal Street cleaning Other Sanitation and Garbage Urban Storm water drainage Environmental Protection
Examples - aboriginal housing, owned houses, dentist housing, doctor housing, home units, retirement village.
- litter control, vehicle disposal, trade waste, sanitary and sullage. - see Section 4.7.8 - Protection of the environment contains assets that are used for the following activities: Air pollution, Breakwater, Clean Air Act, Flood control, Flood mitigation, Dune protection/restoration, Protection works - Foreshore etc, Noise Control, Pollution control, Sand control, Seawalls. - public toilets - drinking fountains, underground electricity cabling, pedestrian malls, public clock, rest centres, trees for ratepayers.
Public cemeteries Public conveniences Other community amenities
Water Supply Sewerage Services Recreation and Culture
Water Sewerage Libraries Museums Art Galleries Community Centres Public Halls Other Cultural Services
Swimming Pools Sporting Grounds Parks and Gardens Other Sport and Recreation
- community and neighborhood centres - public halls and civic centres - Animal parks, ANZAC Day, Bands, boy scouts, broadcasting, community art, creative arts and crafts, cultural facilities, festivals, fauna parks, historic buildings, local histories, monuments, National Estate, orchestras, performing arts, playhouse, reptile parks statues, TV facilities, zoos. - swimming and diving facilities - Ovals, playgrounds - Amusement parks, barbecue areas, picnic areas - Basketball courts, bowling greens, halls, recreation centres, fairs, golf course, gymnasium, recreational jetties, recreational irrigation, tennis courts, youth camps, youth groups
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Function Fuel and Energy Mining, Manufacturing Construction
Activity and
Gas Supplies Building Act/Control Abattoir Quarries and Pits Other Sealed
Examples
Transport and Communication
Unsealed Formed only Bridges Footpaths Aerodromes
Parking Bus
- Manufacturing, mining - Roads which have a pavement structure of crushed rock and/or natural gravels and a sealed surface. Sealed surface media may comprise asphaltic concrete, chip seal, concrete, clay or segmental pavers and any other impervious surfacing layer. - All roads which have a pavement structure of crushed rock and/or natural gravels, but no seal, fall into this subgroup. - Unformed local roads which have a trafficable surface constructed of local natural materials but lack a pavement structure. - Bridges should be subgrouped by size - small, medium and large. See Section 4.6.7 - See Section 4.6.7 - Aerodromes include the following components: Land, Runways, Taxiways, Apron, Passenger terminals, Hangers, Carparks, Public roads, Refuelling tanks. - Parking contains assets that are used for the following activities: Impounding motor vehicles, Parking on/off street. - Bus contains assets that are used for the following activities: Community bus service, Omnibus service, Town bus, Bus shelters.
Water Transport Other
Economic Affairs
Camping areas Caravan parks Tourism and area promotion Industrial development promotion Saleyards and markets Real estate development Commercial nurseries Other business undertakings (includes
private works, forest plantations etc)
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4.3.3
Asset Types
Whilst AAS 27 does not specify asset categories for reporting purposes the Local Government Code of Accounting Practice and Financial Reporting requires certain disclosures. The following major asset categories of non-current assets must be disclosed in Example Note 9, Property, Plant & Equipment.

Plant and Equipment Office Equipment Furniture and Fittings Property Plant and Equipment leased Land - Council owned (freehold) - Council controlled - Non-Depreciable Land Improvements - Land under roads (only if valued) Land Improvements (Depreciable) Buildings Other structures Infrastructure - Roads Bridges and Footpaths - Non-Depreciable bulk earthworks - Stormwater Drainage - Water Supply - Sewerage Assets - Other Other Assets - Heritage Collections - Library Books - Other: specify if material
The Asset Accounting Manual has been developed to provide guidance on recognising and valuing non-current fixed assets, and therefore "Investments" will not be discussed. For information on this category, reference should be given to the Local Government Code of Accounting Practice and Financial Reporting. It is intended that the above described categories be used to provide the basis for disclosure in the financial statement reports. These categories are to be used as the asset description in the statement of financial position and the notes to the financial report for which will be shown the gross value of assets (including revaluations), accumulated depreciation and written down current costs. Refer to the Local Government Code of Accounting Practice and Financial Reporting for examples of disclosure. Councils may wish to further segregate these categories in accordance with their own asset management objectives and plans.
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The remainder of this section of the manual describes each category in more detail and considers appropriate units of measure for each of the sub groups of assets in each category and suggested types of assets which will usually fall into each. 4.3.3.1 Plant and Equipment Plant and equipment refers to any mechanical or electronic equipment used by the council, but does not include office equipment. It will usually comprise of construction equipment, road making plant, motor vehicles, air conditioning and heating plant, outdoor plant, etc. Unit of measure Each asset should be recorded as a separate item. Section 5 of the Asset Accounting Manual provides guidance on the levels of materiality that should be applied. 4.3.3.2 Office Equipment Office equipment refers to mechanical or electronic equipment used within the office environment. It will comprise of computer hardware and major software, photocopiers, facsimile machines, typewriters, etc. 4.3.3.3 Furniture & Fittings
Furniture and fittings are fixed assets not integral to a building structure, although they may be affixed to walls and ceilings. This asset type will include curtains, furniture items, light fittings, etc. 4.3.3.4 Property, Plant and Equipment leased Property, plant and equipment leased refers to all land and buildings, any mechanical or electronic equipment including office equipment under lease agreement. Unit of measure Each asset should be recorded as a separate item. Section 5 of the Asset Accounting Manual provides guidance on the levels of materiality that should be applied. 4.3.3.5 Land Land has four subgroups which are: Council Owned (Freehold) Council Controlled Non-Depreciable Land Improvements Land under Roads (only if valued)
Items that would normally be included in land are:

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Non-Depreciable Land Improvements (that meet the attributes contained in Section 4.3.3.5.1) Land under roads All land brought to account needs to have met the control/ownership tests (Refer to Section 3). Access to the land by other authorities will not necessarily preclude the council from exercising control. Land controlled but not owned directly should be recorded in the asset register with some indication of the non-ownership. Land improvements including all works carried out to the land to improve its utility, service potential or make it ready for an identified use should be included in the value of land improvements. It could include the following items: 1. 2. 3. 4. Landscaping (including trees, grass, rocks, shrubs, trees, etc) Land forming Earthworks not integral to other assets (not bulk earthworks) Water and drainage reticulation
Unit of Measure This will vary depending on the nature of the asset. For land, area, such as hectares or square metres may be adequate, however location may sometimes be more appropriate. The same measures can be applied to land improvements.
4.3.3.5.1 Non-Depreciable Land Improvements Introduction The Australian Accounting Research Foundation is in the process of forming a committee to consider on a National basis the valuation of land under roads. Of a similar nature to land under roads are certain assets which have a high value and an indefinite life. The accounting treatment set out below has been determined as an interim measure pending the findings of the Australian Accounting Research Foundation Committee as well as National Road Authorities and the Local Government Authorities in other States. In the construction of some assets there are parts of the assets value which have the following attributes: They are an integral component of the land form or landscape The asset has a once only construction cost of reasonable magnitude compared to the total asset value of the particular asset which is generally of a once only nature The asset has an indefinite life, ie. it does not wear out and hence it does not depreciate
Non-Depreciable Council assets displaying the above attributes should not be depreciated. Examples of such items where the value shall be included under this asset type are:-
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Roads
bulk earthworks, ie. cuttings and embankments. It excludes the excavation for the road pavement structure and basic urban footpath formation - this must be included in the depreciable value of the road pavement under Infrastructure Roads, Bridges and Footpaths. bulk earthworks for a channel bulk earthworks for a retention basin. bulk earthworks
Drainage
Parks
To be included in the Non Depreciable Land Improvement asset type the asset component must be material to the particular asset and it largely would not be removed, replaced, or eliminated under normal maintenance/ renovation activities. Depreciable Council assets which do not display the abovementioned attributes must be depreciated in accordance with AAS 4. Examples of such items would include: Buildings Drainageearthworks for foundations and the building platform earthworks for pipelaying (as repair/replacement of the pipe warrants re-excavation).
Water Supply/Sewerage - reservoirs/dams and other water and sewer assets should be depreciated in accordance with their respective asset type
4.3.3.6 Buildings Building structures include all structures controlled by a council and constructed for dwelling purposes, human or otherwise, and will also cover a wide range of other structures used for many other purposes. Items that will normally fall into the category of Buildings include: Administration Centres Recreation Centres Health Centres Cultural Centres Sporting Centres Libraries Public Utilities
Buildings should be separately identified by location.
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4.3.3.7 Other Structures Other Structures include all other structures not included in the category of Buildings that are controlled by a council and constructed for a variety of purposes. Items that will normally fall into the category of Other Structures include: Statues Fences Monuments etc. Clocktowers etc.
4.3.3.8 Roads, Bridges & Footpaths This category includes the following four major sub groups: Local/Regional roads Footpaths Bridges and culverts Car parks
It is expected that assets in this category will in many cases be the most significant assets in the statement of financial position. Local/Regional roads These comprise all roads under the control of the councils (i.e. not under the control of the State or Federal Government or private enterprise). The following two classifications of roads may be used to classify roads. These are: Sealed - Roads which have a pavement structure of crushed rock and/or natural gravels and a sealed surface. Sealed surface media may comprise cement concrete, asphaltic concrete, bitumen, tar or epoxy resin material into which aggregate is incorporated. Unsealed - All roads which are either Formed and Gravelled (including pavements constructed of gravel, rubble, limestone and by use of soft stabilisation processes) or Formed Only (including roads without constructed pavement but which are formed by grader such that drainage of stormwater can occur).
Councils are reminded that they are required to report annually on their Transport and Communication assets in a prescribed manner for the Grants Commission in Special Schedule 1 (refer to page A304 of the Code of Accounting Practice and Financial Reporting for details). It is expected that local and regional roads will be further subclassified into the following components; Land under roads.
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Structure - crushed rock, natural gravels and seals
The local roads subgroup also takes into account: Land included in road reserves - the land area is based on a fence line to fence line measurement consistent with the area of land controlled by a council. Rights of way - all roads not wider than 3.7 metres measured between adjacent property boundaries which provide service access only to private or commercial properties. Bicycle and wheelchair paths - all cycleways and shared footways not located within road reserves. Road furniture - school crossings, crash barriers, landscaping, seats, road signs, speed bumps, roundabouts and parking meters. (Note that in most instances individual road furniture items would be below the threshold level for recording and recognition as separate assets). In aggregate however, these items may be material and sufficient records need to be maintained. Refer to section 5 of the manual for further discussion of this issue. Kerbs and channels and surface drains for the collection of surface water.

The descriptions for road classifications noted above can be further subclassified by councils for more specific description if required. The decision to further refine descriptions should be made primarily for purposes of better asset management. Unit of measure Each unit of road should be recorded as a separate asset and calculations for valuation purposes made in square metres. Unit of road is defined as a homogeneous road or uniform segments of a road or a representative unit. In determining the unit of a road it will be necessary to consider whether there are significant changes in the nature and structure of roads which may require separate recording. A homogeneous segment of road is simply a stretch of road that has the same characteristics, such as condition, construction, useful life etc. Boundaries The boundaries of each road shall be determined by the road reserve. Footpaths Footpaths include all footways, whether sealed with a bituminous seal, concrete, or gravel. They may be located within the road reserve or in separate footway reserves. Unit of measure
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Each footpath should be recorded as a separate asset and calculations for valuation purposes made in square metres. Footpaths made of different materials may require separate recording where the costs of materials vary significantly. (e.g. asphalt and concrete). Bridges and Culverts Bridges comprise all structures which convey a road, footpath or cycleway across another physical feature (including waterways and other roads) but do not include culverts. They should be sub-grouped according to the predominance of steel, concrete, or timber and masonry (stone) as construction materials. The sub-grouping should relate to the bridge substructure and not the deck material. Culverts comprise all drainage structures beneath roads which have a structural floor or base as well as a structural deck or roof. Subgroups should be determined by pipe size as follows: Small Medium Large - less than 0.9m span or waterway less than 0.5 square metres. - span of 0.9m to 3.0m or waterway area of 0.5 to 6.0 square metres. - greater than 3.0m span 6.0 metres waterway area.
Unit of measure Each bridge should be listed separately. Measures should be in square metres. Bridge length measurements should be measured along the centre line of the carriageway. The unit of measure for culverts shall be length in metres for each specified pipe size. In considering multi-cell pipe and box culverts the distance is to be measured between the points where the straight headwalls meet the wingwalls. Car parks Car parks adjacent to other infrastructure assets such as reserves, are included under this classification. These include all off street parks whether at ground level or multi-level. On street parking will be classified as part of the road. Unit of measure Each car park should be recorded separately except where it is part of a building. Measures to be in square metres. The land on which the park is located should be recorded as a separate asset. 4.3.3.9 Non-Depreciable Bulk Earthworks Non-Depreciable bulk earthworks refers to those major earthworks that are constructed to enable a road structure and road seal to be constructed. For example, major cuttings or fills through undulating or mountaineous terrain. Non-Depreciable bulk earthworks would normally have the following attributes:
They are an integral component of the land form or landscape The asset has a once only construction cost of reasonable magnitude compared to the total asset value of the particular asset which is generally of a once only nature The asset has an indefinite life, ie. it does not wear out and hence it does not depreciate
4.3.3.10 Stormwater Drainage Drainage refers to the system for the collection, storage and removal of stormwater developed and maintained by the council. Facilities not under the control of the council should not be included. Where other drainage authorities control the assets, those assets should not be recorded as council assets. Surface drains, kerbs and channels for the collection of run off should be included under local roads. Water reticulation systems for reserves and sporting facilities should be included under the land and buildings category. Drainage assets should be sub-grouped under: retarding basins; flood control structures and equipment; weirs for controlling and storing stormwater run off; improvement works to natural and artificial waterways; underground drains, pits and chambers.
These could be further sub-grouped by size: Small Medium Large - diameter less than 0.6m or waterway area less than 0.35 square metres. - diameter of 0.60 to 1.65m or waterway area of 0.35 to 2.5 square metres. - diameter greater than 1.65m or waterway area greater than 2.5 square metres.
Unit of measure Measurement should be in metres for each pipe size. 4.3.3.10 Water supply network A council which facilitates water supply should classify all assets used for the service under this heading. Such assets include: Bores Reservoirs/Dams Tanks and storages Above ground mains Underground mains Water service connections
Buildings Treatment Plant Pumping stations Land 4.3.3.11 Sewerage network A council which provides common effluent drainage facilities should classify all assets used for the service under this heading. Such assets include: Sewer mains Sewer service connections Sewer pump stations Sewerage treatment plants Manholes Land 4.3.3.12 Other Infrastructure A council which facilitates gas supply should classify all assets used for the service under this heading. Such assets include: Meters Cylinders and tanks Tools and equipment Gas stations Plant & machinery Land 4.3.3.13 Other Assets Other community assets includes all community assets that are not classified elsewhere. This may include heritage collections, library books etc.
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4.4
WORKED EXAMPLE
Following the asset categories depicted in Section 4.3.2, the assets of the swimming pool complex should be recorded as follows:
ASSET FUNCTION Recreation & Culture
ASSET TYPE Land and Buildings Land - Crown Land
MEASUREMENT UNIT
Areas Location Location
- Landscaping Buildings - Kiosk, dressing room,admin. Other Structures - Main Pool - Diving Pool - Learners Pool - Toddlers Pool - Wire Fence
Location
Area and depth Area and depth Area and depth Area and depth Height and length
Plant and Equipment - Water Filtration - Pumping and Chlorination equipment
Unit Unit
Determination and the classification of the asset function is important for two reasons:(1) it establishes that function within the council which is responsible for control, use, maintenance and replacement of the asset, and it establishes the department or programme to which the depreciation expense will be charged.
(2)
Refer to Appendix 6 for guidance on asset classifications.
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Section 5 Capitalisation Principles and Materiality
SECTION 5 - CAPITALISATION PRINCIPLES AND MATERIALITY

5.1
5.1.1
ACCOUNTING STANDARD
Application of materiality concept
The accounting standards set out in this Standard shall, in accordance with Australian Accounting Standard AAS 5 "Materiality", apply to general purpose financial reports where such application is of material consequence. Information about a local government is material if its omission, nondisclosure or misstatement has the potential to adversely affect: (a) decisions about the allocation of scarce resources made by users of the local government's general purpose financial report; or the discharge of accountability by the governing body of the local government (AAS 27 paragraph 10).
(b)
5.1.2
Materiality guidelines
The following percentage limits are proposed as useful benchmark in considering the materiality of the amount of an item in relation to the level of equity or the appropriate asset or liability class total for balance sheet items; or in relation to the operating result for items relating to the operating statement: (a) an amount which is equal to or greater than 10% of the appropriate base amount may be presumed to be material unless there is evidence or convincing argument to the contrary; and an amount which is equal to or less than 5% of the appropriate base amount may be presumed not to be material unless there is evidence, or convincing argument, to the contrary. (AAS 5 paragraphs 4.1.6 (a) & (b).
(b)
....Further indications of materiality may be evident from making assessments of the items in an absolute and a relative context.... (AAS 5 paragraph 4.1.8). In absolute terms, consideration is to be given to the financial report as a whole.... (AAS 5 paragraph 4.1.9). In relative terms, items are to be compared to any directly related items. ...(AAS 5 paragraph 4.1.10)
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5.2
FRAMEWORK
5.2.1 (1)
Capital/maintenance expense
Ref: 5.3.1, 5.3.2
Expenditure on assets would generally be regarded as capital where: - the asset's economic life has been extended; - the asset revenue earning or service potential has been improved; and - the asset has had added attributes which were not previously part of the asset, ie. length, width etc. Councils must exercise judgment based on their local conditions, corporate objectives and any external factors including the requirements of the Australian Accounting Standards when considering whether expenditures should be capitalised or expensed.
(2)
5.2.2
Level of disaggregation of assets
Ref: 5.3.3
In determining the degree of detail of asset's components for recording purposes, councils should disaggregate assets to the point where management and financial information requirements will be satisfied and decisions can be made about renewal, replacement, useful lives and disposal of assets.
5.2.3 (1)
Establishment of materiality threshold Councils should establish: (a)
Ref: 5.3.4, 5.3.5
a capitalisation threshold, being the value above which items are capitalised as assets; and a revaluation threshold being the value which assets are to be revalued in accordance with the revaluation policy.
(b)
(2)
Councils should set these thresholds based on their particular needs and with due regard to guidance provided in AAS 5. The relevant value for the measuring the materiality threshold for assets purchased after 1 January 1993 is the cost of acquisition whereas current replacement costs should be applied for assets acquired prior to 1 January 1993. If assets are presently not recorded in the accounts, council should make a preliminary assessment of the value of those assets to establish a value against which materiality can be measured. Unless council considers it material, all resealing and resheeting costs should be expensed as a period cost (maintenance expense).
(3)
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5.2
5.2.4 (1)
FRAMEWORK (Cont'd)
Accounting for aggregate assets Ref: 5.3.6
When considering materiality thresholds for homogeneous assets like trees, chairs in a theatre, mobile garbage bins, library books, road furniture (signs, traffic control devices) etc, council may either: (a) examine the value of the asset in isolation against the threshold to determine materiality of the asset. treat the asset in aggregate and determine materiality based on the homogeneous group.
(b)
(2)
Trees should be considered as period expenses except where council has large quantities of trees in accordance with stated corporate objectives. Where it is determined that trees should be capitalised, they would only require separate identification where they do not add value to a particular asset (e.g. forest plantation).
5.2.5
Minor assets
Ref: 5.3.7
In order to discharge custodial and risk management responsibilities, councils should maintain a separate record of assets (attractive items) which fall below the capitalisation threshold.
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5.3
5.3.1
DISCUSSION
Background and conceptual framework
Traditionally the Local Government Accounting Regulations have prescribed the treatment and recognition principles for local government expenditure on assets. These principles have resulted in: (1) acquisition or construction costs of some assets being treated as operating or period costs in the financial statements of the councils. some capital expenditure being recognised in the statement of financial position of councils.
(2)
The main determining factor for the accounting treatment described above has generally been the source of funding of the expenditure. As a result, significant expenditure on assets has not been recognised in councils' statement of financial position. This basis of treatment is not relevant to the determination of accounting treatment for assets under AAS 27. AAS 27 promotes the consistent application of conceptually sound principles for recording and recognition of assets including community assets. The concepts on which these principles are based are set out in SAC 4 "Definition and Recognition of the Elements of Financial Statements". The definition of an asset under SAC 4 is discussed in Section 3 of this manual. The future economic benefits embodied in an asset must extend over a period greater than one accounting period in order to justify recognition in the statement of financial position. Expiry of the future economic benefits within one accounting period should result in the expenditure being treated as an operating or period expense. Effectively, the statement of financial position should include only the unexpired portion of the future economic benefits of any asset, including community assets. 5.3.2 The distinction between capital and maintenance expenditure
The guidelines on identification, recording, valuation and depreciation of assets adopted in this manual are based on the assumption that in normal circumstances assets are fully maintained. The use of an asset over its economic life usually depends on an effective maintenance program. Generally, delay or cancellation of maintenance programs will reduce the economic life of an asset or reduce its operating efficiency. With respect to roads, the use of the asset over its optimal serviceable life requires both the continued injection of capital funds as well as an ongoing maintenance program. A significant practical issue that has been confronted by reporting entities in both the private and the public sectors is the classification of expenditures between those which give rise to increases in the value of assets and those which can be classified as giving rise to expenses. As a general guide a repair or maintenance of an asset is a period cost rather than "capital" expenditure. This type of expenditure has the effect of sustaining the future economic benefit of an asset as opposed to expenditure directed towards changing or replacing the service potential inherent in the asset. Capital expenditure on an asset, however: (1) extends the asset's economic life; and/or
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(2) (3)
improves the asset's revenue earning capacity, often taking advantage of more modern technology; and/or adds attributes which were not previously part of the asset.
For councils, criteria (2) above should be interpreted to include improvements in future economic benefits of assets. "Capital" expenditure should be recorded as an increase in the current cost of the asset. These views are consistent with the concepts expressed in SAC 4 with regard to definition and recognition of assets. SAC 4 defines assets as future economic benefits and expenses as consumptions of service potential. Accordingly, where expenditure provides future economic benefit an asset is created, and must be recognised. The view adopted in this manual for classification of expenditure between maintenance and capital is similar to these views. There will no doubt be instances where the distinction between maintenance and capital will be difficult. In such cases, careful judgment will need to be exercised. Such judgment will need to be applied consistently and should be documented, probably through the development of an accounting manual by councils which may deal with this and other accounting issues. Expenditure on assets may be classified as capital expenditure in the following circumstances: (1) (2) it is expected to significantly increase the practical capacity or useful life of the asset. it is an upgrading of the basic qualities of the asset (e.g. load bearing capacity, width, number of lanes, removal of danger spots, better drainage, etc. on a road). it is a renewal of an existing asset which had reached the point of being unserviceable. it is reconstruction of an asset which was destroyed (for example, by a natural disaster such as flooding). In this case, the carrying value of the destroyed asset must be written off in the operating statement). it is material to the total value of the relevant nature/type asset category (refer to 5.3.4 in this section of the manual for discussion on materiality).
(3) (4)
(5)
Expenditure on assets should be treated as maintenance expenditure in the operating statement in the following circumstances: (1) it is part of an ongoing, regular or rotational maintenance, repairs and overhauls program. It is acceptable in practice to recognise as operating expense, expenditures in respect of periodic maintenance, repairs and overhauls where such expenditures represent the consumption of service potential embodied in an asset. it will not significantly increase the service potential or useful life of the asset. it relates to repair of localised problems such as subsidence, breaking up, etc. of part of the road construction.
(2) (3)
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(4) (5)
the basic qualities of the asset are not being upgraded. whilst relating to the acquisition or upgrading of an asset, is not material to the total value of the relevant nature/type asset category (refer to 5.3.4 and 5.3.5 in this section of the manual for discussion on materiality). Level of disaggregation of assets
5.3.3
The process of recognition of assets requires the development of appropriate policies with regard to the degree of detail required in recording assets for two distinctly different purposes:(1) disclosure in financial statements Asset details need to be summarised by functional category and by nature or type as explained in the manual. The summarisation will lead to aggregation of asset groups and components. (2) recording of assets in asset registers This process will require identification of each significant asset component for recording and valuation purposes. The criteria for the level of detail required will be dictated by considerations of: asset management policies estimated economic life usage (nature and frequency) condition value interdependency
In determining the degree of detail required in asset recording, it is logical to commence from the most summarised version and move to the more detailed level. Disaggregation refers to the process of unbundling of the component parts of assets to a level which will allow appropriate identification of asset components. The difficulty with disaggregation is to establish the degree of detail beyond which further disaggregation is not required. The level of disaggregation will vary between councils depending on the nature of the asset and the degree of detail councils desire in their asset registers. Recording of assets should generally be on an asset-by-asset basis although grouping of similar or related assets may be more practical in some situations. Certain assets are so interdependent that an integrated group of assets might be considered as one whole asset for recording purposes. Hence, assets should be disaggregated to the point where asset management techniques can be applied and decisions can be made about renewal, replacement, use and useful life. Assets should also be disaggregated to the point where disposal of components can be treated separately in the asset register.
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These decisions may be affected by interdependency of asset groups or components. Where interdependency is a strong characteristic, there is likely to be scope for grouping of components. Clearly, however, asset characteristics as noted above will probably vary on an asset-by-asset basis and hence different levels of disaggregation may apply within different groups of assets. 5.3.3.1 Disaggregation - an example A comparison of the characteristics of a building and a swimming pool provides a useful example to illustrate the importance of disaggregation. A building would normally be recorded as one asset although some of the mechanical equipment (e.g. air conditioning equipment, ducts, etc) may be separately identified for useful life and depreciation purposes. It may not be practical or appropriate to separately record the components of the building structure, that is, its foundations, brickwork, roof, plaster, etc. These structural components are integral parts of the building and are interdependent on each other to provide the utility of the building. They have limited value of their own and may be difficult to separately value. Importantly they will probably each have similar economic lives and therefore there would be an immaterial difference in the reported financial performance of the entity irrespective of whether these components were recorded and depreciated separately or in aggregate. A council may therefore direct its efforts to management and maintenance of the building, rather than its components. In this case, the building would be recorded in the asset register as a single asset, although mechanical equipment may be separately recorded as noted above. The swimming pool may comprise of buildings, the pool structure, filtration, chlorination and pumping equipment, pavement, pool covers, diving boards and landscaping. Each of these components, and any others are likely to be listed separately in the asset register. The pumping equipment, as an example, would be comprise a number of sub components which are not expected to be recorded separately. The reason is that all of the pumping equipment components will have similar characteristics and will be managed as one operating unit. An important point to note is that it would be considered inadequate to record all components of the swimming pool as one asset only. In summary, the degree of detail recorded for the building is vastly different to that employed for the swimming pool. It will be necessary for each council to consider the relative costs and benefits of grouping of assets in the context of the overall objectives of recording and reporting, including control over custody, disposal and replacement of assets. This discussion has so far ignored the concept of materiality and how it can be used to overcome some of the practical problems councils will encounter with regard to the level of detail in recording assets. The next part of this section of the manual introduces this concept. 5.3.4 Concept of materiality
The implementation of the principles outlined earlier in this Section 5.3.1 for recognition of assets may require the allocation of significant resources to identify, record and value assets on hand at the selected implementation date.
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In addition, the process of recognition and recording of assets acquired after 1st January, 1993 will also require the allocation of resources. In order to limit the amount of work involved in the recognition and recording exercise, while still maintaining important information, it is necessary to consider the materiality of the data to be collected. Australian Accounting Standard AAS 5 "Materiality " provides important criteria to be applied in the process of recognition of assets and which will assist in determining the degree of disaggregation of the assets. A major consideration of councils will be to find the optimum level of recording of community assets, which will not waste scarce council resources in determining excess detail whilst delivering the maximum benefit from the recognition process. The establishment of materiality or recognition thresholds below which assets will not be recorded will greatly assist this process. Before developing thresholds, however, it is essential to consider in some detail the requirements of AAS 5. AAS 5 applies the concept of materiality to financial reporting and states that: General purpose financial reporting involves making decisions about the information to be included in the general purpose financial reports and how it is to be presented. In making these judgements, considerations of materiality play an essential part. .... (Para 3.1.2). In essence, if an asset is not considered to be material then the entity must determine whether those assets will be recognised measured or disclosed. However AAS 5 does not require the entity to record those assets in the financial records of a council. To determine the materiality of an asset, AAS 5 states that materiality should be referenced to: 1. 2. the nature of the asset, and the value of the asset.
Whilst AAS 5 does not provide prescriptive guidance as to values or conditions at which point an asset becomes material, it does provide the following judgmental criteria: (1) for the statement of financial position, in determining materiality, the amount of the item (asset) or aggregate of items is to be compared with recorded amount of total equity and the appropriate asset class total; for the operating statement, in determining materiality, the amount of the item or aggregate of items is to be compared with the more appropriate of the: (i) change in net assets resulting from operations for the current period; and (ii) average change in net assets resulting from operations for a number of reporting periods (including the current period). (3) for the statement of cash flows, in determining materiality, the amount of an item or aggregate of items is to be compared with the more appropriate of the:
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(i)
net cash provided by or used in the operating, investing, financing or other activities as appropriate, for the current reporting period; and net cash provided by or used in the operating, investing, financing or other activities as appropriate, for a number of reporting periods (including the current).
(ii)
Significantly, AAS 5 does not prescribe absolute materiality levels but provides the following benchmarks as guides: (1) an amount which is equal to or greater than 10% of the appropriate base amount may be presumed to be material unless there is evidence or convincing argument to the contrary; and an amount which is equal to or less than 5% of the appropriate base amount may be presumed not to be material unless there is evidence, or convincing argument, to the contrary.
(2)
In addition to the guidelines mentioned above, further indications of materiality may be evident from making assessments of the items (asset) in an absolute and a relative context. In absolute terms consideration of the asset should be made to the financial report as a whole. AAS 5 also emphasises recognition of such factors which may indicate deviations from normal activities such as the reversal of a trend, or creating or eliminating the margin of solvency in a statement of financial position. For example, where the entitys financial position has deteriorated, and the entity has revalued its assets upwards, information regarding the revaluation of those assets are likely to be material even if immaterial to the appropriate asset class total. In relative terms, items are to be compared to any directly related items. For example, the amount of stores and materials would be compared with the amount of inventories. Such a comparison may indicate that too much or too little stores and materials are being held or that items other than stores make up the considerable proportion of inventories in the statement of financial position. Clearly, careful judgment must be applied in this case and the nature of the item will be important. Decisions as to the materiality of an asset will vary depending upon the specific characteristics and size of each council and for this reason prescriptive guidance is not provided. The standard also refers to the fiduciary duties of reporting entities whereby there may be a requirement to report on an item regardless of its nature or size due to certain regulatory or legislative requirements. It is assumed that any requirements for councils to meet these fiduciary responsibilities will be met other than by disclosure in the annual financial statements, although disclosure in the financial statements is not precluded. 5.3.5 Determination of capitalisation thresholds
Each council should set a monetary threshold for the recording of physical assets. This registration threshold should be set in the light of the particular needs of each council and with due regard to the guidance provided in AAS 5. The effect of the threshold is to limit the recording and financial reporting of assets to those above the threshold.
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Significant administrative savings are expected to result from this approach whilst maintaining the quality and usefulness of the information derived from the asset register. This approach is consistent with the concepts embodied in AAS 5 and provides some practical direction as to the point at which a council should begin to record its assets. Whilst application of the materiality principles embodied in AAS 5 will assist in focusing on significant existing assets on implementation of AAS 27, AAS 5 also provides a sound basis for setting minimum recording thresholds in respect to assets acquired or constructed after the implementation date. The basis for recording these assets should be consistent with that for the stock of assets on hand at the implementation date. The view adopted in this manual is that it is desirable to set and apply minimum thresholds for recording of assets. The applicable materiality thresholds should be stated in councils significant accounting policies reported in Note 1 of their Financial Reports. Refer to page A203 of the Local Government Code of Accounting Practice and Financial Reporting for an example of those reporting requirements. Accordingly, it is recommended that councils make a preliminary assessment of the value of assets in an attempt to establish a value against which materiality can be measured. This can be done by asset category as shown in Section 4 of the manual. It is expected that the assets to be included in this exercise will include the most valuable assets of the council which will probably include the major transport assets, all other substantial structures, large holdings of freehold and crown land and plant and equipment. It may not be possible to prepare an estimate until the initial identification phase of existing stocks of assets has been completed. Having established estimated values as recommended above for community assets, it will then be possible to set recording thresholds. Because of the different characteristics of asset components as identified in this manual, it is also expected that different recording thresholds may be set for each asset component. Once assets are recorded in the statement of financial position, materiality will be based, not on estimates but on the values recorded in the statement as per AAS 5. Indications are that the greatest values of assets will be in land and roads. The thresholds which can be set for these assets will therefore be far greater than thresholds for other assets. The values of land and roads will vary between councils but could be in a range of $200M to $1B for larger councils. Councils should in consultation with their auditors, establish an internal policy specifying materiality and revaluation thresholds based on their particular needs. 5.3.6 Treatment of aggregate assets
Problems may occur where there are large numbers of homogenous assets which have complementary values. (e.g. trees, chairs in a theatre, mobile garbage bins, library books). In such cases the assets may be recorded either in isolation and expensed if it falls below the materiality threshold or in aggregate. While the isolation approach will lead to treatment of most homogeneous assets as periodic expense, the aggregate approach will be beneficial where the value of the components of the asset fall under the recording threshold but the aggregate value of the asset lies above the threshold. It is not acceptable to aggregate assets which have fundamentally different characteristics as this will result in incorrect assumptions about useful life and depreciation.
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Reassessments of the value of aggregate assets should occur periodically to allow for changes in the number of assets on hand and their unit values. Trees are likely to fall within the category of aggregate assets. Great difficulty will be experienced in placing values on trees and because of the requirement in SAC 4/AAS 27 that assets be recognised only when value can be reliably measured, there could be circumstances where trees of significant value are not recognised. However, non recognition of trees is unlikely to be acceptable where councils have large quantities of trees in accordance with stated corporate objectives. For example, trees would require separate identification and recording in the accounts if the purpose is other than to increase or add value to a particular asset. (e.g. forest plantation). Where trees add material value to the amenity e.g. land, they should be recorded as part of that amenity. If a large planting of trees was carried out on a site the overall cost of land improvements would be recorded. The asset register should then depict a total amount which includes the cost of the site and the cost of the trees, e.g. park with trees $120,000. When however small numbers of trees are planted incidental to general maintenance activities over time, the items would initially be expensed and the overall land improvements would be taken up at the next scheduled revaluation. 5.3.6.1 Valuation of aggregate assets Accordingly, where existing trees are expected to be a significant aggregate asset, it is recommended that they be reported on the basis of standard unit cost. Different unit cost could be applied to different types of aggregate assets ie. trees, grouped by size (e.g small, medium, tall). The use of a small number of unit cost reflecting current cost will simplify the valuation process. If the value of trees is expected to be material but excluded from the financial statements because value can not be reliably measured, the notes to the financial statements should state the omission and the reason for it. A similar approach should be adopted for all other aggregate assets where value is expected to be material. With respect to road furniture (signs, traffic control devices, etc) the total value of these assets is not expected to be significant in comparison to the value of roads. Therefore, they should be recorded and reported on the basis of standard unit costs. Different unit costs could then be applied based upon the type and density of street furniture. 5.3.7 Recording of minor assets
Prior to the introduction of AAS 27, councils have generally recorded only buildings, plant and equipment and possibly furniture and office equipment in asset registers. With the introduction of AAS 27, there is significant scope to implement proper asset and risk management strategies in order that assets are properly managed, recorded and maintained. The degree of effectiveness of asset management techniques will depend on decisions taken about the degree of detail required in the recording of assets in asset registers. Whilst thresholds may be set below which assets will not be recorded for accounting purposes, there may still be a need to record those assets for management purposes. In order to discharge custodial and risk management responsibilities, each council should consider maintaining a separate record of assets which fall below the registration threshold. The council may decide to keep a separate record of all assets that are below the registration threshold or set another
threshold whereby all assets above a minimum requirement but below the registration threshold are recorded. Regardless of the recording aspect, all assets that are below the registration threshold and are not recorded in the asset register, should still be subject to adequate custodial controls. It is important that councils carefully consider the recognition criteria prior to commencing the recording process. Once the recording process has commenced as described in Section 6, changes in the recognition criteria may be difficult to implement as assets will have been recorded on the basis of different recording thresholds. A later change in this parameter may even result in the recording process being recommenced. Initial decisions on these issues are therefore important to councils.
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5.4
WORKED EXAMPLE
The outdoor swimming pool complex introduced in Section 5.3.3.1 forms the basis of the example. The complex is a recreational asset and we have agreed that all the asset components of the complex are controlled by the council. The next task is to establish the degree of detail we require in our asset register for each asset in the complex and to determine those assets which are likely to be material. Earlier meetings of the implementation team have established that for recreation assets the materiality threshold is $5,000. The instructions issued by the implementation team for the counting of assets state that only assets which clearly will have a current replacement cost of less than $5,000 are to be excluded from the identification process. All other assets are to be recorded on the Asset Inventory Forms (refer to Section 6 for a discussion on these). The implementation team has agreed as follows with regard to the disaggregation of asset components: Buildings - no disaggregation. These are to be recorded as single assets. Pool structures - each pool is to be recorded separately. Water filtration equipment - despite the many components of the equipment the interdependency of each results in the equipment being managed as one unit. Hence the equipment should be recorded as one asset. Pumping equipment - as for filtration equipment. Chlorination equipment - as for filtration equipment. Diving boards - to be recorded separately. Concrete concourses - to be recorded separately to landscaping. Landscaping - will include earthworks, lawns and trees. Hence separate recording of each of these components will not be necessary. Solar blanket and equipment - these components will be separately recorded because of potential for major variation in asset life. Large waste bins - these are to be recorded in total as one asset in view of their similar characteristics.
The above procedures has determined all the variables which may impact on the physical inventory process. Once established the recording exercise can then commence.
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Section 6 - Recording of Assets
SECTION 6 - RECORDING OF ASSETS
6.1
6.1.1 General
ACCOUNTING STANDARD
Initial recognition of assets
Where assets .....are first recognised in the statement of financial position during the transitional period specified in paragraph 108 of AAS 27 or during the first reporting period that ends on or after 1 July 1996, the net amount of the resultant adjustments shall be adjusted against accumulated surplus/deficiency in the reporting periods in which the assets are first recognised. (AAS 27 paragraph 110). Land Under Roads Where land under roads is first recognised in the statement of financial position, or its recognition is discontinued, during the transitional period specified in paragraph 115 of AAS 27, the net amount of the resultant adjustments shall be adjusted against accumulated surplus/deficiency in the reporting periods in which the assets are first recognised or their recognition is discontinued. If subsequently, the recognised amounts of land under roads are revised during the transitional period specified in paragraph 115 to reflect a reassessment of the factors used to determine those recognised amounts, the net amount of the resultant adjustments shall be adjusted against accumulated surplus/deficiency in the reporting periods in which the recognised amounts are revised. [AAS 27 paragraph 117]
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6.1
6.1.2
ACCOUNTING STANDARD (Cont'd)

Accounting for constructed assets
The costs incurred by a reporting entity that undertakes construction contracts can be divided into: (a) Costs that relate directly to a specific contract, for example: (b) direct labour costs (labour employed specifically on a contract including direct supervision); direct materials (materials used in the contract); depreciation of plant and equipment used on a contract; costs of moving plant and equipment to and from a site; expected warranty costs.
Costs that are attributable to the contract activity in general and are capable of being allocated on a reasonable basis to specific contracts, for example: tender preparation; insurance; design and technical assistance; project overheads.
(c)
Costs that relate to the activities of the reporting entity generally, or that relate to contract activity generally and are normally nor related to specific contracts, for example: general administration and selling costs: finance costs; research and development costs; depreciation of idle plant and equipment.
Costs referred to in paragraph 6.1.2(c) are usually excluded from accumulated contract costs because they do not relate to reaching the present stage of completion of a specific contract. However, in circumstances where such costs are capable of being attributed to a particular contract they may be included as part of accumulated contract costs (AAS 11, paragraphs 14 & 15). Note : Reference to "contracts" is in relation to the construction of an asset by councils, not the hire of external contractors.
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6.2
6.2.1
FRAMEWORK
Identification and recording of assets Ref: 6.3.1
Councils should consider the following elements in the identification and recording of the inventory of assets on hand at 1st January, 1993:1. 2. 3. 4. identification of assets recording of assets valuation of assets determination of remaining useful life
6.2.2
Recording of initial assets
Ref: 6.3.1.6
While paragraph 121 of the Standard encourages councils to recognise Land Under Roads as an asset wherever it can be measured reliably (for example, where land under roads has been acquired at a cost of acquisition), it is not required to be recognised under the transitional provisions until 30 June 2000.
6.2.3
Audit considerations
Ref: 6.3.1.7
Councils must prepare and retain work papers to support the recording and valuation of their assets for audit purposes.
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6.2
6.2.4
FRAMEWORK (Cont'd)
Accounting for constructed assets Ref: 6.3.2
Paragraphs 14 and 15 of Australian Accounting Standard AAS 11, "Accounting for Constructed Contracts" are to be used as a guide when identifying the cost associated with the construction of an asset by a council. Administration costs, interest and finance costs incurred in the process of acquiring the service potential or future economic benefits embodied in an asset are to be included in the value of an asset when those costs can be reliably attributed to the existing asset up until the completion of construction. Where borrowings are made in respect of assets under development, and are invested prior to remission of the funds to suppliers or contractors (for example, where delays occur), any interest revenues generated as a result should be deducted from the interest costs included in the determination of the assets cost.
6.2.5
Legislative requirements - disposal of property
Ref: 6.3.3
A council may, by resolution, delegate to the general manager or any other person or body (not including another employee of the council) any of the functions of the council, other than the following: ..... the compulsory acquisition, purchase, sale, exchange or surrender of any land or other property (but not including the sale of items of plant or equipment)..... (LGA 1993 section 377).
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6.3
6.3.1
DISCUSSION
Identification and recording of existing assets
Recording of assets refers to the process of identifying and documenting assets on hand for the purpose of asset management and subsequent recognition in the financial records. As previously mentioned, councils cannot recognise non-current assets in their financial reports if they were in existence prior to 1 January 1993 before the implementation timetable specified in section 2. There are a number of issues relating to the identification and recording of the inventory of assets on hand at 1st January, 1993. The strategy for this task will have already been determined by the implementation team (refer Section 2 of the manual). The steps in the identification and recording process are expected to include the following elements:1. 2. 3. 4. identification of assets recording of assets valuation of assets determination of remaining useful life
6.3.1.1 Identification of assets The identification of assets can only be completed after the issue of asset control has been considered and there is clear internal policy as to the criteria which must be applied in establishing whether assets are controlled (refer Section 3 of the manual). In addition there must be a clear understanding of recording or materiality thresholds. It is not expected that the policy on the identification of assets will have been finalised at this point as it may be influenced by other factors which may emerge after the initial identification phase described below is completed. The identification phase involves gaining a thorough knowledge of the assets controlled by the council. This undoubtedly includes the process of determining all locations where assets are likely to be located so that when the physical inventory is carried out the risk of omitting assets will be minimised. The identification process may include some or all of the following:1. 2. 3. 4. reference to council maps. aerial surveys of the council. discussion with department heads or managers of council undertakings. visits to locations where assets may be situated.
Once the council has a "feel" for the likely asset locations, the physical inventory process can be planned with confidence. 6.3.1.2 Inventory and recording of assets This phase refers to the physical stock take and for it to be successful, it must be well planned. Good planning will include some or all of the following:-
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(1)
development of a suitable Asset Inventory Form which includes provision for recording at least the characteristics shown in Section 6.3.1. the Asset Inventory Form should be prenumbered so that adequate control can be established over usage. All forms should be accounted for at the completion of the recording phase. A suggested Asset Inventory Form is shown on the following page. inventory teams should be advised of the task they are expected to carry out and should have a clear understanding of the nature of the information they must record. inventory teams should be carefully selected so that at least one person in each team (two people suggested per team) can make the assessments required on the Asset Inventory Form. careful selection of the days on which the recording process will be completed so that team members: will not be distracted from the task are able to record assets at times when there is little movement or usage of assets (weekends are ideal).
(2)
(3)
(4)
(5)
(6)
units of measure, (whilst self evident in many cases), should be carefully established prior to the recording process so that consistent units of valuation can be applied to like assets. the recording process should be done systematically with teams moving logically from one geographical location to another, so that risk of error or omission is minimised. the Asset Inventory Forms should be reviewed by appropriate senior personnel soon after the recording exercise is completed so that any missing or inconsistent data is captured or clarified quickly.
(7)
(8)
There are likely to be a large number of completed Asset Inventory Forms and it is also likely that each form will contain many asset components which will need to be separately recorded for valuation purposes. Councils will be concerned to ensure that the data on those forms is transcribed accurately and efficiently onto some form of asset register. It is likely that councils will either develop appropriate computer spreadsheets or will acquire commercially available asset registers. It is essential that the asset register provides adequate scope for the recording of comments on asset condition and the other characteristics noted above in the recording process. Inventory teams should be instructed to record all assets including those in which control or utility is doubtful.
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Specific Asset Description (including location) Suggested Asset Inventory Form
Ref. No. 4/______
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Are there any doubts over Council ownership or control of this asset? Yes No
Asset Group Classification
Administration Public Order and Safety Health Community Services &

Education
Housing & Community Amenities Water Sewerage Recreation & Culture
Fuel & Energy Mining, Manufacturing & Construction Transport & Communication Economic Affairs
Unit of Measure
Km S. Metres Hectares
Condition Ranking 1 2 3
Units Other (describe)_______________________
Near perfect Superficial deterioration Serious deterioration

)
4 5
Require major reconstruction Asset unserviceable
Valuation Component (
Plant & Equipment Plant & Equipment (Leased) Office Equipment Furniture & Fittings Roads Bridges
Office Equipment & Furniture & Fittings (Lease) Land & Buildings (include Parkes & Gardens) Land & Buildings (Leased) Water Sewerage Stormwater Drainage
Real Estate Assets held for

resale
Other (Specify)
Yes
.................................. .................................. Gas Supply Other (Specify)
Should this asset be valued as one component If No, should it be valued at each of its individual components
Yes
No No

Other Comments .................................................................................................................................................................................. .................................................................................................................................................................................. .................................................................................................................................................................................. .................................................................................................................................................................................. .................................................................................................................................................................................. ..................................................................................................................................................................................
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6.3.1.3 Valuation of assets The valuation of assets is the next step in the recording process. It involves consideration of materiality, the types of cost to be used and asset lives. Procedures dealing with the valuation issues are included in Sections 7 and 8 of this manual. Additional working papers may be necessary to support a summary of asset values. Such working papers should be retained and cross referenced to the summaries. 6.3.1.4 Determination of estimated remaining useful life The final phase of the recording process is the estimation of residual life. The Asset Inventory Form should contain some indication of residual life which is to be reviewed by appropriate engineering or finance personnel for reasonableness before being recorded in the asset register. The accuracy of this information and asset condition will have a significant impact on the ultimate accuracy of depreciation charges. After review and approval, this data should be recorded in the asset register. It should be noted that under AAS 4 residual life should be reviewed annually. Refer to Section 9 of the manual for discussion of depreciation and useful life. 6.3.1.5 Conclusion of inventory process Once the recording and valuation process is complete, senior personnel should review the asset register to identify any anomalies, such as: serviceable assets with nil values unusually high or low valuations whether significant assets have been omitted or overlooked double counting of asset inconsistent determination of: - units of measure - valuations - residual life
These anomalies should be rectified. The results of the inventory process for assets previously recorded should be reconciled with existing records of those assets and appropriate adjustments made. An example of an asset register and the accounting entries required for the initial recording of assets is included in Section 11. 6.3.1.6 Recording of Initial assets An acceptable method of initially recognised assets previously acquired by the local government which have not been recognised in the statement of financial position is to initially recognise them at their written-down current cost, identifying separately, their current cost and any accumulated depreciation. Where a depreciable asset which has not previously been recognised in the statement of financial position initially recognised, the local government is required by paragraph 42 of Australian Accounting Standard AAS 4 "Depreciation of Non-Current Assets" to determine its initial carrying amount after taking into account any expired portion of the asset's useful life.
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6.3.1.7 Audit considerations Non-current assets are likely to be a significant component of the statement of financial position and accordingly will attract close scrutiny by the auditor. As with all audits of non-current assets, the auditor of the council will require access to all records produced in the recording and valuation of assets in order to form his opinion in accordance with the Local Government Code of Accounting and Financial Reporting and Australian Auditing Standards. It is therefore essential that councils prepare and retain work papers supporting the recording and valuation process. Unsupported amounts may result in increased audit testing and in extreme cases may result in audit qualification.
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6.3.2
Treatment of costs of construction and other major contracts
Councils often enter into construction contracts and other major contracts relating to the acquisition of assets. There are a number of costs relating to those contracts which councils should treat as part of the cost of acquisition of assets. It is not necessary to provide detailed commentary in this manual on these costs as a comprehensive discussion is provided in AAS 11 "Accounting for Construction Contracts" (paragraphs 13 to 16) and the Local Government Code of Accounting Practice and Financial Reporting. However, it is worth emphasising that any costs (internal or external to the entity) which can be identified with the contract should be treated as part of the total contract costs. Costs which are easily identifiable with a major contract such as direct labour, direct materials, plant hire and labour oncosts have generally been added to contract costs. However, other costs that are attributable to the construction activity in general and are capable of being allocated on a reliable basis to specific items under construction should be capitalised. For example: depreciation of plant and equipment used on the contract insurance costs of moving plant and equipment to and from site survey, design and technical assistance project overheads tender preparation
Interest charges relating to borrowings arranged specifically for the purpose of constructing an asset, shall be included in the cost of the asset up until the completion of construction. The "capitalisation period" during which finance costs should be included in the current cost of the asset is the period during which the following tests are met: (a) (b) (c) Expenditures on the asset are being made or borrowings have been made for the purpose of such expenditures; Activities necessary to prepare the asset for use by the council are underway; and Finance costs are being incurred.
The activities referred to in (b) include, in addition to physical construction, the necessary administrative and technical activities of the pre-construction stage, such as the development of plans or the obtaining of permits for construction activities. Where assets comprise a group of components, some of which can be used prior to the completion of the total assets structure, finance costs should cease to be capitalised in respect of particular components when they are ready for use. Where borrowings are made in respect of assets under development, and are invested prior to remission of the funds to suppliers or contractors (for example, where delays occur), any interest revenues generated as a result should be deducted from the interest costs included in the determination of the assets' cost.
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6.3.3
Disposal and scrapping of assets
The Local Government Code of Accounting Practice and Financial Reporting comments that when a fixed asset is scrapped or disposed of any accumulated depreciation must be written off against the asset to ascertain the carrying amount. The gain or loss on disposal shall be shown in the Operating Statement. 6.3.3.1 Accounting for disposal of assets It is recommended that councils create sale of asset accounts into which the following items can be posted on an asset disposal:
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the recorded gross value of the asset sold the accumulated depreciation of the asset sold are to be written back to the asset account to determine the carrying amount which is transferred to the Disposal of Asset Account. the amount of any revaluation increment held in the asset revaluation reserve in respect to the asset sold shall be transferred directly to the Accumulated Surplus Account the amount to be received on sale of the asset (net of any selling costs) are to be credited to the Disposal of Assets account and the Gain or Loss on disposal transferred to the Operating Statement.
The net result of these entries will remove the asset, its related accumulated depreciation and any revaluation increment from the ledger and the asset register and result in a gain or loss on disposal which should be disclosed in the operating statement. This treatment will apply also to assets such as Crown Land where, for whatever reason, a decision has been taken by the council that it no longer controls the asset. An example of the accounting entries required is included in Section 11. 6.3.3.2 Accounting for asset scrapping The principles in this case are similar to those outlined above. The only significant difference is that the disposal is at "nil" value, and unless the asset had been fully depreciated prior to disposal, the scrapping will result in a loss which will be disclosed in the Operating Statement. 6.3.3.3 Control over asset disposal Adequate procedures need to be established so that finance personnel are advised of all disposals. A particular risk area is the disposal and/or trade-in of an old asset for a new one, where the finance department is not advised of the transaction (particularly where assets are disposed of at "nil" value). Ideally councils should appoint one member of the finance department to be responsible for maintaining the asset register and reconciling it to the general ledger control accounts (at least on a quarterly basis). Procedures should be tailored to ensure that copies of relevant internal documentation (purchase orders, suppliers invoices, etc.) are directed to the asset control clerk. 6.3.4 Private contributions to asset construction/acquisition
Councils often enter into private schemes with ratepayers (e.g. developers) for the construction of roads, footpaths, kerbing and channelling, etc. AAS 27 requires that contributions of this nature to councils should be recognised as revenue and should not be offset against the cost of construction or acquisition of the asset.
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6.3.5
Council contributions to asset construction/acquisition
Councils may also contribute substantial funds to projects in the council which are controlled by other entities such as Committees of Management. Such contributions, do not represent assets of the council and should be recorded as either donations or contributions to other entities in the Operating Statement. If the council controls the entity which is in receipt of the contribution, the asset of the Controlling Authority to which the council contributed will appear in the consolidated financial statements of the council as assets. If control does not exist, the asset will not appear in the consolidated financial statements. The council then has the option of disclosing additional details in a note to the accounts. 6.3.6 Asset register
The asset register is a subsidiary record supporting the balances of the general ledger control accounts for each asset category. The register should be periodically reconciled to the general ledger control accounts. The register records the key data for each asset. Traditionally within local governments little emphasis has been placed on the accuracy and completeness of asset registers. It is therefore appropriate to provide guidelines on the attributes which should be recorded in the register for each asset. Both asset management and finance considerations have been taken into account in developing this guide: asset description primary use of asset department responsible for control of asset description of asset components unit of measure asset location asset condition assessment of total useful life and residual life date of acquisition (year) valuation valuation basis date of valuation name of valuer, engineer or other person responsible for assigning the valuation depreciation method depreciation rate annual depreciation charge accumulated depreciation written down current cost net revaluation increment/decrement
The Working Guide for SAP 1 (Section 2, Part E) which is a publication of the Australian Accounting Research Foundation provides a useful worked example of an asset register. Good asset management dictates that the asset recording process should continue after the initial recording exercise for assets acquired prior to 1st January, 1993 has been completed. This will be an important ongoing function for the asset clerk in conjunction with engineering personnel.
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Decisions about maintenance of assets can only be made on the basis of accurate data (refer to section 10 on asset management).
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6.4
WORKED EXAMPLE
In section 5 of the manual we had developed our worked example of the outdoor swimming pool complex to the point where we had established ownership and control of assets, recording thresholds and asset categories and types. Following further discussions with the implementation team we know that our decisions on these issues are consistent with decisions by other groups working on recording of assets for our council. The team have decided that a physical inventory will be carried out in the last week of April, 1995 for the following reasons: the implementation team has determined that all recreation assets will be recognised in the financial statements at 30th June, 1995. April is a month of low activity at the complex and public attendance's should not interfere with the task.
The plan for the inventory process is: developing a site plan showing the location of each major asset (the buildings, with separate identification of changing rooms, shower blocks, lockers, administration office, kiosk, entrance and ticketing area, the filtration, pumping and chlorination equipment, the concrete concourses, the seats, the barbecues, the fencing, the waste disposal equipment, the pools, the diving boards, the pergolas, etc. obtaining an adequate supply of the pre numbered Asset Inventory Forms from the implementation team. selecting only one team of two people for the recording phase. This will comprise of the pool manager, and one of our council engineers who has been responsible for engineering issues at the complex over the past three years.

Prior to the completion of the inventory, the recording team has been briefed to ensure they understand the process. This involved: advising the team that it must record all assets (decisions will be made later about those which have a value of less than $5,000) and that if it is in any doubt about whether to record an asset (because it is no longer being used, etc.), it should record the asset. explaining how to use the Asset Inventory Form. explaining that any observations about the asset should be recorded. (These were noted at 6.3.2 above). providing them with a copy of the site plan that was prepared and explaining that they are to move logically around the complex recording all assets as they proceed.

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After the physical inventory was completed, we reviewed the Asset Inventory Forms that were received. It was established that: all forms, completed and unused, were returned. some recording was not entirely satisfactory but through discussion with the team and returning to the site of the asset in some instances, the queries were resolved.
Using the asset types identified earlier, each asset was recorded on the computerised spreadsheet provided by the implementation team under each asset type. That information was returned to the implementation team, along with the notes and the Asset Inventory Forms.
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Section 7 General Valuation Principles
SECTION 7 - GENERAL VALUATION PRINCIPLES
7.1
ACCOUNTING STANDARD
7.1.1 (1)
Valuation principles - definition "Current cost", in relation to an asset, means its cost measured by reference to the lowest costs at which the gross "service potential" of the asset could currently be obtained in the normal course of business (SAP 1, paragraph 49c). "Service potential" in relation to an asset, means its economic utility to the entity, based on the total benefit expected to be derived by the entity from use (and/or though sale) of the asset. "Gross service potential means the total benefit expected to be derived when the asset was first acquired, and also the benefit from any subsequent upgrading (SAP 1, paragraph 49f). "Written down current cost", in relation to an asset, means its current cost less, where applicable, accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired service potential of the asset (SAP 1, paragraph 49). "Fair value", means the amount for which as asset could be exchanged between a knowledge, willing buyer and a knowledge, willing seller in an arm's length transaction. (AAS 27, paragraph 12). "Recoverable amount", in relation to an asset, means this net amount that is expected to be recovered through the cash inflows and outflows arising from its continued use and subsequent disposal (AAS 10, paragraph 13).
(2)
(3)
(4)
(5)
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7.1

Recoverable amount and not-for-profit entities This Standard (AAS 10, "Revaluation of Non Current Assets) does not require the recoverable amount test as defined in paragraph 12.1 of AAS 10 to be applied to the noncurrent assets of not-for-profit entities whose services potential is not related to their ability to generate net cash inflows. A diminution in the ability of the non-current assets of such entities to generate net cash inflows from their continued use and subsequent disposal does not necessarily represent a decline in their service potential. The carrying amount of noncurrent assets recognised in the statement of financial position of a not-for-profit entity should reflect their service potential as at the reporting date, measured at an amount consistent with the measurement model adopted by the entity in respect of its assets. (AAS 10 para 5.2.3) In those cases where the service potential of non-current assets of not-for profit entities is related to their ability to generate net cash inflows, these assets should not be recognised in the statement of financial position at amounts in excess of the future net cash inflows they are expected to generate from continued use and subsequent disposal (AAS 10, para 5.2.4). The definition of not-for-profit entities includes all public sector entities other than government business entities, and other reporting entities whose objectives do not include the generation of profit, including a surplus, for distribution to members. Entities which ostensibly operate on a not-for-profit basis but which are part of an economic entity whose objective is to generate profit or make other distributions to members would in substance not meet the definition.
7.1.2 (1)
(2)
(3)
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7.2
7.2.1 (1)
FRAMEWORK
Valuation of non-current assets Ref: 7.3.1, 7.3.2
Councils must use the current cost principle as the basis for valuation of their physical noncurrent assets. Councils must use current replacement cost methodology (deprival value concept - refer to 7.3.2) to establish the current values of their non-current assets. Under this approach, assets are valued at an amount expected to be incurred by an entity to replace service potential or future economic benefits of these assets in the market place at the reporting date. Current replacement costs will be based on the cost of obtaining an equivalent or identical asset (Refer p.706). The provisions of Australian Accounting Standard AAS 21 "Accounting for the Acquisition of Assets (including Business Entities)" are to be applied when determining the value of an asset when acquired.
(2)
(3)
(4)
The above guidelines are represented in diagram form as follows: Accounting Basis of procedure Valuation References ___________________________________________________________________________ Initial recognition of assets on Current Cost SAP 1 hand prior to 1st January 1993. - current market buying price AAS 27 - current reproduction cost - current replacement cost ___________________________________________________________________________ Recording of assets acquired Cost of Acquisition AAS 21 on or after 1st January 1993. ___________________________________________________________________________ Subsequent revaluation Reassess current cost AAS 10 SAP 1 Code of Accounting ___________________________________________________________________________ Donated assets Fair Value AAS 21 ___________________________________________________________________________
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7.2
7.2.2
FRAMEWORK (Cont'd)
Contributions by external parties
Where a council has received contributions toward assets from external parties either by way of direct contribution of an asset or some up front payment to allow the council to either purchase or construct the asset, the asset is to be recognised by the council if it meets the asset recognition criteria and brought to account at its fair value at the date control is obtained over the asset.
7.2.3
Application of the recoverable amount test
Ref: 7.3.3
The recoverable amount test is only to be applied to a physical non-current asset of a council when, and only when, the service potential of the asset, is dependent on its ability to generate net cast inflows from the goods and services provided. Where the recoverable amount test is applied, the effects of the initial application of the test are to be disclosed in the notes to the Statement of Financial position.
7.2.4
Accounting for heritage assets
Ref: 7.3.5
Heritage assets are to be valued consistently with the valuation policies applicable to other physical non-current assets of councils - that is, at current replacement cost valuation basis. The heritage or aesthetic utility component of the heritage assets should not be considered when calculating replacement values of the assets. Where the service potential embodied in a heritage asset can be acquired through replacement, reproduction, rental, leasing or in any other manner the asset must be valued at the current replacement cost. If the service potential embodied in the heritage asset cannot be replaced or reproduced if the council was deprived of it, the asset should be valued at its market selling price. Where a heritage asset is not recognised in the accounts because it cannot be measured on a reliable basis councils should disclose information in respect of the asset which is relevant for decision making purposes in the notes to the financial reports.
7.2.5
Accounting for land under roads (LUR)
Ref: 7.3.6
Land under roads need not be valued until the implementation of the transitional provisions or until such time as directed by the Department. Where a council chooses to value land under roads the valuation methodology used must be in accordance with the Policy Framework set out in 8.2.2 of this Manual. Disclosure of land under roads should be separately reported in the Financial Reports.
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7.3
7.3.1
DISCUSSION
Background
Traditionally assets recognised by Councils in their financial statements have been recorded at historical cost on acquisition in accordance with AAS 21 "Accounting for the Acquisition of Assets (including Business Entities). Statement of Accounting Practice (SAP 1) on "Current Cost Accounting" was issued in 1976 and amended in 1989. This statement recommends that all reporting entities should present current cost accounting supplementary financial statements in addition to their conventional financial statements. The requirements of AAS 27 in relation to valuation or revaluation of assets are as follows: acquisitions of assets should be accounted for on the basis of cost of acquisition. revaluations of non current assets are not required but are permitted.
This Manual requires that all non current assets controlled by councils be revalued at every 5 years commencing from the date the asset group is first recognised as per the Asset Recognition Table included in Section 2. However, implementation of these requirements will not necessarily be an easy task with respect of assets acquired prior to 1st January, 1993 where in many cases the historical cost of assets acquired prior to that date will not be known. AAS 27 states that an acceptable method of initially recognising such assets acquired prior to 1st January, 1993 is to record them at their written down current replacement cost, identifying separately their current cost and any accumulated depreciation. The three issues which therefore arise for consideration in this section are: 7.3.2 the determination of written down current cost for existing assets (as depreciation is dealt with in section 9, this section will focus on current cost); recording of acquisition of assets acquired on or after 1st January, 1993; revaluation of non current assets.
The Concept of Deprival value & Valuation methodologies
7.3.2.1 Deprival Value The concept of deprival value was originally developed by Bonbright and was based on the legal notion of compensation for loss. Bonbright defined deprival value in the following terms: The value of property to its owner is identical in amount with the adverse value of the entire loss, direct or indirect, that the owner might expect to suffer if he were to be deprived of the property.... Value to the owner is generally measured in terms of money and is then set by the amount that would just compensate the owner for loss of the property. Value is here simply a positive expression of the negative values of those injuries that the owner might anticipate if his property were taken from him.....
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Solomons further developed Bonbrights concepts of deprival value. Value to the entity is bound by net realisable value on the lower side and replacement cost on the upper side. It is clear that an asset cannot be worth less to its owner than he could sell it for. It is also clear that the loss that he would sustain, if he were deprived of the asset, cannot be greater than the cost to which he would be put to replace it or its services, if an alternative asset could provide them more cheaply ..... Deprival value of the asset then is the value to the entity of the future economic benefits that the entity would forgo if deprived of the asset. For example, assume a local government purchased 5 hectares of land for the purpose of providing a public park. The amount paid to purchase the land was $2 million which represented the current value of real estate in the residential area. Once purchased, the zoning of the property was changed to one reflecting community rather than residential use of the purchased property. The effect being that residential property in the area had a market value of $400,000 per hectare whereas non residential property had a market value of only $100,000 per hectare. Clearly, the market value of the 5 hectare park land has been reduced to only $500,000 as compared to the previously paid price of $2 million. However, when the deprival value concept is considered it is also clear that the local government was aware of the expected change in market value and despite that knowledge, deliberately determined that it was willing to pay $2M for the park land. Furthermore, if it were deprived of that asset, all things being equal, it would be prepared to forgo another $2M to replace the lost asset. Under these circumstances, the value of the asset to the entity remains at $2M despite the fall in market value to only $500,000. If the asset had been on the nature that it could be replaced by alternative means ie. a bridge, and the alternative asset costed less to replace than the existing one, then the value to the local government if it were deprived of the existing bridge would be the lessor of the two values - ie. the cheaper alternative. 7.3.2.2 Current cost The Working Guide SAP 1 published by the Australian Accounting Research Foundation defines the current cost of an asset as its cost measured by reference to the lowest cost at which the gross service potential of that asset could currently be obtained in normal course of business. Under current cost principle the following three broad valuation methods may be used.

Current Market Buying Price Current Reproduction Cost Current Replacement Cost
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Market Buying Price as the name suggests, is the current cost of purchasing an equivalent asset in a normally competitive market environment. There may be some situations where market value provides the best estimate of replacement cost and should therefore be considered where appropriate. Since the majority of council assets are not generally traded on any market the market value will be difficult to determine. In many ways replacement cost is, in effect, market value as it is based on the current market buying prices for assets equivalent to those assets already owned. Current Reproduction Cost is the cost of reproducing or replicating the asset. This basis is useful where the existing asset would be replaced by a very similar asset. Current Replacement Cost reflects the cost of replacing the service potential of an existing asset by reference to some measure of capacity, with an appropriate modern facility. The decision as to which valuation method is to be used for a particular asset or class of assets, is determined by the following considerations: (1) Where assets with a gross service potential identical or similar to that of existing assets are available in the marketplace, and the existing assets are not technologically out of date, the current market buying price of such non-current assets will be used as the current cost of the existing assets; Where assets with a gross service potential identical or similar to that of existing noncurrent assets are not available in the marketplace, and the existing assets are not technologically out of date, the current cost of the existing assets will be obtained from an assessment of their current reproduction costs; Where assets with a gross service potential identical or similar to that of existing assets are not available in the marketplace, or are available but are technologically out of date, and there are more modern assets available, the current cost of the existing asset shall be determined by the lower of: (a) the replacement cost per unit of service potential (measured by the most appropriate modern asset presently available in the marketplace); and the reproduction cost per unit of service potential (measured by the cost of constructing exact replicas of the existing assets).
(2)
(3)
(b)
The definition of current cost referred to above is concerned with the market buying prices of new assets and not with second hand assets unless the second hand market is the market on which the council would normally acquire the asset. Reproduction cost is determined by calculating the current cost of service potential of the existing asset by reference to the cost per unit of service potential of the most appropriate modern equivalent asset. Unit costs of constructing a reference asset are applied to the physical quantities of the existing asset. If the functionality and productivity of the currently available asset (i.e. reference asset) are significantly different to those factors as they apply to the asset on hand for which replacement cost is required, the replacement cost of the currently available asset will need to be expressed as a unit
replacement cost. The unit replacement cost can then be applied to the productive capacity of the asset on hand to determine a gross current replacement cost. In this way the problems of valuation associated with changes in technology can be overcome. It is important to understand that reference to the modern equivalent asset is only made so as to obtain a current cost for the asset already held. It is irrelevant as to whether the modern equivalent asset will be purchased, or whether the existing asset will ever be replaced. If the reproduction cost is less than the replacement cost, reproduction cost should be used to determine the value of the asset. Further detailed commentary on this issue and on determination of replacement cost and reproduction cost is provided in SAP1 and its guidance notes. 7.3.2.3 Historical cost AAS 21 requires that asset acquisitions be recorded at cost, which includes the purchase consideration determined at the date of acquisition plus any costs incidental to the acquisition. If a council is required to carry out substantial work in order to produce, assemble, install or test an asset, these costs will form part of the total acquisition cost. Reference is made in Section 6 of this Manual to such costs in the context of construction contracts. It is essential that any costs charged to the acquisition by a council do not include any profit element (e.g. in respect to plant hire and oncost charges). Likewise it is essential that all costs relating to asset acquisition be identified. Acquisition cost will not usually require a valuation exercise as it should be readily available from suppliers invoices, purchase orders, contractual agreements, engineering records, internal time sheets, plant hire usage records and stores requisitions. 7.3.2.4 Fair value Where councils gain control of assets by way of donations or approvals i.e. roads sewer, water and parklands, they should be recorded at their fair value and accounted for as revenue in the operating statement. Refer to AAS 21 for guidance on this treatment. 7.3.3 Recoverable amount test
The recoverable amount test does not apply to the valuation of non-current assets of local government where service potential is not related to the ability to generate net cash inflows. For those assets falling under the heading of business activities the recoverable amounts test would apply. It should be noted, however, that the carrying amount of non-current assets recognised in the statement of financial position should reflect the remaining service potential of those assets as at the reporting date. In those cases where the service potential of non-current assets of not-for-profit entities is related to their ability to generate net cash inflows, these assets should be recognised in the statement of
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financial position at amounts equal to the future net cash inflows they are expected to generate from their continued use and subsequent disposal. 7.3.4 Other factors in the valuation process
The valuation process described above will require the involvement of qualified engineers and valuers, whether the task is the initial valuation process for existing council assets or the revaluation of assets at some future date. The degree of involvement of these professionals will depend largely on the nature of the asset for which a value is required. A key element in the valuation process will be the existing use of the asset as this will have an impact on the ultimate valuation. It is essential that the professional selected to value an asset be briefed carefully on the reasons for the valuation, whether the asset is to be valued for existing use, as surplus to operational requirements or as an investment, the date on which the valuation is to be done and the purposes to which the valuation will be applied. The professional should also be advised of the documentation required from them in order to support the valuation bearing in mind asset management, finance and audit requirements. In some cases it will be necessary to commission both council engineering personnel and valuers to provide valuations as significant variations between current replacement cost and market value may be anticipated. In these cases, the lower of the two valuations must be used unless there are compelling reasons not to do so or unless the difference between the two valuations is not material. Valuations carried out by council valuers are required to be conducted in accordance with guidance notes issued by the International Assets Valuations Standards Committee (TIAVSC) and endorsed by the Australian Institute of Valuers and Land Economists (AIVLE). The methodology in this manual is in accordance with these guidelines. The AIVLE guidance notes include commentary on the following and other relevant topics: classification of fixed assets the valuation of land and buildings depreciation of land and buildings and plant and machinery plant and machinery valued with buildings the valuation of plant and machinery leasehold interests existing use value and alternative use value the valuation of rural assets
These notes may also provide a useful reference point for others involved in the asset recognition process. The implementation team set up for the introduction of the asset accounting manual (refer Section 2) will need to carefully allocate the valuation tasks between engineers and valuers. Where market value is relevant, valuers will most likely be required and where replacement cost is relevant, engineers will mostly be required. Valuers may be required for land and building valuations, including crown land and land under roads, whilst roads, bridges, footpaths, car parks drainage assets, and most other structures will be capable of valuation by engineers.
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7.3.5
Heritage assets
The N.S.W. Heritage Act 1977 defines heritage assets as those buildings, works relics or places of historic, scientific, cultural, social, archaeological, architectural, natural or aesthetic significance for the State. Under the Heritage Act an asset can be classified as a heritage asset by an interim or permanent conservation order issued by the responsible Minister of State. For the purposed of these guidelines heritage assets are those assets which a council is required to preserve for the duration of their physical life because of their unique historical, geographical, cultural or environment attributes. Where assets of historical significance such as historical buildings and works of art, are permitted to be sold or re-deployed by the council, or are not required to be maintained indefinitely, they are not considered as heritage assets for the purposes of the following discussion. Other examples of heritage assets are monuments, art and museum collections, wilderness reserves, battlefields and buildings designated for preservation. 7.3.5.1 Valuation criteria for heritage assets (a) Valuation of reproducible heritage assets The view of the Department is that if the service potential embodied in the asset can be reproduced or replaced, it is essentially similar to other physical assets which are held for the their value-in-use, and must be valued at the current cost of replacing the asset. In addition, the classification of heritage asset between those which may be described as having purely historical or cultural interest and those which provides functional service is not relevant to the measurement policies which should be applied because the aesthetic utility component many be difficult to reliably measure. The key issue is whether the service potential embodied in the asset would be otherwise acquired if the council was deprived of the asset. If so, the service applied to other non-current physical assets. Therefore, in measuring the current replacement cost of these assets, it is not necessary to identify the aesthetic utility of the asset. That is, the heritage component is in effect excluded from the asset valuation disclosed in the he statement of financial position. However, additional information on the heritage component may be included in the note to the financial statements. (b) Valuation criteria for non reproducible heritage assets Where the service potential of the asset cannot be reproduced the asset should be valued at its market selling price as stated under the bases of current replacement cost above. There will be instances where the value of the heritage asset will not be recognised in the accounts because the replacement or the market value cannot be reliably measured (e.g. where there are not markets for comparable assets). Examples are historic library and museum collections, historical treasures and unique works of art. Information in respect of these items which is relevant for decision making purposes should be disclosed in the notes to the financial statements. (This information would
include, for example, the quantum and the nature and functions of the asset together with the annual costs of maintenance, where applicable). 7.3.6 Land under roads
The Public Sector Accounting Standards Board (PSASB) decided at its February 1996 meeting to include new transitional provisions in AAS 27. These have since been incorporated in the latest issue of the Standard (June 1996). Under the new provisions, local governments will be able to elect not to recognise land under roads as an asset during the transitional period. The PSASB state that the principal reasons for the new provisions are that: 1. A number of practitioners have expressed the view that land under roads cannot be reliably measured. 2. Concerns about how to measure reliably land under roads are unlikely to be resolved in the short term, and policies adopted in respect of the value of land under roads are likely to remain divergent until those concerns can be addressed effectively. The NSW Treasury have also argued that the value for land under roads has essentially been included in the value of adjoining properties. In essence, unimproved land has a value which is greatly improved when infrastructure services are provided, including the road network. The land component which is already there has not changed, but the improvements thereon are reflected in the improved prices of the land once the new services are available. Until this issue is emphatically resolved, the Department of Local Government will allow councils to value land under roads if they wish. Where this is the case, the council should disclose the following information in the financial reports: 1. the valuation amount for land under roads as distinct from council owned or council controlled land (refer to Note 9 in the Code of Accounting Practice & Financial Reporting); 2. the valuation methodology used; and 3. the details of the valuer (if the valuer is the council then a statement at councils valuation) should be made. If councils choose not to value land under roads, a policy statement to that effect should be made to inform the reader of the financial statements that the valuation of land provided excludes that component.
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Section 8 Specific Asset Valuation Components
SECTION 8 - SPECIFIC ASSET VALUATION COMPONENTS
8.1
8.1.1 (1)
ACCOUNTING STANDARD
Accounting for revaluation of non-current assets Revaluations of non-current assets shall, subject to paragraph 39, be accounted for in accordance with Australian Accounting Standard AAS 10 "Accounting for the Revaluation of Non-Current Assets" (AAS 27, paragraph 38). Where a class of depreciable assets is revalued, local governments shall either: (a) credit any accumulated depreciation existing in respect of that class of assets immediately prior to revaluation against the asset accounts to which it relates, and then increase or decrease the asset accounts by the amount of the revaluation increment or decrement; or restate separately the gross amount and related accumulated depreciation of the assets comprising the class of revalued assets (AAS 27, paragraph 39).
(2)
(b)
8.1.2
Changes to accounting policy
If an entity changes an accounting policy in order to comply with an Australian Accounting Standard, a Statement of Accounting Concepts, or a statutory requirement, or a Consensus view of the Urgent Issues Group which in that instance specifically requires the making of an initial accounting entry to give retrospective effect to the changed accounting policy, any resulting revenue or expense shall be adjusted directly against retained profits (surplus) or accumulated losses (deficiency) as at the beginning of the reporting period to which the change is applied, and adequate disclosure shall be made in the financial report (AAS 1, paragraph 15).
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8.1
8.1.3

Disclosure requirements of revalued non-current assets
Where a class of non-current assets has been revalued, or a non-current asset has been revalued to its recoverable amount in accordance with AAS 10 paragraph 5.1, the financial report must, in respect of each such class of non-current assets or non-current asset, disclose: (a) the reporting period in which the revaluation was made or, where a progressive basis has been adopted in accordance with paragraph 4.1(a), the dates of the revaluation; and the basis of the revaluation; and where a progressive basis has been adopted in accordance with paragraph 4.1(a), the approach to determining which non-current assets within the class are revalued in each reporting period within the three year period; and whether the revalued carrying amounts have been determined in accordance with an independent valuation; and where the revalued carrying amounts have been determined in accordance with an independent valuation and the revaluation was made during the reporting period, the name(s) of the person(s) who made that valuation and relevant particulars of the valuer's or valuers' qualifications; and whether the revaluation was made in accordance with a policy of regular revaluation of that class of non-current assets and, if so, particulars of that policy and the period between revaluations; and the accounting policy adopted in respect of the potential effect of any capital gains tax. (AAS 10, paragraph 9.1).
(b) (c)
(d) (e)
(f)
(g)
Where a class of non-current assets comprises assets which are carried at revalued carrying amounts and assets which are carried at their cost of acquisition less, where applicable, any accumulated depreciation or amortisation, the financial report shall disclose: (a) the aggregate carrying amount of each of the following: (i) (ii) assets within that class of assets which are carried at revalued amounts less, where applicable, any accumulated depreciation or amortisation; and assets within that class of assets which are carried at their cost of acquisition less, where applicable, any accumulated depreciation or amortisation; and
(b)
the basis or bases of valuation adopted in respect of each amount disclosed in accordance with paragraphs 9.2(a)(i) and 9.2(a)(ii) of AAS 10.
The financial report must, regardless of whether non-current assets have been revalued during the reporting period, disclose whether, in complying with paragraphs 4.2 and 5.1 of AAS 10, the expected net cash flows included in determining the recoverable amounts of non-current assets have been discounted to their present value. (AAS 10, paragraph 9.4).
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8.2
8.2.1 (1)
FRAMEWORK
Revaluation of non-current assets Ref: 8.3.1, 8.3.2
Councils should currently be holding all non current assets [except land under roads] at current values that is, values as at 30th June 1995 or later. However, subsequent revaluations are not prescribed other than for any non current assets not yet recognised [i.e. brought to account]. Where a council chooses to revalue its assets, either a particular class or in its entirety, the revaluation must be made progressively over a period of up to three years. Where a progressive revaluation of a class of assets is adopted, a policy statement must be included in the financial reports.
(2)
Where an asset group is revalued councils must credit any accumulated depreciation existing in respect of that asset group immediately prior to revaluation against the asset account to which it relates, and then increase or decrease the asset accounts by the amount of the revaluation increment or decrement. Where a class of non-current assets is revalued, the revaluation increment or decrement shall be accounted for as follows: (a) an increment shall be credited directly to an asset revaluation reserve - except that, to the extent such an increment reverses a revaluation decrement previously charged to the operating statement in respect of that same class, it shall be credited to the operating statement for the period; and a decrement shall be debited to the operating statement - except that, to the extent such a decrement reverses a revaluation increment previously credited to, and still included in the balance of, an asset revaluation reserve in respect of that same class, it shall be debited directly to that revaluation reserve.
(3)
(b)
(4)
Increments and decrements on revaluation of individual assets shall not be offset against one another, except within a class of assets. Disclosure requirement as a result of revaluation of non-current assets must be in accordance with AAS 10 - "Revaluation of Non-Current Assets".
(5)
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8.2
8.2.2
FRAMEWORK (Cont'd)
Valuation of land Ref: 8.3.2.1
At a minimum, council may adopt the Valuer-General valuations for rateable properties and a municipal rate(s) for valuation of all non rateable properties. A single rate can be used to value open space land, land under roads etc. Alternatively, rates for segments of council non rateable land, e.g. one for the city and another rate for rural non rateable land may be used. The calculation of the municipal rate for non rateable land would be based on the unimproved land valuations used by council for determining its residential, farming, and commercial rates, divided by that total land area, to determine and average "unit rate" which could be applied. If more that one rate is preferred, (i.e. differentiate CBD from rural or suburban) the valuation rate would have to be based on valuations per the council rating system.
Alternative methods of valuation may be considered, but the valuation method chosen must be consistent with the deprival value concept discussed in Section 7 of this Manual. The following valuation methods for land valuation can be considered subject to the above mentioned condition:

Valuations from qualified valuers Adjacent site value(s) Cost, where new purchases have been made.
8.2.3 (1)
Valuation of buildings
Ref: 8.3.2.4
Councils should exercise management judgment in choosing a valuation methodology which is most suitable to their local condition from any one, or a combination of any of the following:

Independent external valuation by a qualified valuer Council valuation by an accredited valuer Insurance values (replacement or reinstatement) Council valuation by a non valuer
(2)
Where council determines to use internal methods of valuation, the valuation method chosen will need to be substantiated to council auditors. If council uses the services of staff who are not accredited valuers in valuing buildings, resultant valuations must be compared to insurance values as an independent benchmark and variations explained.
(3)
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8.2
8.2.4
FRAMEWORK (Cont'd)
Valuation of Water and Sewerage assets
Councils should adopt a consistent valuation methodology for ascertaining the current values of their Water and Sewerage assets. Councils are referred to the Department of Land & Water Conservations (formerly Public Works) NSW Reference Rates for Valuation of Existing Water Supply and Sewerage Assets November 1994 for examples of best practice in this regard.
8.2.5
Adjustments to valuation of non-current assets
Councils should adopt a consistent valuation methodology for ascertaining the current values of their physical non-current assets. Where the existing value of non-current assets has changed because of: (a) (b) a change in the valuation methodology; or a detection of an error(s) made in the initial valuation of non current assets acquired prior 1 January 1993, the financial effect of these changes shall be accounted for as a current revaluation adjustment.
No retrospective effect should be made to the accumulated surplus and the accumulated depreciation accounts. Councils must give adequate disclosure of the effect of this change in the financial report if material.
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8.3
8.3.1
DISCUSSION
Revaluation of assets
AAS 27 recommends that the recognition of previously acquired local government assets in the statement of financial position at their written down current replacement cost. AAS 10 does impose certain constraints on councils where assets are revalued. These constraints are not expected to affect the initial recognition exercise for existing council assets but will impact on future revaluations of assets. The constraints on revaluations as noted in AAS 10 are as follows: Where a non current asset is revalued, the assets within the class of non current assets to which it belongs shall be revalued on a consistent basis and, immediately after the revaluation is made, shall be stated at values which are substantially of the same date .... AAS 10, paragraph 4.1. Revaluation is required every five years for all infrastructure, heritage and land and buildings. Since rateable properties are revalued by the Valuer General on a regular basis, normally every four or five years, such properties are not required to be revalued to coincide with the above mentioned five yearly requirement. The land and buildings which typically require separate revaluation are those relating to Administrative Services such as Council Chambers, Administrative Offices and Committee Rooms. Other assets of operating nature such as plant and equipment, office equipment and furniture & fittings may be revalued if the council considers it appropriate, however under normal circumstances these assets need not be revalued due to their fast turnover. 8.3.2 Application of general valuation principles
The remainder of this section of the manual is devoted to the explanation of valuation procedures for the asset identified below: Asset Type/Class Land Land improvements Roads Buildings Other structures Plant and equipment and office equipment (PE & OE) Furniture and fittings (F & F) Other assets Section 8.3.3 8.3.4 8.3.5 8.3.6 8.3.7 8.3.8 8.3.9 8.3.10
The asset types/classes identified above are expected to cover the whole range of assets for councils, although others could be added if necessary.
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ASSET DESCRIPTION
Asset Category Function/Type

Administration Public Order and Safety Health Community Services and Education Housing and Community Amenities Water Supplies Sewerage Services Recreation/Culture Fuel and Energy Mining, Manufacturing and Construction Transport/ Communication Economic Affairs Total
Land
Land Imprvt $
Road
Buildings
Other structure $
PE & OE $ $
F&F
Other
Total
Furthermore, this matrix should provide sufficient details to enable acceptable levels of reporting in the financial statements. Summarised below are the procedures for valuation which will need to be considered for each of these asset types. The elements for each asset component are listed below: (1) (2) (3) (4) Asset type A brief but informative description of the asset will be essential. Valuation basis An indication of the valuation base selected and the reasons for that selection. Valuation sources An indication of who will prepare the valuation. Significant fluctuations in values Notes on whether any special circumstances exist which may require adjustment to the carrying value of the asset. Exclusions Consideration of whether any components of the asset should be recognised separately or in another category or type of asset. For example, air conditioning plant in a building would normally be considered as a separate asset to the building. Other important data Note any other relevant data to the valuation process.
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(5)
(6)
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Important aspects of the valuation procedures recommended or suggested for each of these asset components are summarised below.
Asset component Land Land improvements Roads Buildings Other structures Plant equipment Furniture Fittings Other
Likely valuation basis Market Replacement Replacement Replacement/ Market Replacement and and Replacement Replacement Replacement/ Market
Likely valuation source Valuer Engineer Engineer Engineer/ Valuer Engineer Engineer/ Finance Engineer/ Finance Engineer/ Valuer
Revaluation required Yes Yes Yes Yes Yes Yes Yes Yes
8.3.3
Land
8.3.3.1 Asset types Land assets will be comprised of the following sub components: 1. 2. 3. 4. Council owned (freehold) Council controlled (not owned) Non-Depreciable Land Improvements Land under roads (only if valued)
All land needs to have met the control/ownership tests (Refer to section 3). Access to the land by other authorities will not necessarily preclude the council from exercising control. 8.3.3.2 Valuation basis Valuations provided by the Valuer-General or independent valuer may be the most appropriate and simplistic method of obtaining most types of land values. Using the concept of current cost land will be valued at market value. In summary, it is required that when valuing land for inclusion in financial statements a valuer will normally report valuations on one of the following basis as is appropriate: (a) (b) (c)
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for community land: market value for the existing use. for land occupied by the council: market value for the existing use. for land which is surplus to operational requirements: market value.
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(d)
for land held by the council as investments: market value.
If a valuer should use any other basis of valuation or has qualifications on the basis of valuation referred to above as applicable to non-current assets for inclusion in financial statements, a suitable explanation of their meaning should be embodied in the Valuation Certificate or Appraisal Report. The following will be acceptable alternative valuation methodologies: (a) (b) (c) Municipal/Regional rate(s) Adjacent site value Cost (new purchases)
8.3.3.3 Significant Fluctuations in Values Fluctuations in land values should be determinable from records maintained by the Valuer-General. Any material fluctuations in land values should be reflected in the financial statements. Fluctuations may occur as a result of market forces as distinct from changes in asset utility, condition, etc. 8.3.3.4 Exclusions Exclusion does not apply to Crown Land for which the council is the appointed Controlling Authority. Land held for resale should be excluded from this category. Such land should be valued simply on the basis of the lower cost or net realisable value in accordance with Local Government Code of Accounting Practice and Financial Reporting. 8.3.3.5 Other information The primary source of information for land owned or controlled by the council will be the records maintained by the Valuer-General. Controls need to be established to ensure that all council land is included in the asset register. The initial identification exercise may be difficult in terms of identifying all land controlled by the council. It may be necessary to carry out a review of all land in the administrative area of the council from council's maps, aerial surveys, etc. and match this with the records. Any land which is non-rateable should be carefully reviewed as this is more likely to be controlled by the council than rateable land. 8.3.4 Land Improvements
Anything done to land to improve its utility, service potential or make it ready for an identified use that has a limited useful life should be included in Land Improvements. 8.3.4.1 Asset type Land improvements will usually include the following items: 1. 2. 3.
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Landscaping (including trees, grass, rocks, shrubs, trees, etc) Land forming (including formed lakes) Earthworks not integral to other assets (not bulk earthworks)
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4. 5. 6. 7.
External playing surfaces: sporting reserves, tennis courts, netball courts, golf courses etc. Water and drainage reticulation Walking tracks Playground equipment
Land improvements do not include the value of the land to which the improvements have been made. The land will be valued in accordance with section 8.3.3. The land improvements can however, be valued as part of the land when it is considered they have an unlimited life, rather than as a separate component as the two items may be difficult to separate. 8.3.4.2 Valuation basis The valuation basis most appropriate to land improvements will be replacement cost, or where lower, reproduction cost. 8.3.4.3 Valuation sources The valuation will be determined by council engineers. 8.3.4.4 Significant fluctuations in asset values Fluctuations in asset values should be taken into consideration in the valuation process, although for land improvements these are not expected to be significant unless there are unusual or special circumstances. 8.3.4.5 Exclusions Land improvements not controlled by the council should be excluded. The land component should also be excluded from valuation of land improvements. 8.3.5 Roads
8.3.5.1 Asset types Road structure consists of crushed rock, natural gravels, seal & concrete (excluding land). 8.3.5.2 Valuation basis When determining current cost, current replacement cost is likely to be the most appropriate basis or where lower, reproduction cost. Unit replacement rates will be applied to the physical measurements of each component of the asset to determine current replacement cost. 8.3.5.3 Valuation sources Information on current replacement cost will be supplied by council engineers.
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8.3.5.4 Significant fluctuations in values Significant fluctuations in asset values need to be recognised and adjustments made to recorded asset values. Refer to section 11 for the accounting entries necessary to adjust recorded amounts where significant road assets are severely damaged. 8.3.5.5 Exclusions Road pavements maintained by councils but controlled by other entities (e.g. Road and Traffic Authority) should be excluded from the valuation exercise and not recognised in councils accounts. Reference to council engineers will assist in determining the boundaries of roads to be excluded as they generally have a clear understanding of the roads for which councils are responsible. 8.3.6 Buildings
8.3.6.1 Asset types All building structures controlled by a council are included in this component. Building structures includes all structures constructed for dwelling purposes, human or otherwise, and will cover a wide range of structures used for many purposes. 8.3.6.2 Valuation basis For building structures, determination of current cost will generally be established by engineers using the costing references mentioned elsewhere in the manual. This exercise will provide the following costs: (a) (b) (c) (d) for community buildings: replacement cost for buildings occupied by the council: replacement cost for buildings surplus to operational requirements: market value for properties held by the council as investments: market value.
The Valuer-General or other licensed valuer may also be engaged to provide market valuations for comparison with written down current replacement costs established by engineers for larger, more significant building structures. Judgment will be important in these circumstances as to which valuation should be applied. As a general rule, the lower of the two valuations should be used. It will be essential to review both valuations to ensure they are consistent in the assumptions they make. Second valuations should only be obtained where doubt exists as to some aspects of the value of the asset. It is important to note that for amounts to be recognised in financial statements they must be reliably measured. Councils can also use the councils own qualified valuer, or non valuer, and insurance values as alternative method of valuations. 8.3.6.3 Valuation sources A council or consulting engineer and the Valuer-General or other licensed valuer may both be involved in derivation of valuation data. Sources will vary between councils.
8.3.6.4 Significant fluctuation in values Where buildings are valued at market value the valuation should take account of any material trends in building values in the council. In such instances the whole class of asset in which the building is recorded should be revalued to depict the material change immediately rather than at the next scheduled general revaluation for that class of asset. 8.3.7 Other structures
8.3.7.1 Asset types These structures are not for dwelling purposes and will include all fabricated structures not classified as building structures. Other structures are likely to vary widely in use and type and some will be unique structures. 8.3.7.2 Valuation basis When determining current cost, current replacement cost is likely to be the most appropriate basis or where lower, reproduction cost. Where practicable, unit replacement rates should be applied to the physical quantities or measurements of each component of the asset for determination of current replacement cost. Significant structures should be individually valued. 8.3.7.3 Valuation sources The council engineer will usually provide the valuation information. 8.3.7.4 Significant fluctuations in values Annual fluctuations in asset values would not normally be significant. Assessments need to be made to ensure that significant fluctuations are identified. 8.3.7.5 Exclusions Any land held in connection with or as part of other structures should be valued in accordance with section 8.5. 8.3.8 Plant and Equipment and office equipment
8.3.8.1 Asset types This asset type will be comprised of construction equipment, road making plant an equipment, motor vehicles, air conditioning and heating plant, office equipment (including computers hardware and software), outdoor plant, etc and any other mechanical of electronic equipment used by all departments of the council as operating asset.
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8.3.8.2 Valuation basis These assets need not be revalued as they are generally held for a relatively short period of time (2 to 5 years). 8.3.9 Furniture and Fittings (office)
8.3.9.1 Asset types These assets will not be integral to a building structure although they may be affixed to walls, ceilings, etc. They will include decorative items such as curtains and all furniture items, whether used inside building structures or outside. 8.3.9.2 Valuation basis These assets need not revalued as they are generally held for a relatively short period of time (2 to 5 years). 8.3.9.3 Exclusions Significant works of art would not normally be included under this section. These assets should be classified as other assets. 8.3.10 Other assets
8.3.10.1 Asset Types Any asset not classified elsewhere. Specific assets in this component will include works of art, items or artefacts of cultural or heritage significance, library books, etc. 8.3.10.2 Valuation basis Any valuation of these assets may be performed in accordance with SAP 1. For unique assets such as works of art, councils may wish to record at acquisition cost and revalue at market value at the date when revaluation of that class of asset arises. 8.3.10.3 Valuation sources External valuers and appropriate council management. 8.3.10.4 Significant fluctuations in values Assessments need to be made to ensure that significant fluctuations are identified. 8.3.10.5 Exclusions Any assets controlled by the Federal or State Governments or any other entity should be excluded.
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8.4
WORKED EXAMPLE
Referring to our worked example of the outdoor swimming pool complex, it is now appropriate to determine the current cost of each asset component identified in the previous section of the manual. The parts of this section of the manual which need to be considered are:Asset Type/Class Land Land improvements Building structures Other structures Plant and Equipment Furniture and Fittings Other assets Likely source of valuation data Valuer Engineer/Valuer Engineer/Valuer Engineer Engineer/Finance Engineer/Finance Engineer/Valuer/Finance
For the purposes of the worked example, we will refer only to the land valuation process here. In earlier sections of the manual it has been established that: the land is controlled by the council area of land is one hectare primary or predominant use of the land is the provision of recreational swimming facilities
The current cost of the swimming pool complex assets will be used to recognise the assets in the financial statements at 30th June, 1995 since the assets in the complex were on hand at 1st January, 1993. Hence the current cost should be determined as at that date. Using the valuation rules in 8.5.2, clearly the most appropriate valuation base for the land is market value. It is expected that the valuer will be the most appropriate professional to engage for this process. The land should be valued on the basis of market value for existing use. Where reliable market information is not available, adjacent site value should be adopted. It is essential that the valuer be advised whether the asset is to be valued on the basis of: 1. 2. 3. existing use surplus to operational requirements or held as an investment
The valuation could vary substantially depending upon the basis applied. For this exercise we will assume that the Valuer-General has provided a report which indicates that the land has a market value of $500,000. As land is not considered to be a depreciable asset, we need to introduce a depreciable asset to the example so that we can illustrate the effect of the depreciation and useful life concepts later in the manual. For this exercise we will look at the building structures in the complex.
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As the buildings in the pool complex are unlikely to be capable of being traded on an open market, it will be very doubtful whether a realistic market value can be determined. We have therefore decided to commission the council engineer to determine a current cost for the buildings. We will assume that the engineer has determined a current gross replacement cost of $750,000. He has also assessed the total useful life of the asset at 60 years and its residual life at 25 years. The crown land and the buildings should now be recorded in the asset register at $500,000 and $750,000 (see Section 9.14 for an explanation of this figure) respectively, together with full asset descriptions, the valuation basis and date, the name of the valuer/engineer providing the valuation, the total useful life and estimated residual life and comprehensive notes on the condition of each asset. We now have all the data we need to calculate depreciation charges and determine accumulated depreciation.
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Section 9 Depreciation and Useful Life
SECTION 9 - DEPRECIATION AND USEFUL LIFE

9.1
9.1.1
ACCOUNTING STANDARD
Recognising the depreciable amount
The depreciable amount of a depreciable asset must be allocated on a systematic basis over its useful life. The depreciation method applied to an asset must reflect the pattern in which the assets future economic benefits are consumed or lost by the entity. The allocation of the depreciable amount must be recognised as an expense, except to the extent that the amount allocated is included in the carrying amount of another asset. (AAS 4, paragraph 5.1). In estimating the useful life of a depreciable asset, consideration must be given to the following factors: (a) expected physical wear and tear; (b) obsolescence; and (c) legal or other limits on the use of the asset.(AAS 4, paragraph 5.2). The depreciable amount must be allocated from the time when a depreciable asset is first put into use or held ready for use.(AAS 4, paragraph 5.3). The depreciable amount of any addition or extension to an existing depreciable asset which becomes an integral part of that asset must be allocated over the remaining useful life of that asset. (AAS 4, paragraph 5.4) The depreciable amount of any addition or extension to an existing depreciable asset which retains a separate identity and will be capable of being used after that asset is disposed of must be allocated independently of that existing asset on the basis of its own useful life. (AAS 4, paragraph 5.5)
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9.1.2
Residual Values & Subsequent Costs
Residual values Where a non-current asset is not revalued, the residual value must not subsequently be increased for changes in prices. Where a non-current asset is revalued, a new estimate of residual value must be made at the date of revaluation. (AAS 4, paragraph 5.6). Subsequent Costs Costs incurred relating to a non-current asset subsequent to it having been first put into use or held ready for use must be added to the carrying amount when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the asset, will flow to the entity in future reporting periods. All other such cocts must be recognised as an expense in the reporting period in which they are incurred. (AAS 4, paragraph 5.7).
9.1.3
Monitoring Depreciation Rates and Methods
Review of Rates & Methods Depreciation rates must be reviewed at least annually and, if necessary, adjusted so that they will reflect the most recent assessment of the useful lives of the respective assets(AAS 4, paragraph 6.1) Changes to Rates & Methods When depreciation rates or methods are changed, the change must be accounted for as a change in accounting estimate. The effect must be recognised in the reporting period of the change . Depreciation recognised in prior reporting periods must not be changed either by an adjustment via the profit and loss or via retained earnings.(AAS 4, paragraph 6.3).
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9.1.4
Disclosure requirements
In the statement of financial position, accumulated depreciation must be presented as a deduction from the asset or class of assets to which it relates. The following information must be disclosed, for each class of depreciable asset: (a) (b) (c) (d) the depreciation methods used the useful lives or the depreciation rates used the aggregate amount of depreciation allocated, whether recognised as an expense or as part of the carrying amounts or other assets during the reporting period the gross amount of depreciable assets and the related accumulated depreciation.
Where the depreciation expenses for any reporting period have changed because of: (a) (b) (c) re-assessment of the useful lives of certain assets; or changes in depreciable amounts in consequences of a revaluation (upward or downward) of certain assets; or changes in depreciable amounts following a re-appraisal of the net amounts expected to be recovered on disposal of certain assets the financial effect of the change (that is, the increase or reduction in the depreciation expenses) must be disclosed. Where there is a change in the depreciation method from that applied in the preceding reporting period which has a material effect in the current reporting period the following information must be disclosed: (a) (b) (c) the nature of the change the reasons for the change where the change materially affects the current reporting period, the financial effects of the change since the beginning of the reporting period, and since the date of the change in depreciation method, if the two dates differ where the change does not materially affect the current reporting period and is expected to affect a subsequent reporting period, a statement that the change does not materially affect the current reporting period. (AAS 4, paragraphs 11.1 to 11.4).
(d)
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9.2
FRAMEWORK
9.2.1
Depreciation methodology and indicative useful lives
Ref: 9.3.1, 9.3.2 Appendices 4&5
All non-current assets with limited useful lives ("depreciable assets") are to be depreciated in accordance with Australian Accounting AAS 4, "Depreciation of Non-Current Assets." Councils must depreciate their physical non-current assets using a depreciation method appropriate to the nature of respective assets and their expected use. The depreciation rate at which Councils depreciate their non-current assets must be based on the indicative useful life of the asset to the Council. Guidelines on indicative useful lives are provided in appendix 4 and 5 of this Manual. Councils must indicate the depreciation method used in the statement of accounting policies. The useful lives of major asset classes may also be included. Councils with water and sewerage assets are advised to refer to the Department of Land & Water Conservations (formerly Public Works) NSW Reference Rates for Valuation of Existing Water Supply and Sewerage Assets November 1994 for examples of best practice in this regard.
9.2.2
Provision for deferred maintenance
Ref: 9.3.4
Where major cyclical maintenance is scheduled (in accordance with a maintenance program) over a number of reporting periods or maintenance is deferred to future reporting periods, the depreciation expense recognised during each reporting period until the maintenance is performed is to take into account the consumption or loss of service potential or future economic benefits. When the cyclical or deferred maintenance is carried out the accumulated depreciation is to be adjusted by the amount of the cost of the restoration. Expenditure in excess of the amounts that have been charged as depreciation or provision for major periodic maintenance expense are to be reported as a maintenance expense in that period.
9.2.3
Commencement of depreciation charges
Ref: 9.3.6
Depreciation charges for non-current assets should commence from the date when an asset is first used or held ready for use.
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9.2
9.2.4
FRAMEWORK (Cont'd)
Renewals accounting Ref: 9.3.7
Renewals accounting is not permitted as a basis for accounting for councils' assets.
9.2.5
Reassessment of remaining residual life
Following the initial recognition of an asset and the assessment of its residual life, councils should continue to reassess the residual life on an ongoing regular basis. There is no requirement to make retroactive adjustment to the accumulated depreciation and accumulated surplus or the operating statement to reflect the adjusted reassessed useful life. The difference must be reflected in the calculation of future depreciation expense. .
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9.3
9.3.1
DISCUSSION
The concept of depreciation
Assets held on a long term basis, with the exception of land, have limited useful lives, that is, their service potential declines over time to a point where it is, for practical purposes, used up or lost. This manual, requires that all non-current assets with limited useful lives ("depreciable assets") are to be depreciated by the systematic and progressive recognition of depreciation expense in the operating statement over the useful lives of those assets. Factors contributing to this decline include: wear and tear through physical use which is greater than that which maintenance can restore; technical obsolescence whereby an asset becomes increasingly out of date and inefficient as a result of technological advances and improvements; commercial obsolescence whereby an asset becomes redundant through a fall in demand.
The decline in service potential of an asset is recognised in the financial statements of a council through depreciation, which is a systematic charge against revenue of the recorded value of the asset over its useful life. In the broad sense, there are three variables in determining depreciation. These are the recorded value of the asset, its useful life and its residual value. The determination of recorded value has already been addressed in previous sections of this manual. Useful life and residual life will be discussed in detail in this section. Depreciation represents the consumption of service potential of an asset over its useful life. Recognition of depreciation is necessary for faithful representation of the cost of an entity's operations for the reporting period, and to the extent to which that cost has been recovered from revenues for the reporting period. Recognition of depreciation is also necessary if the service potential or future economic benefits embodied in depreciable assets is not to be overstated. 9.3.2 Useful life
The total useful life of an asset is defined as: (1) the estimated period of time over which the future economic benefits embodied in a depreciable asset are expected to be consumed by the entity; or the estimated total service, expressed in terms of production or similar units, that is expected to be obtained from the asset by the entity.
(2)
The useful lives of many local government assets will be determined by local government policy and practice. In determining the useful life, consideration needs to be given to the potential physical life of the asset, that is the period of time, over which the asset can be expected to last physically, at the projected average rate of usage and assuming adequate maintenance.
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The determination of useful life is essentially a matter of judgment. It is therefore important that appropriately qualified personnel make the assessment of useful life, which should be recorded (in years) in the asset register. Some councils may wish to aggregate some community assets so that in the asset register they are recorded as one asset. For example: (1) (2) roads are made up of earthworks, crushed road, natural gavels, concrete and the seal and bridges are made up of earthworks, superstructure, guard railing and fencing, etc.
Whilst this may be appropriate for determining the unit replacement cost of a road (assuming the nature of the road is the same for all aggregated roads), it is unlikely to lead to a reliable assessment of depreciation. This is because even though roads may be of the same type, each individual road has a different useful life. For the same reasons it is not appropriate to combine the road and the bridge and record them as one asset in the asset register. Many factors may contribute to the decline in useful life of an asset. Using a road as an example, these factors would include traffic volume and axle weight loadings, climatic conditions, geological conditions, environmental considerations and technical and commercial obsolescence. In contrast, the decline in useful life can be favourably affected by proper and regular maintenance programs. For example, the useful life of a road will be significantly greater where periodic maintenance is regularly carried out. Maintenance can also affect other interdependent assets. For example, council A has a policy of resealing roads every ten years whilst council B has a policy of resealing roads every twenty years. The useful life of the road surface will be twenty and ten years respectively. However, for council A, the pavement structure is very likely to have a longer useful life than for council B. This is because the more frequent resealing will also have the effect of preserving the pavement structure in a better condition. As such it would be appropriate for council A to depreciate its pavement structures over a longer period of time than council B. 9.3.3 Residual life
As the date of acquisition will not be known for most existing council assets, the following information (much of which will be provided by engineering personnel) will be required in order to determine annual depreciation charges and accumulated depreciation at the date on which assets are first recognised: gross replacement cost (refer Sections 7 and 8 of the manual) estimated total useful life residual life
Residual life is the remaining useful life of an asset at a specified point of time. Total useful life has been explained earlier in this section of the manual. In respect to determination of residual life the following factors must be considered:
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(1)
Asset condition Residual life will be affected by the assessment of asset condition. Clearly assets which have been maintained in good condition will have greater residual lives than those which have not.
(2)
Indicative useful lives For existing assets, residual life should not be greater than total useful life (refer appendixes 4 & 5) because part of those assets have already been used up or have expired. However, where assets have been well maintained, remaining useful life could be similar to useful life. When this information is available, the accumulated depreciation can be calculated because the residual life can be compared to the total useful life to provide an indication of the used up portion of the asset. Asset condition level assessments should be used in connection with the determination of residual life. They should not be used to amend or determine gross replacement cost of an asset.
9.3.4
Residual life and asset condition
Section 10 of the manual emphasises the close relationship between the residual life of an asset and its condition assessment which is important for establishing maintenance programs. To illustrate this relationship an example is included below. A section of road pavement might be considered, at the time of construction, to have a useful life of 100 years. In the event that the council attends to the maintenance requirements at the level whereby the road pavement remains reasonably serviceable, the residual life is determined as the total useful life less the age of the road pavement. However, if at 10 years after construction the council consciously chooses to do no further maintenance on the road (e.g. does not fill pot holes), the residual life of the pavement structure would be shortened. Similarly, a heavy industry may be established adjacent to this road 10 years after the road was constructed, and this may subject the road to a substantial increase in heavy vehicular traffic. Hence, despite a commitment by the council to maintain the road with the previous level of expenditure, the residual life of the road pavement will be reduced. This is a typical example where change of usage can severely affect the remaining useful life of an asset. 9.3.5 Future and deferred maintenance
When major maintenance is scheduled (in accordance with a maintenance program) over a number of reporting periods or is deferred to future reporting periods, an issue which arises is how the effect of such maintenance should be accounted for. Some entities have recognised provisions for maintenance as liabilities. Such provisions do not qualify as an expense and liability in the financial statements under AAS 27.
Instead, they require that, where the effect is material, the depreciation expense recognised during each reporting period until the maintenance is performed should take into account the consumption or loss of service potential or future economic benefits which results from the cyclical nature or the deferral of maintenance. This recognition of the effects of such cyclical or deferred maintenance would occur until the date that the maintenance is performed. Alternatively, a separate provision for major periodic maintenance expense may be recognised in each reporting period with a corresponding amount being shown as a deduction from the carrying amount separately from accumulated depreciation. When the major cyclical or deferred maintenance is carried out it will be necessary to adjust the written-down value of the asset to accurately reflect the restoration of the remaining service potential or future economic benefits. This should be done by adjustment of the accumulated depreciation or provision for periodic maintenance by the amount of the cost of the restoration. Expenditures in excess of amounts that have been charged as depreciation or provision for a major periodic maintenance expense are to be reported as maintenance expenses in that period. 9.3.6 Aggregation of assets for depreciation purposes
As indicated it is unlikely that infrastructure assets can be aggregated or grouped for the purpose of calculating depreciation. However aggregation may be appropriate where there are assets with long lives. Assets constructed within five or ten year periods may be treated as discrete assets, thus reflecting the way in which road networks have developed (i.e. on a subdivision basis). This means for example that a road or road network may be disaggregated into assets as shown in the following example. Assessment Year 1995/6 Period of construction 1900-1910 1910-1920 1921-1930 1931-1940 1941-1950 1951-1960 1961-1970 1971-1980 1981-1990 1991-1993 Useful life = 100 years Pavement structure Area m2 1,100 2,200 2,800 2,800 3,500 4,600 5,200 4,200 4,000 2,000 Remaining Useful Life 12 22 32 42 52 62 72 82 92 99
Having established the remaining useful life on this basis it is then appropriate to calculate depreciation on the same basis. However if circumstances give rise to a change in useful life for an individual road, sufficient records would need to be maintained to ensure that this change can be accurately recorded. It is therefore recommended that councils record roads on an individual basis as noted in Section 8 of the manual.
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9.3.7
Reassessment of remaining useful life
Following the initial recognition of assets and assessment of the residual life of each, it is necessary to reassess the residual life on a regular basis. AAS 4 encourages regular reassessment of depreciation rates (and therefore useful life). The standard states that: Being a function of factors which cannot be determined with certainty, for example, useful life and amount recoverable on disposal, depreciation expenses necessarily contain an element of approximation. This emphasises the need to review those factors annually with adjustment, where necessary, to existing depreciation rates. (AAS 4, paragraph 4.5.1). Where reassessment results in a different residual life, adjustments may be accounted for as follows: Option 1 (prospective method). The written down cost of the asset is expensed over the remaining useful life of the asset. Option 2 (retrospective method). Retrospective adjustment is made to the Operating Statement to reflect the adjusted reassessed useful life as follows: (1) Where residual life is less than previously estimated An expense needs to be recognised in the operating statement in the period of reassessment representing the loss of service potential greater than originally estimated (i.e. loss on revaluation). (2) Where residual life is greater than previously estimated An adjustment is required in the operating statement in the period of reassessment representing the gain resulting from the increase in service potential beyond that previously estimated. Option 3 (retrospective method). Retrospective adjustment is made to the accumulated depreciation and accumulated surplus to reflect the adjusted reassessed useful life. Councils are not required to make retrospective adjustment to the operating statement or the accumulated depreciation and accumulated surplus to reflect the adjusted reassessed useful life. This Manual adopts the prospective method which require the adjustments to be reflected in the calculation of future depreciation expense. 9.3.8 Depreciation of Heritage Assets
Where heritage assets are maintained in near perfect or very good condition, these assets will generally have very long useful lives and may be depreciated over a longer period of time because of this higher level of maintenance. It is appropriate to periodically reassess the useful lives of such assets and revise the rate of depreciation if appropriate.
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9.3.9
Commencement of depreciation charges
As required by AAS 4, depreciation charges should commence from the date when a depreciable asset is first used or held ready for use. Where an asset is a complex structure made up of many parts, stages, etc, it should be considered as being held ready for use only after installation has been completed to the point where service can be provided. If the asset is commissioned in stages over a period of greater than one year, that portion of the recorded value of the asset commissioned at each stage, should be depreciated from the date of commissioning. 9.3.10 Renewals accounting
It has been argued that an alternative approach to assessing useful life of infrastructure assets is to adopt renewals accounting. Under the renewals accounting approach it is assumed that assets are maintained forever and that in any year there is no depreciation of assets. Periodic maintenance expenses are assumed to equate to depreciation charges. However, in reality most assets have to be replaced eventually as they are used up. AAS 4 takes the view that the useful lives of physical assets held on a long term basis are limited and that this loss of service potential be recorded as depreciation expense. As the service potential for most assets is, for practical purposes, used up or lost, renewals accounting is rejected as a valid basis for accounting for local government assets. 9.3.11 Depreciation rates - Income Tax Assessment Act
Depreciation rates should be determined after having considered the estimated useful and residual life of existing assets and their prospective utility to the entity. Whilst Appendices 4 & 5 of the manual sets out indicative useful lives for most council assets, these can only be taken as guidelines. The Income Tax Assessment Act includes an extensive listing of approved depreciation rates for Australian Income Tax purposes and can provide added guidance. A council however, should give regard to the fact that it is normally tax exempt and the net capital costs of acquiring and disposing of particular assets may be significantly different from that of taxpayers and therefore some rates listed in the Tax Assessment Act may not be appropriate to use. 9.3.12 Depreciation methods
The basis for calculating depreciation ought to be appropriate to the nature of the respective assets and their expected use. The basis chosen should be that which best reflects the underlying physical, technical, and commercial facts for each asset or class of assets. There are many depreciation methods available for use and these are discussed in AAS 4. A brief description of two methods of depreciation is set out below:(1) Prime Cost or the Straight line method This method provides a means of calculating depreciation charges for assets which expire at a constant rate over their useful lives. It is the most commonly adopted method mainly because of it's simplicity.
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This method assumes that the diminishing service potential (future economic benefits) of the assets are constant over time from when the asset is first held ready for use until it is in need of replacement. Whilst this assumption may not be practical for some individual assets (road), application to the asset class (road network) may make it far more reliable. Example Asset Value : $100,000 Useful Life : 10 Years Depn Rate : 10% /year Depn Expense 19X0: $100,000 X 0.1 = $10,000 Depn Expense 19X1: $100,000 X 0.1 = $10,000 Depn Expense 19X2: $100,000 X 0.1 = $10,000 (2) The reducing balance method This is one of several methods where depreciation charges decrease from reporting period to reporting period. Decreasing charges resulting from the application of this method can be justified where an asset is expected to yield more service in the earlier reporting periods than in the later. Example Asset Value : $100,000 Depn Rate : 10% Depn Expense 19X0: $100,000 X 0.1 = $10,000 Depn Expense 19X1: ($100,000-$10,000) X 0.1 = $9,000 Depn Expense 19X2: ($90,000-$9,000) X 0.1 = $8,100 Councils are required to adopt a depreciation method appropriate to the nature of respective assets and their expected use. Councils must depreciate their physical non-current assets based on their expected useful lives.
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9.4
WORKED EXAMPLE
From the previous section we know the value of the land and the buildings separately of the pool complex. We also have the notes of the valuer and the engineer separately with regard to asset condition. These notes also contain details of the estimated total useful life and residual life of the building, which we will assume to be 60 years and 25 years respectively. The engineer has assessed that the condition of the buildings are such that there is no excess depletion of the asset condition. Conversely, the engineer has also assessed that the condition of the buildings is no better than would be expected of a building of its age. The estimated remaining useful life of 25 years therefore reflects normal wear and tear on the building. The land on which the pool complex is situated is not depreciable and hence depreciation calculations and determination of remaining useful life are irrelevant concepts for this asset. The depreciation charge for the building in 1994 and the accumulated depreciation at 30 June, 1994 are calculated as follows:Market Value of building at 30/6/94 Total useful life Estimated residual life Depreciation method Written down current ($750,000 35/60) cost at 30/6/94 Annual depreciation rate (Based on the need to fully depreciate the building over the next 25 years) Annual depreciation charge ($312,500 at 4%) Accumulated Depreciation at 30/6/94 $750,000 60 years 25 years Straight line $312,500 4.0% $12,500 $437,500
These details should also be recorded in the asset register. Refer to Section 11 for accounting entries.
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Section 10 Asset Management Issues
SECTION 10 - ASSET MANAGEMENT ISSUES

10.1 FRAMEWORK
10.1.1
Asset management techniques
Ref: 10.3.3
Councils should adopt the following asset management techniques in all phases of the life cycle of their physical non current assets.

financial/performance management maintenance management risk management
10.1.2
Asset acquisition Ref: 10.3.4.5
10.1.2.1 Responsibility and accountability (1)
When making decisions with respects to acquisition of assets, councils should ensure that there are adequate procedures in place for analysing the need for acquisition of those assets under consideration. Prior to project commencement councils should establish adequate controls in the following areas of project development.

(2)
project evaluation phase design phase construction phase review phase Ref: 10.3.5.2
10.1.2.2 Funding requests and capital budgeting (1)
Councils should consider various alternatives options including the following before the commencement of any capital project:

contracting out or resourcing internally leasing or direct purchase repairing or modifying existing assets delaying the project
(2)
Councils should undertake elaborate capital costings for each proposed capital project from the planning process to the project completion. This process should be clearly documented and included in the council's capital budgets.
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10.1
FRAMEWORK (Cont'd)
General asset condition levels Ref: 10.3.7
10.1.3
Councils should adopt condition levels such as these below in determining the remaining useful life of their physical non current assets. (1) (2) (3) (4) (5) near perfect condition some superficial deterioration serious deterioration, requiring substantial maintenance level of deterioration affects the fabric of the asset, requiring major reconstruction or refurbishment level of deterioration is such as to render the asset unserviceable
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10.2 10.2.1
DISCUSSION
Purpose
The purpose of this section of the manual is to emphasise the need for efficient asset management and to identify the key elements of asset management. To the extent that management and control of council assets is the responsibility of council engineering personnel, this section of the manual will be of particular relevance to them. 10.2.2 Background
Asset management has always been an important function of councils but it has too often received little recognition in the management process, or alternatively inadequate funds have been provided to properly maintain assets. This has resulted to a large degree from the absence of requirements for councils to record and report on all assets under their control. In general terms, only assets such as plant and equipment, vehicles, buildings and some land holdings have been recorded. These assets have also been generally well managed with few instances of major run-down in stocks and with regular maintenance programs to ensure significant run-down in condition has not occurred. Replacement of these assets has also been a management focus so that it has tended to occur at or near the optimal time for replacement. It is not a coincidence that these assets, whilst being well managed have also been recorded in council asset registers. The introduction of AAS 27, as noted earlier in this manual, will require councils to record and report all material non-current assets in their financial statements. This requirement, whilst not of itself asset management, will provide the means by which better asset management techniques can be implemented. 10.2.3 Characteristics of asset management
Asset management refers to the techniques which an entity applies (in this case, a council) to all phases of the life cycle of a non-current asset. In summary, it encompasses the following: financial/performance management maintenance management risk management
Effective financial performance management for assets comprises: providing decision makers with the necessary information to make informed decisions about asset acquisition, maintenance and replacement. enabling the council to optimise the management of cash and other financial resources to meet current commitments and maximise investment potential. monitoring the return on the community's investment. providing a source of information for insurance, audit and management reporting purposes. providing a basis for the councils accountability to the community for its investment in assets. providing a reflection of ratepayer equity.
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Effective financial management of non-current assets will include the identification of needs for new assets, control of projects in the construction or acquisition phases, review of completed projects and identification of surplus assets. Effective maintenance management requires informed decisions on resource allocation and prioritisation. As a basis for these decisions, the following data will be essential: assets under the control of the council asset value useful life of assets costs of asset maintenance (to an agreed condition).
The importance of this information is clearly recognised with the development of Pavement Management Systems which provides asset managers (engineers in the main) with key information to permit the optimisation of resources for maintenance, rehabilitation and reconstruction of road pavements. The effective management of assets also needs to take account of the custodial role of the asset manager. Guarding assets against theft or fraudulent or illegal use will also necessitate comprehensive asset registers. Assets will need to be valued for insurance purposes. In the wider area of risk management, information is needed about the nature, location and condition of assets with a view to ensuring assets are not endangered (e.g. risk of fire, theft, etc.) or the council is not exposed to other risks including Occupational Health and Safety or public liability claims. The added emphasis on asset management resulting from the introduction of AAS 27 will not only place an increasing responsibility upon asset managers but will also provide important benefits and assistance in ensuring an appropriate allocation of resources. The benefits of efficient asset management include: identification of the level of resources invested in non-current assets. This will assist in decisions about resource allocation. full recognition of the resources required to maintain all municipal assets. more comprehensive information concerning the condition of assets to assist in replacement and maintenance decisions.
Asset management techniques will vary depending on whether the assets have been acquired or are planned to be acquired. The remainder of this section of the manual will review these aspects more closely. 10.2.4 Asset acquisition
This section deals with management issues relating to asset acquisition under the following headings:
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responsibility and accountability funding requests and capital budgeting information needs for approval of projects control over project implementation review of completed projects
These issues are relevant in varying degrees to all projects whether they involve complex long term construction or direct purchase from a supplier. 10.2.4.1 Responsibility and Accountability When making decisions with respect to assets, councils should ensure that there are adequate procedures in place for analysing the need for acquisition of those assets which are under consideration. Such procedures should refer to corporate plans and should include adequate definitions of the needs for assets planned to be acquired. Responsibilities for setting objectives and goals and developing proposals for asset acquisition should be clearly defined and communicated. There should be a clear understanding of this process so that resources are not wasted in developing proposals. Prior to project commencement it is essential that controls be clearly established in the following areas: project evaluation phase design phase construction phase review phase
This will ensure that there is clear responsibility for those involved in the project which will improve co-ordination and maximise project efficiency. 10.2.4.2 Funding requests and capital budgeting Each proposed capital acquisition should begin with an objective analysis of the need to be met and its relationship to council objectives. Care should be taken to ensure that the need for the project is not overstated. For each capital acquisition there should be a clear written statement of goals which should be related to the identified needs. Where feasible, goals should be stated in such a manner that they can be easily measured against performance once the asset has been installed and is operating. The approval process for funding requests should be clearly documented. Alternative courses of action should be evaluated impartially. The alternatives should be examined on the basis of their impact on revenues, benefits and life-cycle costs (i.e. costs including operating and maintenance costs over the life of the asset). Options that should be evaluated might include:
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Contracting out or resourcing internally Leasing or direct purchase Repairing or modifying existing assets Delaying the project
Capital cost estimates at all stages of the planning process should be realistic and complete, covering all aspects of the project. An up-to-date estimate of cost based on the actual design, schedule and site conditions should be prepared before seeking final approval. The effects of possible future inflation should be considered separately from other cost increase factors. Estimates should be expressed in both current and anticipated values. Estimates of projects should be incorporated into capital budgets and it is recommended that councils establish five year rolling capital budgets if these are not already in place. This will result in longer term planning of projects and will lead to important discussions at a senior level on funding of future essential/desired projects. 10.2.4.3 Information needs for approval When a project is first considered, approval should only be given for funds to conduct feasibility studies, development of design and preparation of cost estimates. Final approval should be given in the early planning phase only when adequate and complete information is available. Complete information should be available including an assessment of costs in the event that the project does not proceed beyond each stage in the process. One reason for withholding final approval is that an accurate estimate of construction costs would not be available until site conditions have been assessed and a design selected and approved. This will be particularly important for longer term projects where progress can be slow in the planning phase. 10.2.4.4 Control over project implementation It is important to ensure that projects are completed on schedule and within authorised budgets. Controls should therefore be exercised over projects during design and construction. Systems should be in place to ensure that progress is monitored and that any changes in design are properly authorised. 10.2.4.5 Review of completed projects Each completed project should be reviewed to: Ensure that proper procedures were followed Assess the extent to which considerations of economy were followed Ensure that the project was managed efficiently Assess the extent to which objectives were met Enable feedback for future projects
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10.2.5
Asset maintenance
Once assets have been installed and operating, it is essential to ensure that the benefits of acquisition are maximised. Councils need to consider the following issues: is the asset being used to its maximum capacity? is the asset being operated correctly? is the asset condition deteriorating excessively? the timing and nature of maintenance programs
For new assets it is important to gather this information so that a profile of the asset can be established. This will assist in decision making on maintenance programs. Asset maintenance has important implications for finance budgets and should not be overlooked. The full cost relating to the maintenance program should be determined and included in the budget. If this does not occur, assets will deteriorate excessively and future replacement, rather than maintenance may be required. Maintenance programs will, to a large degree, be influenced by assessments of asset condition. In order that asset maintenance programs are properly formulated, it is important that accurate data on asset performance and condition is recorded. In Section 6 of the manual this point is emphasised as an important role for the asset clerk (that is the person responsible for maintaining asset records). 10.2.6 Asset condition levels
The condition of an asset will generally deteriorate more quickly when insufficient or less than normal maintenance is undertaken, and will improve when additional maintenance work is performed. Hence, it is important when assessing the condition of an asset to be aware of the maintenance program, and to make a distinction between maintenance expenditure and capital works improvements. Guidance on this is provided in Section 5 of the manual. Asset condition assessment will be particularly useful in identifying areas where there is insufficient maintenance. Regular assessment of condition levels of assets will enable profiles of the deterioration of assets to be developed. It will also enable assessments to be made of the costs to reinstate assets to a reasonable condition. Such information will be important for planning purposes, when developing budgets and when making submissions for funding. Recording of asset condition assessments will enable councils to plan future maintenance. In this regard, Pavement Management Systems are available for collection of data on road pavements to assist in optimising the level and prioritisation of maintenance expenditure. These systems record data on collected asset condition assessment, pavement structure, axle loads, road furniture, etc. 10.2.6.1 General Principles It is recognised that the method of assigning a value to an asset will be based on either market valuation (as in the case for land associated with an asset) or on current replacement cost (as in the case for roads and bridges for example). For those assets where the current replacement cost method of valuation is appropriate, an allowance must also be made for the current physical condition of the asset. For those assets valued on a market valuation basis, it is assumed that the condition of the asset is considered as part of the market valuation process. Therefore, asset condition needs to be assessed only for those assets which will be valued at current replacement cost.
Another factor which will modify the value of an asset is level of usage, because circumstances may arise which change the usage level or usage patterns. Such circumstances should be taken into consideration when assessing the remaining useful life of the asset. Level of usage should be assessed independently of the asset's condition and other identified modifying factors. 10.2.6.2 General asset condition levels The following condition levels can be applied universally to any asset and can be assigned judgmentally when determining the remaining useful life of particular assets. It is recommended that councils adopt condition levels such as the following: Level 1 2 3 4 5 Condition description Near perfect condition Some superficial deterioration Serious deterioration, requiring substantial maintenance Level of deterioration affects the fabric of the asset, requiring major reconstruction or refurbishment Level of deterioration is such as to render the asset unserviceable
Within the useful life of an asset, the condition may fluctuate from one condition level to another. Judgment will need to be exercised to determine whether the condition of an asset has changed to such an extent as to justify assigning a new condition level for the asset. If an assets condition level increases, one of the following must have occurred; (a) (b) the original evaluation of condition level was incorrect; or works of a capital nature were carried out on the asset improving its condition. (Any such works should be capitalised and added to the value of the asset).
It must be recognised that it is possible for an asset condition level to move to a non-adjacent condition level between valuations, either as a result of major works or as a consequence of deterioration due to lack of routine maintenance over a valuation period. 10.2.7 Asset life and condition assessment
The significance of residual life is that it will provide a very useful indicator to the future estimated rate of depreciation of an asset. By expressing residual life as a factor of total useful life (which may relate to but is not necessarily the same as the engineering design life of an asset), it is possible to establish whether depreciation already charged in the financial statements has adequately accounted for asset usage. Hence, when asset condition is assessed for the purpose of establishing maintenance programs, the assessment should be compared with residual life as recorded in the asset register. Any significant differences should be recorded in the asset register and annual depreciation charges and accumulated depreciation amended accordingly. Refer to Section 9 of the manual for discussion on the effect of these issues on depreciation.
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Using the five levels depicted in Section 10.3.6 percentages of total useful life can be attached to determine the approximate residual useful life: Level Residual Life as a Percentage of Total 100% 90% 60% 30% 0%
1 2 3 4 5
10.2.7.1 Specific asset condition levels The following sections highlight specific asset condition ratings for the major assets of a council being land, roads, bridges and culverts and urban stormwater drainage, however the general condition ratings can be applied to any non-current assets. It is anticipated that future editions of this manual will provide guidelines in regard to other specific assets. 10.2.7.2 Land Asset condition for land whether identified as an asset on its own or as a component of another type of asset is to based on market valuation principles. Asset conditions for land are unlikely to change. 10.2.7.3 Roads Conditions for roads are particularly important when considering the pavement structure and seal of the road. For these components, more specific descriptions of condition levels are: Condition level 1 Condition level 2 Condition level 3 Condition level 4 Condition level 5 - near perfect condition - some surface/pavement structure deterioration - patching only needed for repair - serious surface/pavement structure deterioration - requires resurfacing or recycling of pavement structure - deterioration materially affecting entire surface/pavement structure - requires major reconstruction or complete replacement - deterioration is of sufficient extent to render the surface/pavement structure unserviceable.
Due to the relatively long useful life of a road's earthworks component, it is expected that its condition level will remain at Level 1 or 2 for most of the road's useful life. There may be special circumstances, such as earthquake or flood damage, which will require consideration of a lower condition level for earthworks. A similar approach to road condition level assessment can be readily applied for footpaths and carparks.
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10.2.7.4 Bridges and culverts To assess the condition of a bridge or culvert structure adequately it would normally be necessary to undertake some investigative work and testing of the structure, especially if the general condition is poor and the bridge or culvert is identified at being at Condition level 3 or 4. Condition as it relates to both structural and functional adequacy should be assessed. For large bridge structures, it may be necessary to divide the structure into sections for assessment, especially if the design type, type of condition, or the structure varies along its length. As bridge management systems are developed by various groups such as AUSTROADS, structural and functional condition will become easier to assess on a consistent basis. For example the following system uses a condition rating from 0 to 9 as follows: 9 8 7 6 5 4 3 2 1 0 new condition good condition generally good condition fair condition generally fair condition marginal condition poor condition critical condition critical condition critical condition
no repairs needed potential exists for minor maintenance potential exists for major maintenance potential exists for minor rehabilitation potential exists for major rehabilitation repair or rehabilitation required immediately bridge should be closed until repairs are completed bridge closed but repairable bridge closed and beyond repair
These ten rating levels are considered with the five condition levels originally depicted in Section 10.6.2 as follows: Condition level 1 - rating 9 to 8 Condition level 2 - rating 7 to 6 Condition level 3 - rating 5 to 4 Condition level 4 - rating 3 to 2 Condition level 5 - rating 1 to 0 10.2.7.5 Urban stormwater drainage The various drainage sub-groups depicted in Section 4.8.48 will need to be carefully surveyed to ascertain their condition levels. Due to the nature of the main underground drainage network commonly in place in urban areas, it is likely that any one of the five condition levels nominated in Section 10.6.2 may apply. However, without substantial effort being put into a survey of underground drains, it may be difficult to ascertain which condition level is appropriate. For drainage assets other than underground drains, condition should be readily assessed from visual inspection. 10.2.8 Risk management factors
Section 10.4 of the manual referred to risk management of assets and the need to implement good custodial controls over assets. This aspect of asset management should also be one important role of the asset clerk.
Unauthorised asset use and theft of assets cannot be effectively controlled unless there is a full record of all assets. Section 6 of the manual deals with the information that should be collected in respect to every asset currently on hand and every asset acquired on or after 1st January, 1993. The list of information required (along with any other requirements municipalities may identify) is extensive and, as noted above, will generally require the use of computers. Councils should regard the development of a comprehensive asset register which meets financial and management needs as a high priority. Councils will then be able to establish controls which are effective in guarding against theft and fraudulent or illegal use of assets. Section 5 of the manual deals with the issue of recording of minor assets and suggests that for assets with values below the established recording thresholds, they not be recognised in the financial statements. However, if it is decided that all assets with a replacement cost of, say between $100 and the recording threshold are also to be subject to asset management techniques, it will be necessary to ensure that the register allows such recording. Once the register is in place controls over asset security and usage should be established and recorded in the internal accounting manual of councils.
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Section 11 Reporting in the Financial Statements
SECTION 11 - REPORTING IN THE FINANCIAL STATEMENTS

11.1
11.1.1
ACCOUNTING STANDARD
Financial statements
The general purpose financial report of a local government shall include an operating statement, a statement of financial position, a statement of changes in equity and a statement of cash flows (AAS 27, paragraph 21).
11.1.2
Depreciation of non-current assets
All non-current assets with limited useful lives shall be depreciated in accordance with Australian Accounting Standard AAS 4 "Depreciation of Non-Current Assets (AAS 27, paragraph 45).
11.1.3
Initial recognition of assets
Where assets are first recognised in the statement of financial position during the transitional period specified in paragraph 108 of AAS 27 or during the first reporting period that ends on or after 1 July 1996, the net amount of the resultant adjustments shall be adjusted against accumulated surplus/deficiency in the reporting periods in which the assets are first recognised (AAS 27 paragraph 110).
11.1.4
Revaluation of non-current assets
Revaluations of non-current assets shall, subject to paragraph 39, be accounted for in accordance with Australian Accounting Standard AAS 10 "Accounting from the Revaluation of Non-Current Assets" (AAS 27 paragraph 38). Where a class of depreciable assets is revalued, local governments shall either: (a) credit any accumulated depreciation existing in respect of that class of assets immediately prior to revaluation against the asset accounts to which it relates, and then increase or decrease the asset accounts by the amount of the revaluation increment or decrement; or restate separately the gross amount and related accumulated depreciation of the assets comprising the class of revalued assets (AAS 27 paragraph 39).
(b)
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11.2
11.2.1
FRAMEWORK
Legislative requirements
Councils must prepare their financial reports in accordance with the requirements of:

the Local Government Act 1993 the Local Government (Financial Management) Regulation 1993 the Australian Accounting Standards prescribed standards - Code of Accounting Practice and Financial Reporting - Asset Accounting Manual (Section 413 LGA 1993 Clause 21 & 22 Regulation)
11.2.2
Accounting records
Ref: 11.3.3.5
A council must keep such accounting records as are necessary to correctly record and explain its financial transactions and its financial position (LGA 1993, section 412(1)). Accounting records, in relation to a council, ..... includes any cash receipt record, assets register ..... (Financial Management Regulation Clause 14).
11.2.3
Revaluation of Assets
When assets are revalued, they must be valued at their written down current cost. The resulting credit from the increased value of the asset goes to the Asset Revaluation Reserve, except that, to the extent such as increment reverses a revaluation increment previously charged to the operating statement in respect of that same class, it shall be credited to the operating statement in that period.
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11.3
11.3.1
DISCUSSION
Purpose
To provide guidance to councils on:(1) (2) (3) recording of non-current assets and depreciation in the asset register disclosure of non-current assets in the financial statements the accounting entries for recognition, acquisition and disposal of assets, depreciation of assets and subsequent revaluation of assets Asset Register
11.3.2
Discussion on the recording of assets in an asset register is included at section 6.3 in this manual. Reference was also made in that section to the "Working Guide for Statement of Accounting Practice (SAP 1)" published by the Australian Accounting Research Foundation. In section 2 of that publication, detailed guidance is provided by way of commentary and example on accounting for non current assets in a current cost environment. Part E of that section is entitled "Detailed Accounting Records" and contains an appendix which provides an example of an asset register. Users of this manual who wish to obtain more guidance on the detail of asset registers, should refer to that publication. 11.3.2.1 Asset register - Worked example It is appropriate that we now view the asset register which we need to develop for the worked example which has been flowing through the manual. This will give an appreciation of the details we should record. The register shown below is simplified for practical purposes and can be extended to include any other features of an asset. The register uses the data developed in preceding sections of the manual.
ASSET REGISTER as at 30th June 1995

Accum dep'n charge 30/6/95
Asset Category
Asset Component
Valuation $
Accum valuat'n adjust't $
Useful life years
Est'd residual life years
Dep'n rate %
Annual dep'n charge $
Written current 30/6/95 $
down cost
Sport & Rec (Community)
Outdoor pool -land -build'gs
500,000 750,000
N/A 60
N/A 25
4.0
12,500
437,500
500,000 312,500
1,250,000
12,500
437,500
812,500
Other details which should also be recorded in the register are as follows: Date of acquisition This will not be known in many cases but can be calculated when the total useful life has been determined or estimated.
Valuation details The following data should be recorded, as a minimum, in the register for each valuation so that a full history of valuations is developed for each asset: - valuation basis (acquisition cost, market value, replacement cost, recoverable amount) - date of valuation - name of valuer - other valuation notes relating to asset condition, usage level, etc.
This information could either be recorded in the register itself against each asset or filed as a separate record to support the register. Comments are made later in this section about audit requirements with respect to data recorded in the register. The totals of the valuation, accumulated depreciation and accumulated revaluation adjustment columns of the register must agree with control accounts in the general ledger. In respect to the accumulated valuation adjustment column, the total of this column will agree to the balance of the asset revaluation reserve in the Statement of Financial Position. Note that this example does not include an illustration of the effect of acquisition and disposal of assets. Additional columns will be needed where acquisitions and disposals occur. The recording of acquisition and disposal of assets is covered in Section 6 of the manual and the accounting entries are shown later in this section. 11.3.3 Disclosure in the financial statements
Disclosure of assets and depreciation will be required in a number of places within the financial statements. In summary, these are: Statement of financial position & related notes Total current cost of assets Total accumulated depreciation Total net asset revaluation increments
Operating statement & related notes Total depreciation charged for the year (This information must be disclosed by expense type (i.e. "depreciation").
Statement of changes in equity Net movement in the asset revaluation reserve arising from asset revaluations during the reporting period. Total increase in retained surpluses arising from recognition of assets for the first time. Note that this can only occur in relation to existing inventories of assets.
Cash flow statement

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Note that asset revaluation movements and depreciation charges are not disclosed in this statement as they are non cash items. Notes to financial statements Depreciation charged for the year (refer to comment above about disclosure of this item in the operating statement). Recorded asset values (acquisition or current cost), accumulated depreciation and written down current cost for each asset category. Separate disclosure within each asset category of the total value of assets recorded at cost of acquisition and current cost is required. date of valuations where classes of assets are recorded at valuation. details of valuations where the valuations have occurred in the reporting period. description of accounting policies for: - recording and valuation of non-current assets - depreciation of non-current assets - leases - joint ventures - Real Estate Assets held for resale - Employee entitlements

An extract of the suggested disclosure in a set of municipal financial statements is shown at the end of this section for illustrative purposes. It does not purport to deal with all disclosure and reporting options but to provide an understanding of basic disclosure requirements and options available. 11.3.4 Distinction between initial recognition and revaluation of assets
It is important to clearly understand the distinction between the initial recognition of a non-current asset on hand prior to 1st January, 1993 and the revaluation of assets previously recognised in the financial statements. This is because the accounting treatment for each of these two procedures is quite different. The accounting entries set out in this section show the distinction. 11.3.4.1 Initial asset recognition In respect to the initial recognition of an asset on hand prior to 1st January, 1993, the credit arising on recognition must be added directly to accumulated surplus. The credit will be disclosed in the Statement of Changes in Equity as an addition to the opening balance of accumulated surpluses in the accounting period when the recognition occurred. The credit cannot be transferred to an asset revaluation reserve because it did not arise on revaluation. The notes to the financial reports should classify the results for the year balance into operating and credit arising from non current asset recognition.
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For example:
Note X Accumulated Surplus Accumulated Surplus 19X1 $000 Balance at beginning of the reporting period Change in net assets resulting from operations Adjustment due to recognition of assets under transitional provisions (AAS 27) Other Adjustments (Specify) Transfers to asset revaluation reserve Transfers from asset revaluation reserve Balance at end of the reporting period 452,000 200,000 200,000 2,000 250,000 19X0 $000 15,000 5,000 180,000
Refer to the Code of Accounting Practice for minimum financial reporting requirements. 11.3.4.2 Revaluation subsequent to asset recognition Revaluations of non-current assets subsequent to initial recognition give rise to revaluation increments (credits) when a non-current asset value is increased and revaluation decrements (debits) when a non-current asset value is decreased. In accordance with AAS 10, all revaluation increments must be credited to an asset revaluation reserve except that, to the extent such an increment reverses a revaluation decrement previously charged to the operating statement in respect of that same class, it shall be credited to the operating statement for the period. Asset decrements shall be debited to the operating statement - except that, to the extent such a decrement reverses a revaluation increment previously credited to, and still included in the balance of an asset revaluation reserve in respect of that same class, it shall be debited directly to that revaluation reserve. Increments and decrements shall not be offset against one another, except within a class of assets (refer to Measurement of Assets - Revaluations in the Code of Accounting Practice). 11.3.4.3 Initial recognition of non-current assets Section 11.3.6.1 describes the accounting treatment for the recognition of non-current assets acquired prior to 1 January, 1993. These assets are recognised at their current values. Revaluations of these assets at a subsequent date should then be accounted for in accordance with 11.3.6.3. 11.3.5 Leased assets
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11.3.5.1 Accounting by lessees Councils are likely to have leasing arrangements for some non-current assets, such as motor vehicles, road plant, computers, telecommunications equipment and other similar items. AAS 17 requires that for lessees, leases be classified as either operating or finance leases. Assets acquired under finance leases are required to be recognised as assets in the Statement of Financial Position. Accounting for operating leases requires lease rental commitments to be disclosed in the Operating Statement as incurred. Assets under operating lease are not considered to be assets of the lessee. Guidance is provided in AAS 17 on these issues and a useful diagrammatic representation of the decision making process for distinguishing between finance and operating leases is also provided. Extensive comment is also provided in the Local Government Code of Accounting Practice and Financial Reporting under the topic Operating & Financial Leases. 11.3.5.2 Accounting by lessors AAS 17 also provides guidance to entities which lease assets to other entities in return for receipt of lease rental revenue. The requirements of the standard in respect to lessors is similar to the accounting treatment which councils have previously used in these circumstances. Again it is not appropriate in this manual to set out the detailed accounting entries required for the proper recognition of leases by lessors. A fully worked example is provided in an appendix to AAS 17. 11.3.5.3 Disclosure in the financial statements In respect to the accounting for non-current assets developed in this manual, there are some disclosure requirements of AAS 17 which will impact on the financial reports of councils. Specifically the standard requires that assets acquired under finance leases should be shown separately to other non-current assets in the Statement of Financial Position. For example where a council has two computers, one being owned outright and the other being leased under a finance lease, it will be necessary to disclose those two assets separately.
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Refer to table below.
Note X Plant and Equipment (The numbers used are purely illustrative.) 19X1 $000 Plant and equipment (at cost) Less accumulated depreciation Carrying amount (P&E Owned) Plant and equipment under lease Less accumulated amortisation Carrying amount (P&E Leased) Total 1,000 90 910 150 12 138 1,048 19X0 $000 1050 92 958 100 5 95 1,043
As a result of these disclosure requirements, it will be necessary for councils, after having recorded and valued their assets, to identify in the asset register those assets which are subject to finance lease as these will provide the basis for identification of assets within each asset component which will require separate disclosure. This can be done very simply by noting against the asset description brief details of the lease or by having separate categories within the asset register for each type of asset such that assets owned or controlled outright are recorded separately therein from those which are subject to finance lease. 11.3.6 Accounting entries
In this section examples are provided of the accounting entries required to give effect to:1. 2. 3. 4. 5. 6. 7. initial recognition of existing assets acquisition of new assets subsequent restatement of asset values subsequent restatement of accumulated depreciation depreciation of assets disposal of assets scrapping of assets
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11.3.6.1 Initial recognition of community assets Dr $ (a) Outdoor swimming pool complex - land - buildings Accumulated Surplus 500,000 750,000 1,250,000 Cr $
(To initially recognise the complex at gross current replacement cost as determined by council engineer on 30 June, 1995 and as shown in the asset register). (b) Accumulated surplus Accumulated depreciation - recreational assets (To initially recognise the accumulated depreciation on the outdoor pool complex buildings following assessment of remaining useful life by the council engineer as at 30 June, 1995 and as recorded in the asset register). 11.3.6.2 Acquisition of new asset on credit Dr $ Land Reserve - (Smith Street) Creditor (To recognise the acquisition on 1 July, 1994 of land for Smith Street reserve at the cost of acquisition of $60,000.) 11.3.6.3 Subsequent restatement of asset values Assumptions: Asset was recognised on 30 June, 1995 at current replacement cost (refer 11.3.6.1 above) of $500,000. Following a revaluation of the asset at 30th June, 1996 the council recognises the increase in value of the asset in the financial statements. A subsequent restatement was also reflected in the financial statements at 30th June, 1997, following a reduction in the asset value. 60,000 60,000 Cr $ 437,500
437,500
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(a) 30 June 1996 Dr $ DR Outdoor swimming pool complex - Land CR Asset revaluation reserve (Being revaluation of land derived by council) (b) 30 June 1997 Dr $ 37,500 37,500 Cr $ 75,000 75,000 Cr $
DR CR
Asset revaluation reserve Outdoor swimming pool complex - Land
(Being revaluation of land derived by council) It should be noted that if there had been no credit in the asset revaluation reserve account for the land at 30th June, 1995, the revaluation decrement which was recognised in 1996 of $37,500 would have been charged to the operating statement as an expense in accordance with AAS 10 (as shown below). Dr Cr $ $ DR CR Loss on revaluation Outdoor swimming pool complex - Land 37,500 37,500
(Being revaluation of land derived by council) 11.3.6.4 Subsequent reassessment of residual life Assumptions: The outdoor pool complex buildings were recorded at a current cost of $750,000 at 30 June, 1995. The residual life of the asset at 30 June, 1995 was 25 years. A reassessment of the remaining useful life of the building was made by the council engineer at 30th June 1996. The reassessment resulted in the life of the asset being extended by ten years (from 60 years to 70 years). At the date of initial recognition of the asset at 30 June, 1995, the council engineer assessed residual life at 25 years. Residual life at 30th June 1996 will be 34 years (i.e. 25 years to 30 June, 1995 plus 10 year life extension less usage in 1996).
No retrospective adjustment to accumulated depreciation or accumulated surplus should be made. The only difference will be in the calculation of future depreciation expenses.
The depreciation charge for 1996 will be $12,500 and from 1997 onwards it will be reduced to $8,824 ($300,000* divided by 34) Dr. $ 8,824 Cr. $ 8,824
Depreciation expense Accumulated depreciation (To record depreciation charges on outdoor pool complex building for 1995 based on reassessment of remaining useful life as recorded in the asset register). * ($750,000 - $450,000) 11.3.6.5 Disposal of assets Assumptions:
A motor vehicle with a current cost of $20,000 has been on hand for two years and has been depreciated to a written down current cost of $12,000 (i.e. annual depreciation charge of $4,000 based on a useful life of five years). The vehicle is sold at the end of year 2 for $14,000 as a trade in for a new vehicle. For illustrative purposes only, it is assumed the motor vehicle dealer gave the council a cheque for $14,000.
Accumulated depreciation Asset - motor vehicle To determine the carrying amount of the asset Disposal of Motor Vehicle Asset - motor vehicle (To write off the carrying amount of the asset sold) Bank Disposal of Motor Vehicle (To record the proceeds of sale of the asset) Disposal of Motor Vehicle Gain on Sale of Motor Vehicle (operating statement) (To record the gain on sale of the asset)
Dr $ 8,000
Cr $ 8,000
12,000 12,000
14,000 14,000
2,000 2,000
[Note that details of the sale should be recorded in the asset register].
11.3.6.6 Scrapping of an asset Assumptions: As a result of a recent major fracture in a water main, a section of Smith Street was seriously undermined and will need replacement. The asset register shows the written down current cost of Smith Street is $90,000, its gross current cost being $120,000 and accumulated depreciation of $30,000. The municipal engineer has assessed the damage and advised that only half of the Street will need replacement. Dr $ (a) Accumulated depreciation Road - pavement (Smith Street) (To adjust the carrying amount of the Smith Street damaged by a water main breakage to remove accumulated depreciation) Loss on disposal Road - pavement (Smith Street) (To write off the carrying amount of the damaged portion of Smith Street) [Note that the loss on disposal will be recognised as an expense in the operating statement. The scrapping of part of the asset should also be recorded in the asset register]. (b) Road - pavement (Smith Street) Creditor (To record the reconstruction of Smith Street). 11.3.7 Annual summary of assets 70,000 70,000 45,000 45,000 15,000 15,000 Cr $
Prior to the process of preparation of the annual financial statements, it will be necessary to close off the asset register and reconcile the balances for acquisition cost, current cost, depreciation charged for the year, accumulated depreciation and net asset revaluation increments to the corresponding control accounts in the general ledger.
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When this exercise is complete, it is suggested that councils prepare summaries of movements in each of the above mentioned accounts as they will greatly assist in the preparation of the financial statements. These summaries should be prepared for each asset category which will be disclosed in the financial statements. The following summaries are suggested: asset revaluations assets acquired asset disposals (including profits/losses on sale) depreciation charged for the reporting period accumulated depreciation written down current cost
These summaries will need to agree to both the asset register and the general ledger controls. This data can easily be expressed on a spreadsheet. 11.3.8 Extracts of sample financial statements
In order to illustrate simply and effectively the basic disclosure requirements of AAS 27, the extracts of each of the following are shown below:1. 2. 3. 4. 5. 6. Operating Statement Statement of Financial Position Statement of working capital (effective from 30 June 1997) Statement of Changes in Equity Statement of Cash Flows Relevant Notes to the Financial Statements
Refer to the Local Government Code of Accounting Practice and Financial Reporting for details of these extracts.
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Appendix 1 Summary of Accounting Standards and Regulations
APPENDIX 1 - SUMMARY OF ACCOUNTING STANDARDS AND REGULATIONS Set out below is a brief summary of all current accounting concepts and accounting standards. Comments are also included on Statement of Accounting Practice, SAP 1 Current Cost Accounting. Reference should be made to the particular statements for full details of accounting and disclosure requirements. Statements of Accounting Concepts and Statements of Accounting Standards covered in this summary are as follows: Statements of Accounting Concepts SAC 1 SAC 2 SAC 3 SAC 4 Definition of the Reporting Entity Objective of General Purpose Financial Reporting Qualitative Characteristics of Financial Information Definition and Recognition of the Elements of Financial Statements
Statements of Accounting Standards AAS 1 AAS 2 AAS 3 AAS 4 AAS 5 AAS 6 AAS 7 AAS 8 AAS 9 AAS 10 AAS 11 AAS 12 AAS 13 AAS 14 AAS 15 AAS 16 AAS 17 AAS 18 AAS 19 AAS 20 AAS 21 AAS 22 AAS 23 AAS 24 AAS 25 AAS 26 AAS 27 AAS 28 AAS 29 AAS 30 Profit & Loss or Other Operating Statements Inventories Accounting for Income Tax (Tax Effect Accounting) Depreciation Materiality Accounting Policies Accounting For the Extractive Industries Events Occurring After Reporting Date Expenditure Carried Forward to Subsequent Accounting Periods (Withdrawn) Accounting for the Revaluation of Non-Current Assets Construction Contracts Withdrawn Accounting for Research and Development Costs Accounting for Investments in Associates Revenue *Financial Reporting by Segments Leases Accounting for Goodwill Accounting for Interests in Joint Ventures Foreign Currency Translation Accounting for the Acquisition of Assets (including Business Entities) *Related Party Disclosures Set Off and Extinguishment of Debt Consolidated Financial Reports Financial Reporting by Superannuation Plans Financial Reporting of General Insurance Activities Financial Reporting by Local Governments Statement of Cash Flows Financial Reporting by Government Departments Accounting For Employee Entitlements * Not Applicable to Local Governments
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Statements of Accounting Standards (Cont.) AAS 31 AAS 32 AAS 33 AAS 34 AAS 35 Financial Reporting by Governments Specific Disclosures by Financial Institutions Presentation and Disclosure of Financial Instruments Borrowing Costs Self-Generating and Regenerating Assets
Statements of Accounting Concepts Statements of Accounting Concepts (SACs) are intended to form the basis of a conceptual framework for financial reporting. The purposes of this conceptual framework are to ensure that accounting standards are consistent and logically formulated, to provide guidance in the absence of specific accounting standards and to enable users of accounting standards to understand and evaluate those standards and proposals for new standards. While SACs contain no actual requirements the concepts identified therein are given effect in accounting standards. General purpose financial reports should be prepared in accordance with SACs and applicable accounting standards, except where there is incompatibility between an accounting standard and a SAC, in which case the standard prevails. SAC 1 Definition of the Reporting Entity defines and explains the concept of a reporting entity and specifies that such entities shall prepare general purpose financial reports which comply with Statements of Accounting Concepts and Accounting Standards. AAS 27 specifies that each local government is a reporting entity. SAC 2 Objective of General Purpose Financial Reporting states that the purpose of financial reporting is to provide information to users that will help them make decisions about the allocation of scarce resources. SAC 3 Qualitative Characteristics of Financial Information explains in more detail the qualitative characteristics that such financial information must have to achieve this end and that therefore must be taken into consideration when accounting policies and disclosures are considered. These qualitative characteristics are classified between those related to the selection of financial information for inclusion in financial reports relevance and reliability and those related to the presentation of those reports comparability and understandability. SAC 3 also considers the role of materiality as a test of admission of information into an entity's statements and the constraints on an entity's ability to provide relevant and reliable information, that is, the time requirements and the relativity of the costs and benefits involved. SAC 4 Definition and Recognition of the Elements of Financial Statements deals with the elements of financial statements. Assets, Liabilities, Equity, Revenues and Expenses are defined and their nature and characteristics discussed.
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Statements of Accounting Standards AAS 1 Profit & Loss or other Operating Statements This standard requires the inclusion in the Operating Statement information in relation to all items of revenue and expenditure (including current period adjustments) and an operating result. It also identifies abnormal and extraordinary items which may appear in the Operating Statement. AAS 2 Inventories Inventories are to be measured at the lower of cost and net realisable value. In determining the carrying amount of inventories, each item should be dealt with separately or, where this is impracticable, similar items should be dealt with as a group. The cost of inventories means the aggregate of: the cost of purchase; cost of conversion; and other costs;
incurred in the normal course of operations in bringing the inventories to their present location and condition. In determining cost, the following methods are considered appropriate: specific identification; average cost (weighted); first in, first out (FIFO); and standard cost.
The method selected to assign cost to particular items of inventory should be appropriate to the circumstances and applied consistently from period to period. Last in, first out (LIFO), latest purchase price and base stock are not considered acceptable. Replacement cost is not acceptable in historical cost accounting unless it approximates net realisable value (when it is lower than cost). For manufactured inventories, cost should be determined using absorption costing techniques (based on an entity's normal operating capacity). Standard costing is acceptable provided that the standards are realistically attainable, reviewed regularly and revised as necessary in the light of current conditions. Net realisable value is the estimated proceeds of sale less all further costs to completion and marketing, selling and distribution. Costs of a general nature, for example, general administrative and general marketing costs, that cannot be clearly attributed to specific items or groups of items of inventory normally should not be deducted in arriving at net realisable value. The standard does not apply to:
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forests, livestock, or similar regenerative natural resources; work in progress under long term contracts; or marketable securities.
AAS 3 Accounting For Income Tax (Tax-Effect Accounting) This standard only applies to reporting entities subject to the payment of income tax. As such it is not relevant to Local Government. AAS 4 Depreciation This standard requires non-current assets with limited useful lives (including buildings) to be depreciated over their estimated useful lives with the resulting depreciation charges recognised in the operating statement. Depreciation rates are to be reviewed annually, and, if necessary, adjusted so that they will reflect the most recent assessments of the useful lives of the respective assets. Depreciation charges are made from the point in time when a depreciable asset is first put into use or held ready for use. When a depreciable asset has been revalued, depreciation charges subsequent to the date of revaluation are related to the revalued amount. AAS 4 does not apply to: forests, livestock or similar regenerative natural resources; or investment properties (as defined in the standard).
AAS 5 Materiality AAS 5 defines the concept of materiality and specifies how it should be applied in the preparation and presentation of financial statements. The concept of materiality is an overriding concept which governs not only the presentation of financial statements, but also the applicability of accounting standards. Unless explicitly specified otherwise, a Statement of Accounting Standards (or any of its individual provisions) needs only to be applied where it will have a material consequence. Information shall be deemed to be material if its omission, non-disclosure or misstatement would cause the financial statements to mislead users of the statements when making evaluations or decisions. In determining the materiality of information: regard shall be had to the nature of the information, the amount involved, or both; and items of the same or similar nature shall be considered in the aggregate as well as individually.
AAS 6 Accounting Policies A summary of accounting policies shall form the initial section of the notes in the financial statements and shall identify the statutory requirements, ministerial directives, or other government authority which has determined accounting policies.
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Considerations of relevance, materiality, consistency, prudence and substance over form shall govern the determination, application and disclosure of accounting policies. Where there is a change in accounting policies the summary of accounting policies shall disclose, or refer to a note disclosing: the nature of the change; the reason for the change; and the financial effect of the change.
AAS 7 Accounting For the Extractive Industries This standard has specific application to Extractive Industries and is unlikely to affect Local Government. AAS 8 Events Occurring After Balance Date The financial effect of events occurring after balance date shall be brought to account if the events: provide additional evidence of conditions that existed at balance date and thereby assist in determining an amount that was uncertain at balance date; or reveal for the first time a condition that existed at balance date, thereby leading to the recognition of an item or different assessment of the amount attributable to an item.
If the event does not relate to amounts to be brought to account in the financial statements, it shall be disclosed in the notes to the accounts. Where events occur after balance date which do not relate to any conditions existing at balance date, but those events are material in relation to the financial statements, a note to the accounts shall disclose the events and, if possible, their financial effect. AAS 9 Expenditure Carried Forward to Subsequent Accounting Periods (Withdrawn) The concept of accrual accounting requires the proper matching of expense with revenue for each accounting period, which may result in expenditure being carried forward. Expenditure should be carried forward at balance date to one or more future accounting periods only when it satisfies the following tests: it is material in amount; it does not relate solely to revenue which has already been brought to account; it can be clearly identified as contributing to revenue earning capability in the future; and it is reasonably expected that future revenue will be obtained sufficient to absorb the expense carried forward; or the expenditure has given rise to an asset which may be reasonably expected to realise at least its book value. Such realisation may arise from: - a sale (whether alone or in conjunction with another asset); or
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- by way of a refund to which the entity would become entitled consequent upon the disposal of another asset (for example, adjustment of rates in favour of the vendor upon sale of land); or - upon the termination of a contract (for example, a premium refund following cancellation of insurance cover). Expenditure which does not meet these tests should be treated as an expense of the current period. AAS 10 Accounting for the Revaluation of Non-Current Assets A revised version of AAS 10 was issued in September 1991 and is operative for reporting periods ending on or after 30 June 1992. The revised standard requires: that the carrying amount of a non-current asset shall only be changed (other than by way of a change in accumulated depreciation) by revaluation of the class of noncurrent assets in which that asset is included; that upon revaluation the carrying amounts of non-current assets do not exceed their remaining service potential; that when, and only when, the carrying amounts of non-current assets exceed their remaining service potential, downwards revaluations of those assets are to be made to revalue them to their remaining service potential amount; and disclosure of the revalued carrying amounts of non-current assets and accounting policies in respect of the bases, frequency and methods of revaluation.
Revaluation increments and decrements are offset against one another within a class of non-current assets, but are not offset in respect of different classes of non-current assets. Where a class of non-current assets is revalued, the net revaluation increment or decrement in respect of that class of assets is accounted for as follows: an increment is credited directly to an asset revaluation reserve; and a decrement is recognised as an expense in the operating statement;
except to the extent that the revaluation reverses a previous revaluation of the asset class, then it is, as far as possible, accounted for by entries which are the reverse of those by which the previous revaluations were recognised. Where a non-current asset is revalued to its recoverable amount, the revaluation decrement is recognised as an expense in the operating statement except that, to the extent that the decrement reverses a revaluation increment previously credited to, and still included in the balance of, an asset revaluation reserve in respect of the class of assets to which that asset belongs, the revaluation decrement is debited directly to that revaluation reserve. A gain or loss on disposal of non-current assets is measured as the difference between the carrying amount of the revalued asset and the net proceeds on disposal.
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AAS 11 Construction Contracts AAS 11 sets standards of accounting by a contractor for all construction contracts. Construction contracts covered by the standard include, but are not limited to, contracts for general building, heavy earthmoving, dredging, demolition, dams, pipelines, tunnels, ships and transport vehicles. The major accounting issue is the method of profit recognition for contracts that extend over more than one accounting period. In concept, there are two methods, as follows: percentage of completion method profit is recognised in proportion to the progress on a contract for each period in which construction occurs; and completed contract method profit is recognised when the project is substantially complete and remaining known costs and potential risks are insignificant in amount.
The standard requires the percentage of completion method to be applied when progress on the construction contract permits the outcome of the contract to be reliably estimated. This may occur in some circumstances only upon completion. A loss on a construction contract, whether the work is completed or yet to be completed, shall be recognised as soon as it is foreseeable. This standard will only apply where a municipality carries out construction that lasts longer than one accounting period. AAS 12 Withdrawn - Statement of Sources and Application of Funds This standard has been superseded by AAS 28 Statement of Cash Flows issued in December 1991. AAS 13 Accounting for Research and Development Costs The standard requires research and development costs to be expended as incurred, except where the costs meet the following specific criterion for deferral: "Costs incurred during the period on research and development projects should be deferred to future periods only to the extent that future benefits are expected, beyond any reasonable doubt, to equal or exceed those costs, any previously deferred costs and any future costs necessary to give rise to the future benefits. Where research and development costs are deferred they should be amortised over future periods in order to match the costs with related benefits. Previously deferred research and development costs are to be regularly reviewed to ensure the criterion for deferral continues to be met. The standard requires the writing off, or writing down, of deferred costs where the criterion does not continue to be met, or continues to be met only in part.
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The standard also contains requirements on the following matters: the activities to be identified as research and development; the elements of costs to be associated with research and development activities; the treatment of government grants received in relation to research and development; the non-reinstatement of research and development costs previously written off; and disclosure of the amount of deferred research and development costs at the end of the period, and the basis for amortising those costs.
AAS 14 Accounting for Investments in Associates This Statement sets standards for the use of the equity method of accounting in relation to investments in associated companies. As it applies to companies it is little applicability to Local Government. AAS 15 Revenue This standard applies to all business undertakings in the private and public sectors and sets standards for disclosure of operating revenue. However the impact of this standard is negligible as AAS 1 and AAS 27 more appropriately cover disclosure requirements relevant to Local Government. AAS 16 Financial Reporting by Segments This standard is not applicable to Local Governments. AAS 17 Leases AAS 17 contains standards set out in three parts: Part 1 discusses the classification of leases by lessees and lessors; Part 2 discusses accounting for operating and finance leases by lessees; and Part 3 discusses accounting for direct financing, sales type and operating leases by lessors.
A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incident to ownership of leased non-current assets (finance leases), and operating leases under which the lessor effectively retains all such risks and benefits. The following are indications that a lease transfers the risks and benefits of ownership: the lease is not cancellable; and ownership is transferred at the end of the lease term; or the lease contains a bargain purchase option; or the lease term is for 75 % or more of the useful life of the leased property; or the present value of minimum lease payments is equal to or greater than 90% of the fair value of the leased property.
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A lessor must classify finance leases as sales-type or direct finance leases. A sales-type lease is one in which the lessor also acts as manufacturer or merchant rather than solely as financier. All other finance leases are direct finance leases. Where a lessee acquires a non-current asset by means of a finance lease, the minimum lease payments are discounted at the interest rate implicit in the lease. Where the implicit interest rate is not known, an estimate is used. The discounted amount is established as a non-current asset at the beginning of the lease term and amortised over its expected economic life. A corresponding liability is also established and each lease payment is allocated between the principal component and the interest expense. Operating lease payments are charged to expense on a basis which is representative of the pattern of benefits derived from the leased assets. In practice this normally means that such payments are charged to the profit and loss account in the periods in which they are incurred. A number of disclosures are required by the standards, including details of lease commitments. Reference should be made to Part 3 of AAS 17 for accounting standards relating to lessors. AAS 18 Accounting for Goodwill Goodwill is defined as comprising the future benefits from unidentifiable assets that, because of their nature, are not recorded individually in the accounts. A distinction is drawn between purchased goodwill and internally generated goodwill. Internally generated goodwill should not be recorded. Purchased goodwill is defined as the difference between the fair value of the consideration given and the fair value of the identifiable net assets acquired. It can arise through the acquisition of a business entity or part thereof, the assets therein or some or all of the shares in another entity. Purchased goodwill should be: measured as the excess of the fair value of assets given up over the fair value of the identifiable net assets acquired; recognised as an asset at acquisition and included in the financial statements as a non-current asset; and amortised by systematic charges in the operating statement over the period the entity is expected to benefit from it, which in any event should not exceed 20 years. To the extent that the excess of the fair value of assets given up over the fair value of the net assets acquired does not represent goodwill, the amount should be written off to the operating statement immediately. The fair values assigned to identifiable net assets acquired may, on occasion, exceed the purchase consideration plus incidental expenses. The excess, representing a discount on acquisition, should be accounted for by reducing proportionately the fair values of the non-monetary assets acquired until the discount is eliminated.
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AAS 19 Accounting for Interests in Joint Ventures The following definitions apply for the purposes of AAS 19: Joint venture means an unincorporated contractual association, other than a partnership or a trust, between two or more parties to undertake a specific business project in which the venturers meet the costs of the project and receive a share of any resulting output. Venturer means a party to a joint venture.
in a joint venture. Ownership of these assets is usually held jointly with other joint venturers in specific agreed proportions. A venturer's interests in joint ventures are brought to account by including in their respective classification categories the amount of: the venturer's share in each of the individual assets employed in the joint ventures; liabilities incurred by the venturer in relation to joint ventures including the venturer's share of any liabilities for which the venturer is jointly and/or severally liable; and the venturer's share of expenses incurred by the venturers in relation to joint ventures.
AAS 21 Accounting for the Acquisition of Assets (including Business Entities) This standards sets out the accounting treatment that applies to all acquisitions involving a cost of acquisition regardless of whether shares or other assets are acquired. The only exclusion is intra-group company reconstructions. The standard does not deal with the accounting treatment for the receipt of assets involving no cost of acquisition, for instances gifts and donations. Under the standard all acquisitions of assets are to be initially accounted for at the cost of acquisition which is the sum of the purchase consideration plus any costs incidental to the acquisition. The purchase consideration may take the form of cash, other monetary assets, non-monetary assets, securities issued or liabilities undertaken; or a combination of any of the above. Where the consideration is in the form of cash, other monetary assets or liabilities undertaken, its value is readily determinable. Where the consideration comprises non-monetary assets, including shares or other securities, the value will be determined by reference to the fair value of the assets given. Fair value is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller, in an arm's length transaction. Where the acquisition is of a business entity, or part thereof, through acquisition of the assets therein, or in the case of an investment in a subsidiary or associated entity, where the acquisition is of some, or all, of the shares of another entity, any goodwill or discount on acquisition is required to be determined and brought to account in accordance with AAS 18 Accounting for Goodwill.
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AAS 24 Consolidated Financial Reports AAS 24 requires the parent entity in an economic entity which is a reporting entity to prepare consolidated financial reports. An economic entity is a group of entities comprising the parent entity and each of the entities it controls. The notion of control rather than ownership is the criterion for identifying the existence of a parent entity/controlled entity relationship and the requirement to prepare consolidated financial reports. Control is defined as the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity. The requirement to prepare one set of consolidated financial reports applies even if: control is temporary; dissimilar activities are conducted by member entities; or the parent entity holds only a minority ownership interest in the controlled entity.
AAS 24 contains standards to be applied in the preparation of consolidated financial reports and prescribes the financial and other information to be included and disclosed in those reports. AAS 28 Statement of Cash Flows This standard requires the inclusion of cash flows in the financial report of a reporting entity, and specifies the manner in which the statement is to be prepared. With minor exceptions, gross cash inflows and outflows are to be disclosed, and the statement is to be presented to show information about the operating activities and other activities, appropriately classified, of the entity. Disclosures of certain specified items are also required. For purposes of the standard, cash includes highly liquid investments which are readily convertible to cash on hand at the investor's option and which an entity uses in its cash management function on a day-to-day basis. It also includes borrowings which are integral to the cash management function and which are not subject to a term facility. AAS 30 Accounting for Employee Entitlements The purpose of this Standard is to (a) prescribe the methods to be used when accounting for employee entitlements in the preparation of general purpose financial reports; and (b) establish requirements for the disclosure of information about employee entitlements in the general purpose financial reports. AAS 33 Presentation and Disclosure of Financial Instruments The purpose of this Standard is to prescribe certain financial report presentation requirements for financial instruments and to require disclosure in the financial report of information concerning financial instruments.
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AAS 34 Borrowing Costs The purpose of this Standard is to (a) prescribe the accounting treatment of borrowing costs, including when such costs must be capitalised as part of the carrying amount of qualifying assets, (b) prescribe the methods to be used to allocate borrowing costs to individual qualifying assets, (c) require certain disclosures to be made about borrowing costs. AAS 35 Self-Generating and Regenerating Assets The purpose of this Standard is to prescribe that: (a) (b) Self-Generating and Regenerating Assets (SGARAs) be measured at net market values increments and decrements in the net market values of SGARAs be recognised in the profit and loss or other operating statement in the reporting periods in which the increments or decrements occur the net market value of the non-living produce extracted from SGARAs (less the costs of extraction) determined immediately after it becomes non-living be recognised in the profit and loss or other operating statement in the reporting periods in which the extraction occurs the cost of the non-living produce of SGARAs is deemed to be the net market value of the non-living produce immediately after it becomes non-living specific disclosures be made in respect of SGARAs.
(c)
(d) (e)
SAP 1 Current Cost Accounting Councils must use written-down current cost calculated in accordance with SAP 1 for determining carrying amounts for assets on the initial application of AAS 27. Local governments must also use written-down current cost as the basis for revaluing non-current assets in future years. Ideally, current cost would be determined by reference to the market buying prices as they exist either when a transaction occurs or at balance date, as appropriate. For local governments where it is not practical to establish current cost by direct reference to market buying prices, it could be initially determined by expert valuation by council engineers and valuers. Subsequent restatements of current cost may then be made by the application of suitable indices calculated to reflect changes in specific prices. The Guidance Notes on SAP 1 contain guidance on the determination of current cost for simple and complex cases.
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Appendix 2 Glossary of Terms
APPENDIX 2 - GLOSSARY OF TERMS Acquisition Acquisition, in relation to assets, means undertaking the risks, and receiving the rights to future benefits, as would be conferred with ownership, in exchange for a cost of acquisition. Acquisition includes establishing control over an asset. Acquisition Cost The purchase consideration plus any costs incidental to the acquisition. Adjacent site value The current cost of land adjacent to the land under consideration. Aggregate Assets A group of assets with similar characteristics which individually fall below the recognition threshold established by a council but which in total are significant and may be recorded as a single asset in the asset register. Asset Service potential or future economic benefits controlled by a council as a result of past transactions or other past events. Asset classifications The means by which categories of assets may be disclosed in the notes to the financial statements. They will relate to the functional areas of operation or programme areas of councils. Guidance is given in the manual at Section 4 on required categories. Australian Accounting Standards Accounting standards are developed in Australia by the Australian Accounting Research Foundation and approved by the Institute of Chartered Accountants in Australia and the Australian Society of CPA's. Exposure drafts of Accounting Standards do not qualify as Australian Accounting Standards. Carrying Amount This means:(1) In relation to an asset, the amount at which the asset is recorded in the accounting records as at a particular date. In application to a depreciable asset, carrying amount means the net amount after deducting accumulated depreciation or amortisation: and In relation to a class of assets, the sum of the carrying amounts of the assets in that class.
(2)
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Control of an asset The capacity of a council to benefit from the asset in the pursuit of the council's objectives and to deny or regulate the access of others to that benefit. Current Cost Current cost in relation to an asset, means its cost measured by reference to the lowest cost at which the gross service potential of that asset could currently be obtained in the normal course of business. Current Replacement Cost Current replacement cost, in relation to an asset, refers to basis of determining the current cost of an asset. Replacement cost measures what it currently costs to obtain the service potential or economic benefits embodied in the existing asset by using a technologically up-to-date reference asset. Date of Acquisition The date on which the risks and rights to future benefits of an asset, as would be conferred with ownership, pass to the acquiring entity. Depreciation Charge A systematic charge against revenue made for the purpose of allocating the depreciable amount of a depreciable asset over its useful life. Fair value The amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction. Gross Current Cost The current cost of an asset undiminished by any depreciation charges. Historical Cost The amount representing the original cost of an asset. In the case of council infrastructure assets, this cost will generally not be known. Maintenance Expenditure on an asset which does not substantially improve it's service potential or future economic benefits and which generally restores the asset to a reasonable condition.
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Market Value The price at which an interest in an asset might reasonably be expected to be purchased or sold at the date of valuation assuming: (1) (2) A willing seller and a willing buyer; A reasonable period within which to negotiate the sale, taking into account the nature of the interest and the state of the market; Values will remain static during that period; That the property will be freely exposed to the open market, and That no account will be taken of any higher price that might be paid by a purchaser with a special interest.
(3) (4) (5)
Market value should take into account any costs of sale which might be incurred by the seller in effecting the sale. Materiality The concept of establishing the importance of financial data in accordance with Australian Accounting Standard AAS 5. In general an item of information is material if its omission, non disclosure as misstatement would cause the financial statements to mislead users when making evaluations or decisions. Non Current Asset Any asset which it is not expected will be either fully consumed or converted into cash within 12 months after the end of the reporting period. Obsolescence The process of ageing of an asset due either to commercial or technical factors. Pavement Management Systems Engineering based software applications designed to record an inventory of roads and streets and associated features (except land) which have a limited life span and require identification for purposes of maintenance and ultimate replacement. Recognition Recognition in an accounting sense refers to the reporting on, or incorporation in amounts reported on, the face of the financial statements of a council.
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Residual Life The remaining useful life of an asset at a specified date. Revaluation The act of recognising a reassessment of values of non-current assets at a particular date. Revaluation Decrement The amount by which the revalued carrying amount of a non current asset as at the revaluation date is less than it's previous carrying amount. Revaluation Increment The amount by which the revalued carrying amount of a non current asset as at the revaluation date exceeds its previous carrying amount. Service Potential Service potential in relation to an asset, means its economic utility to the entity, based on the total benefit expected to be derived by the entity from use (and/or through sale) of the asset. "Gross service potential" means the total benefit expected to be derived when the asset was first acquired, and also the benefit from any subsequent upgradings. Statements of Accounting Concept These are statements released by the Australian Accounting Research Foundation with the approval of the Institute of Chartered Accountants in Australia and the Australian Society of CPA's. They provide the conceptual framework for the development of accounting standards. Statements of Accounting Practice These are statements released by the Australian Accounting Research Foundation with the approval of the Institute of Chartered Accountants in Australia and the Australian Society of Accountants. These statements do not have the authority of Australian Accounting Standards but provide guidance on specific issues. Transition Period The transition period for AAS 27 is the period from the 1st July, 1993 until the commencement of the first reporting period ending on or after the 1st July, 1996 (i.e. 30 June 1997). Unit of Measure The units by which assets are to be measured to enable recording in the asset register of a municipality.
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Useful Life (a) (b) The estimated period of time over which a depreciable asset is expected to be able to be used, or the benefits represented by the asset are expected to be able to be derived; or The estimated total services, expressed in terms of production or similar units, that is expected to be obtained from the asset.
Valuation The process of placing a value on an asset. Vesting The transfer of certain rights in relation to an asset or assets to a council. In most cases the transfer of the rights does not amount to a transfer of legal ownership. It does generally amount to a transfer of the economic benefits embodied in the asset or assets. Written Down Current Cost The current cost of an asset less, where applicable, accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired service potential.
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Appendix 3 - References ad Further Reading
APPENDIX 3 - REFERENCES AND FURTHER READING
The Statements of Accounting Concepts, Accounting Standards and Statements of Accounting Practice issued in Australia have been summarised in Appendix 1 and are not restated here. In addition to these, the following references will assist in an understanding of the principles relating to accounting for non-current assets. Australian Accounting Research Foundation, 1984, Working Guide for Statement of Accounting Practice SAP 1 "Current Cost Accounting". Australian Accounting Research Foundation, "Definition, Recognition and Measurement of Non-current Physical Assets by Public Sector Reporting Entities: A guide to Applying Professional Pronouncements". Vicroads Finance Division (D.J. Turner and S. Konstantopoulos), "Capitalisation of Road Infrastructure Assets". Australian Accounting Research Foundation, Discussion Paper Number 17 "Financial Reporting for Infrastructure and Heritage Assets". Australian Accounting Research Foundation, Discussion Paper Number 12 "Financial Reporting by Local Governments".

AARF Subscription Service The AARF Subscription Service provides subscribers with the latest pronouncements in Accounting and Auditing. The service comprises three packages as follows: a basic accounting package - this includes accounting standards and exposure drafts, media releases and a newsletter. a professional package - this comprises the basic package plus auditing practice statements, guidance releases and exposure drafts; and a comprehensive package - this comprises the professional package plus accounting theory monographs accounting and auditing discussion papers, and audit guides.
Further details can be obtained from AARF, P.O. Box 132, CAULFIELD, Vic. 3162. Telephone: (03) 9524 3600 Fax: (03) 9523 5499. Internet Address: http://www.aarf.asn.au
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Appendix 4 - Indicative Useful Lives for Water and Sewerage Assets
APPENDIX 4 - INDICATIVE USEFUL LIVES FOR WATER AND SEWERAGE ASSETS
WATER SUPPLY Dams Bores Treatment Plants Pumping Stations Mains River Intakes Reservoirs structures mechanical & electrical structure mechanical & electrical structure mechanical & electrical 100 years 25 years 30 years 70 years 30 years 50 years 25 years 80 years 20 years 100 years 40 years
structure roof
SEWERAGE Treatment Plants Pumping Stations Manholes Mains structure mechanical & electrical structure mechanical & electrical structure ladder AC pipes VC pipes UPVC pipes concrete pipes DI pipes odour control 50 years 20 years 70 years 25 years 70 years 25 years 45 years 70 years 70 years 45 years 40 years 20 years
Others
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Appendix 5 Indicative Useful Lives for Councils Non-Current Assets
APPENDIX 5 - INDICATIVE USEFUL LIVES FOR COUNCILS NON-CURRENT ASSETS
The following list of assets has been prepared as a starting point for the use of in determining useful lives of assets in normal circumstances. Whilst it is only a guide, it is not expected that the indicative useful lives will be exceeded. Councils should choose to adopt useful lives greater than those shown only in exceptional circumstances. The reason for the variation should be well documented.
Assets Animal Parks Artworks Bandstands Bicycle Paths Bicycle Racks/Shelters Bird Baths Books Bridges Buildings Bulldozers Bus Shelters Bush Walking Tracks Cages Car Parks Cemeteries Channels Clock Towers Community House Community Halls Community Services Centres Computers Crash Barriers Creeks - Improvement Works Culverts Decorations Drains Drinking Fountains Earthmoving Equipment Fauna Parks Fire (Access) Tracks Flood Control Structure Flowers & Shrubs
Period (yrs) Consider each component 100 100 50 30 50 5 80 100 6 20 30 30 Refer to roads Consider each component 30 100 50 50 30 5 10 100 60 4 100 20 6 Consider each component 40 100
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Assets Footpaths Forest Plantations Fountains Fun Parks Garages Garbage Collection Trucks Graders Grandstands Health Centres Hot Houses Incinerators Indoor Sports Centre Indoor Furniture Indoor Recreation Centre Irrigation Jetties Kerbs & Channel Lakes - Improvement Works Land Land Fill Sites Lanes Levee Banks Manholes - structure - ladder Markets Marinas Materials Recovery Facility Median Strips Monuments Motor Vehicles Murals Musical Instruments Office Equipment Office Furniture Outdoor Parks & Gardens Outdoor Furniture Outdoor Music Shells
Period (yrs) 50 50 Consider each component 50 6 6 50 50 50 10 50 10 50 20 30 70 100 Infinite 100 Refer to roads 100
70 25 50 50 50 100 100 5 20 10 10 10 Consider each component 10 50
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Assets Parking Meters Parks Paving Pedestrian Crossings Piers Pits Plant Boxes Plant Nurseries Playground Equipment Power Generators Protective Clothing Public Changing Room Public Halls Quarries Railway Lines Recreation Equipment Reservoirs Retarding Basins Rights River Bank Remedial Work Road Cleaners Road Network - Structure Roadmaking Equipment Roundabouts Rubbish Bins Safety Equipment Scaffolding Sculptures Seats and Benches Security Systems Sheds Sound Equipment Sporting Reserves Sports Equipment Statues Stockyards Street Cleaners Street Lights Street Signs Tarpaulins Toilets Tools
Period (yrs) 10 Consider each component 30 Included with roads 50 30 5 20 5 10 3 50 50 20 60 5 100 100 Determine for each unit 50 5 100 5 100 3 10 20 100 10 10 20 60 consider each component 3 100 50 5 20 10 5 50 3
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Assets Town Hall Traffic Lights Transmission & Distribution Lines Uniforms War Memorials Waste Disposal Machines Waste Disposal Vehicles Wharves Zoo
Period (yrs) 100 10 35 3 100 10 5 50 Consider each component
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Appendix 6 Guidance on Asset Classifications
APPENDIX 6 - GUIDANCE ON ASSET CLASSIFICATIONS
This list provides a quick reference to what is considered to be the most appropriate nature and functional categories for most assets that councils are expected to control. However it is possible that some assets in certain circumstances may more appropriately be assigned to alternative nature and functional categories. ASSETS SUGGESTED FUNCTIONAL CATEGORIES Recreation/Culture Recreation/Culture Recreation/Culture Recreation/Culture Transport/Communication Transport/Communication Recreation/Culture Recreation/Culture Transport/Communication Transport/Communication All Functions Transport/Communication Recreation/Culture Transport/Communication Housing/Community Amenities Housing/Community Amenities Recreation/Culture Recreation/Culture Community Services and Education Administration (can be allocated to other functions) Transport/Communication Recreation/Culture Transport/Communication Water Recreation/Culture Housing/Community Amenities Housing/Community Amenities Transport/Communication Recreation/Culture Transport/Communication Housing/Community Amenities Recreation/Culture Transport/Communication
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Animal Parks Artworks Bandstands Basketball Courts Bicycle paths Bicycle racks/shelters Bird baths Books Bridges Bulldozers Buildings Bus shelters Bushwalking tracks Car Parks Cemeteries Channels Clock Towers Community Houses Community Services Centres Computers Crash Barriers Creeks Culverts Dams Decorations Drains Drinking fountains Earthmoving equipment Fauna Parks Fire (Access) Tracks Flood control structure Flowers Footpaths
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Forest Plantations Fountains Fun parks Garages Garbage Collection Trucks Grandstands Health centres Hot houses Incinerators Indoor sports centre Indoor furniture Indoor recreation centre Irrigation Jetties - Boating Facility - Recreation Lakes Landfill sites Land Lanes Levee Banks Light poles Local Roads Manholes Median Strips Monuments Motor vehicles Murals Musical Instruments Nursing Homes Office Equipment Outdoor Parks & Gardens Outdoor furniture Outdoor Music Shells Parking Meters Parks Pedestrian Crossings Piers - Boating Facility - Recreation
Economic Affairs Community Amenities Recreation/Culture All Functions Housing/Community Amenities Recreation/Culture Health All Functions Housing/Community Amenities Recreation/Culture Administration Recreation/Culture Housing/Community Amenities Transport/Communication Recreation Culture Recreation/Culture Housing/Community Amenities All Functions Transport/Communication Housing/Community Amenities Transport/Communication Transport/Communication Sewerage Transport/Communication Recreation/Culture Transport/Communication Recreation/Culture Recreation/Culture Health Administration Recreation/Culture Recreation/Culture Recreation/Culture Transport/Communication Recreation/Culture Transport/Communication Transport/Communication Recreation/Culture
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Pits - Stormwater - Gravel Plant Nurseries - Land & Buildings - Plant & Equipment - Stock Playground equipment Power Generators Public Changing Rooms Public Halls Pumping Equipment - Water - Sewerage - Swimming pool Quarries Radars Recreation Equipment Reservoirs - Water supply - Recreation Residential Housing Retarding Basins Rivers Road Cleaners Road Making Equipment Roundabouts Rubbish Bins Safety Equipment Scaffolding School Crossings Sculptures Seats Benches - Road reserve - Parks Security Systems Sheds Shrubs - Road reserves - Parks Sound Equipment Speed Bumps Sporting Reserves Sports Equipment Statues Street Cleaners
Housing/Community Amenities Transport/communication Recreation/Culture Recreation/Culture Recreation/Culture Recreation/Culture All Functions Recreation/Culture Recreation/Culture Water Services Sewerage Services Recreation/Culture Mining and Construction Transport/Communication Recreation/Culture Water Services Recreation/Culture Housing/Communities Amenities Housing/Community Amenities Recreation/Culture Transport/Communication Transport/Communication Transport/Communication Housing/Community Amenities Public Order and Safety All Functions Transport/Communication Recreation/Culture Transport/Communication Recreation/Culture Public Order and Safety Administration Transport/Communication Recreation/Culture Recreation/Culture Transport/Communication Recreation/Culture Recreation/Culture Recreation/Culture Transport/Communication
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Tennis Courts Theatres Theme Parks Tips Toilets Town Hall - Admin centre - Community hall Trees - Road reserves - Parks Traffic Control Devices Underground Drainage Pipes War Memorials Waste Disposal Machine Watering Systems Wharves - Boating - Recreation Works Depot Youth Resource Centres Zoos
Recreation/Culture Recreation/Culture Recreation/Culture Housing/Community Amenities Housing/Community Amenities Administration Recreation/Culture Transport/Communication Recreation/Culture Transport/Communication Housing/Community Amenities Recreation/Culture Housing/Community Amenities Water Transport/Communication Recreation/Culture Transport/Communication Community Services and Education Recreation/Culture
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Appendix 7 Accounting for Drainage Assets
APPENDIX 7 - ACCOUNTING FOR DRAINAGE ASSETS
Introduction AAS 27 "Financial Reporting by Local Governments" requires councils to recognise all physical non-current assets, including drainage assets in their financial reports by June, 1997. These guidelines have been developed to assist councils in accounting for drainage assets. Planning issues Councils should consider the following planning issues before establishing their implementation guidelines. (1) Develop a Program
Planning for this task is crucial to its successful implementation. The commitment from senior management is essential. Practitioners in other States who have already attempted recognition of drainage assets have found that the process will take longer than they first envisaged. The following points are made in relation to developing a program : (2) Councils are strongly recommended to commence the process now and not leave it until the last minute. To gain maximum benefit from the process an asset management approach should be adopted. A task force should be developed with representation from those responsible for asset planning and management. The task force may include representatives from Engineering, Finance and Maintenance Staff. One officer should be appointed as the co-ordinator with prime responsibility of implementing the process by an agreed date. Detailed timetables should be developed outlining major activities and progress should be monitored at predetermined intervals. The council auditor should be consulted in regard to the proposed approach.
Resources
The following are examples of how councils may supplement their existing resources to assist with undertaking the task : Alternative duties for staff under Work Cover. Institute of Engineers program for unemployed overseas qualified engineers. Tertiary students on work experience. Job skills Programs. Vacation employment of casual staff.
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(3) Data
Resource sharing with neighbouring councils once staff are skilled. Community Service Orders. Consultants (primarily for establishing programs and training staff).
If councils have reasonable records of their drainage systems comprising master drainage plans and detailed drawings, it is possible to undertake the process as primarily a desk top exercise. It is strongly recommended that initial recording systems are kept as simple as possible. Councils may use a system based on their existing records with more detailed information added over time from field notes supplied by their drainage maintenance staff. Level of detailed information required This is at the discretion of management. However, the following should be considered : implementation of the Accounting Standard and/or implementation of a comprehensive asset management system.
The level of detail of the information collected would be determined taking into account a council's : available resources. planned usage of the information/objectives of the exercise. future information collection plans. Sufficient details need to be maintained to ensure that accounts can be prepared in accordance with AAS 27. Details would need to cover all assets whose nature and amount are considered material in the context of the councils asset issue. The parameters for this are contained in Section 5 of this manual. (1) General Approach
Councils with limited resources, intending to meet AAS 27's requirements may determine that a calculation based on : drainage pipe length number of drainage pits average diameter of pits piping
would be sufficient to enable an estimate of the value of the drainage network to be prepared. The information should be identified with a view to further ongoing refinement through future inspections. (2) Comprehensive Approach
A more comprehensive approach will enable substantial long term benefits to be gained from the exercise.
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Councils wishing to undertake detailed analysis may choose to obtain information on the following. drainage map reference. drain description. pipe type (brick, reinforced concrete, AC pipe, plastic. reinstatement (street, garden, reserve). depth (normal, deep, very deep). access (good, fair, poor). location (street description). section of street. pipe diameter. length in metres. number of pits. year constructed. external threats (salt water, soil type, trees and weather conditions). condition and comments. details of maintenance expenditure.
Recording of information To record this information a drainage register, which can be continually updated as more precise information is collected, should be developed. See Attachment A for an example of a typical drainage register. Key principles of data/information collection are : keep it simple (utilise information straight from plans if available). establish clear guidelines suited to the needs of the council. undertaken an initial pilot scheme to establish principles of identification. conduct visual inspections where more detailed information is required. conduct condition monitoring/collection of more detailed information at the time of conducting ongoing maintenance. establish procedural statements to help with audit trail. do not duplicate information collection.
Valuation And Measurement (1) Life Expectancy
The condition rating, ongoing and replacement costs and life expectancy of a drain are affected by the type of material/pipe the drain is made from i.e. brick, reinforced concrete, AC pipe and plastic. In addition each individual section of pipe is individually affected by specific external threats to the piping systems. These include tree roots, any salt water, the soil type in which the drains have been built and the relative weather conditions.
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In determining life expectancy, engineers need to consider the 'economic' as well as the physical life of the drain taking into account technical obsolescence of the drain and the fact that some drains will be replaced before the physical life has expired to meet increased demand etc. Appendix 4 of this manual provides indicative useful lives for councils assets, including an indicative life of 100 years for drains. The remaining useful lives of individual drains should be confirmed by detailed inspection, and condition assessment. (2) Materiality - degree of detail
The degree of detail will depend very much upon the size of the council and the nature of these drains. It may not be necessary to cost every drainage pit or end wall. Using the information from a pilot study, you may be able to predict for example that pits are located every 50 metres and are 900 mm x 600 mm in size. As an initial step to facilitate the implementation of the Accounting Standard this would be adequate. However, over time, as engineers make more specific inspections of areas this information will be improved and the asset register refined. Drainage assets should be sub-grouped under: retarding basins flood control structures and equipment weirs for controlling and storing stormwater run off improvement works to natural and artificial waterways underground drains, pits and chambers.
These could be further sub-grouped by size: Small Medium Large - diameter less than 0.6m or waterway area less than 0.35 square metres. - diameter of 0.60 to 1.65m or waterway area of 0.35 to 2.5 square metres - diameter greater than 1.65m or waterway area greater than 2.5 square metres.
(3)
Specific Issues
The following specific issues need to be resolved : Should all drains in a council be included? Main drains controlled by other authorities should not be included in the councils assets. Should drains under roads be recorded as part of the road asset? Drains under roads should be identified and included under drains for financial reporting purposes. Should open drains be identified and recorded?
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Where a drain takes the place of kerb and channel it should be included as part of the road asset - other open drains, floodways and retarding basins should be identified as components of the drainage asset. Water reticulation systems for reserves and sporting facilities should be included under the land category.
Systems guidance Computers offer the most practical tools for data recording. A variety of programs exist or can be developed. The appropriate system depends on the unique circumstances of each council. Expert advice should be sought when selecting systems. Systems being used to record drainage assets include : Land/Geographic Information Systems. Pavement Management Systems. Fixed Asset Registers. Data Base Type Systems. Spreadsheets Type Developments.
Councils generally would have accounting systems which include a fixed asset register(s). In order to ensure the best use of resources and provide adequate information for financial reporting and asset management purposes it may be appropriate to acquire additional systems. When this is done steps should be taken to avoid duplication of resources and the feasibility of establishing links between systems should be fully investigated. Land/geographic information systems (GIS) These systems offer the optimum solution for the efficient management of drainage assets. The data maintained in these systems serves not only for valuation purposes but as a record base which can be linked to enquiry answering and complaint recording/follow up systems. The disadvantage with GIS is that there is generally a long development time with high capital costs. Pavement management systems These systems may be suitable for councils with very little urban drainage but could be less satisfactory where a lot easement drainage is involved. Fixed asset registers Councils would already have a fixed asset register in some form. Section 6 of this manual provides guidance on the attributes which should be recorded in the register for each asset. Drainage assets should be appropriately identified in order that details for individual assets can be recorded. Updated fixed asset registers would generally provide an effective system for recording physical and financial details for individual drainage assets. Such a system also enables the efficient production of aggregate information for inclusion in the general purpose financial report.
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Data base type systems These systems offered a relatively cheap and simple option with the ability to develop the application to meet needs beyond AAS 27 and/or 'export' the information to a more sophisticated system at some future time. They can often be developed in house. Spreadsheet type developments These developments offer the simplest and easiest systems to set up and understand. Data from a spreadsheet could be relatively easily progressed to a data base or other system. (Some details of characteristics which need to be considered when developing a spreadsheet system are included as Attachment B). Regardless of the system adopted some key points to consider are : Data recorded must be able to be related back to council maps or other records. Information should be recorded in a format which will enable it to be easily transferred into other applications. Adopted systems should be set up and documented such that, should a key person leave, replacement staff will be able to carry out the required tasks with minimum disruption. The degree of detail which is warranted by the relatively low value of the drainage network. For example, it could be less than 10% of road values in an urban situation.
Care needs to be taken when using a spreadsheet system for asset recording and reporting. This is especially the case if this type of system is being used to record large amounts of details. Other issues (1) Work in progress
Work in progress can be included under a "work in progress" category and then recorded as an individual asset under the particular asset category at the time the council accepts responsibility for the asset e.g. upon issue of practical completion certificate for contract works. (2) Subdivision works
Developers should be requested to provide details of all infrastructure within a subdivision when control of an asset passes to the council. A council should detail the format in which they require the information and convey this to the developer. This will save council staff considerable effort especially as the developer will have on hand or obtain costings other information likely to be required. (iii) Benefits of the process
Councils in Victoria which have extensively undertaken or completed the process of accounting for their drainage assets have identified a number of benefits as follows :
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They have a better knowledge of the extent and value of their drainage system. They have been able to use the information in the development of maintenance programs and performance measure. They have been able to develop priority programs with greater acceptance by the council and/or more authoritative response to residents.
A detailed knowledge of individual assets and a comprehensive data base will enable more up to date information for making decisions on resource allocations.
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Attachment A - Illustrative Register of Drains EXAMPLE DRAINS REGISTER
REINSTATEMENT DEPTH S Street G Garden R Reserve N Normal D Deep V Very Deep
ACCESS G Good F Fair P Poor
DRAINAGE ASSETS CATCHMENT(S) Value To ___________ For Life ___________ years
Entry No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Map No.
Drain Description
Reinstate
Depth Code
Access Code
Drawing No
Location File No. Street Description
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No.
Section from Street etc
Section to No. Street etc
Pipe Dia. (mm)
Length (m)
Pits
Year Const.
Condition
Comments
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Attachment B DRAINAGE ASSET REGISTER SPREADSHEET SYSTEMS (1) Characteristics
When designing a spreadsheet system there are certain procedures which should be followed. Issues which should be addressed as part of these procedures include : (2) identification of the required output. documentation of the source of inputs with rounding and measurement details considered. design of output formats with consideration of types of printers available. design of input screens for ease of use. careful planning of the spreadsheet layout. adequate testing program/s. development of appropriate design documentation. development of appropriate user documentation. adequate security arrangements with consideration of back-up procedures and version control. audit considerations.
Illustration
An illustrative worksheet, which matches the spreadsheet input screen used in the system is attached as Attachment C. Separate spreadsheets were prepared for each catchment and some sub-areas. The drainage network was considered as a series of pipe sections. A section being a straight length of pipe of constant diameter without a branch. A section may incorporate several pits. The basic data recorded (where available) was : the Map Number on which the section is located. A general drain description. The drawing and file numbers. Street name and location description i.e. whether it was in an easement or reserve or, if in a street, whether it was a longitudinal or cross drain. Start and finish locations of section. Pipe diameter and length of the section. The number of pits in the section. The year of construction.
Provision was made for a comments field to allow notation of any unusual factors. Certain basic information was incorporated into the spreadsheet. The information included :
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pipe replacement costs for different (specified) pipe diameters ($ per metre). pipe supply and lay costs which were calculated by applying a "lay factor" to the pipe replacement costs. access, reinstatement and depth multipliers which were applied to the supply and lay costs.
By providing for other information in the spreadsheet such as the year of construction, the useful life and the remaining useful life the current value of each asset was determined. Indicative figures for the basic information were :
Dia mm Cost $/m Lay Factor Tot $/m Cost X Pit Cost $
Pipe costs table $/m 150 225 300 23.1 23.9 32.6 3.00 2.95 2.90 69 71 95 Standard Pit cost $750 1.00 1.00 1.00 7.50 750 750
375 43.6 2.85 124 1.20 900
450 60.7 2.80 170 1.20 900
525 76.3 2.75 210 1.20 900
600 94.4 2.70 255 1.40 1050
675 133.0 2.65 352 1.40 1050
750 156.8 2.60 408 1.40 1050
825 191.6 2.55 489 1.60 1200
Cost X
Access Factor Multipliers G F 1.00 1.05
P 1.10
Cost X
Reinstatement Factor S Ga 1.10 1.05
R 1.00
Cost X
Depth Multipliers N D 1.00 1.10
V 1.20
Councils need to develop information relevant to their particular circumstances.
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Attachment C - Illustrative Worksheet EXAMPLE OF ILLUSTRATIVE WORKSHEET

REINSTATEMENT DEPTH S Street G Garden R Reserve N Normal D Deep V Very Deep ACCESS G Good F Fair P Poor DRAINAGE ASSETS CATCHMENT(S) Value To ___________ For Life ___________ years
Entry No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Map No.
Drain Description
Reinstate
Depth Code
Access Code
Drawing No
Location File No. Street Description
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No
Section from Street etc.
No.
Section to Street etc
Pipe Dia. (mm)
Length (m)
Pits
Year Const.
Remaining Useful Life
Condition
Coments
Pipe Rpl Cost $
Pipe Rpl Cost $
Tot Rpl Cost $
Current Value
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Appendix 8 Accounting for Roads
APPENDIX 8 - ACCOUNTING FOR ROADS
Introduction Roads are key assets of councils. The cost of acquiring and maintaining them represents a major resource commitment and their efficient management demands that comprehensive engineering and accounting information is available. This appendix sets out implementation guidelines on engineering and accounting issues relating to the collection and recording of information and valuation of roads. Initial collection and recording of information (1) Planning
Councils are required to recognise their existing road network and the transfer of Regional Roads from the RTA at current cost in the financial reports during the 1995/96 financial year. To do this it is necessary to differentiate between roads acquired after 1 January 1993 and those acquired before that date. A council must establish its accounting policies for roads and these will include the valuation approach adopted, the method of depreciation and the threshold level for the recognition of road assets. As detailed in Section 2 of this Manual adequate planning is important for the successful implementation of asset recording, reporting and management. The size and significance of the road network means that councils will generally have engineering and accounting systems in place which are able to be used to record information on roads. From an asset management perspective a comprehensive system can enable information for engineering purposes and accounting purposes to be maintained. Comprehensive systems used to record road assets can include: geographic information system; pavement management systems; and, fixed asset register.
A council may be able to meet financial reporting requirements by use of simpler systems such as: data base systems; and, spreadsheets.
Expert advice should be sought when selecting systems. A council may decide that a pavement management system (PMS) is appropriate for recording engineering information and that it will enable AAS 27 requirements to be met. In some cases it will be possible for councils to share a PMS. PMS enables prioritising of work, optimisation of resources and modelling alternative programs to be undertaken.
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2)
Establishing an asset register
The first step in the valuation of existing roads is to decide what information is required when conducting a road inventory. The information requirements need to be specified to satisfy engineering and accounting requirements as appropriate. Sufficient details need to be maintained to ensure that accounts can be prepared in accordance with AAS 27. The process of obtaining information and recording and reporting on roads has been found to be a challenging task and, in the light of experience, the following guidelines have been developed: early commencement and commitment from the top is essential - early commencement of the task helps to enable any difficulties to be addressed and assists in meeting the AAS 27 requirements within the time allowed under transitional provisions. Commitment from senior management is important to ensure that adequate resources are made available and to emphasise the importance of making progress. implementation teams must have appropriate skills (refer Section 2) - as a minimum the team should include persons with engineering and accounting expertise. detailed timetables are required - detailed timetables ensure that monitoring of progress can be undertaken, problems can be addressed and deadlines can be met. Timetables should clearly identify specific tasks. a budget should be prepared - this is a major task which has considerable benefits. It should not be assumed that the task can be fitted into existing staff workloads. policies with respect to the levels of details recorded, materiality thresholds, depreciation etc. should be documented. appropriate staff resources need to be used - care must be taken when selecting staff to conduct the inventory. The use of experienced staff can add value to the process particularly in areas where judgment has to be used with respect to the collection and input of data. training of staff is necessary - training greatly assists in efficiently carrying out the collection and recording tasks. steps need to be taken to avoid collecting too much data - collecting too much data leads to a waste of resources both initially and in ongoing systems maintenance. a basic monitoring and checking system needs to be in place - a well defined monitoring and checking system enables any mistakes to be corrected thereby ensuring the accuracy and completeness of the data collected (it is easy to miss sections of streets).
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a pilot study should be conducted - the results of the pilot study can be used to assess the degree of detail required and the costs/resources of the full inventory. records must be adequate - to satisfy audit requirements there must be sufficient documentation. Auditors have to obtain sufficient appropriate audit evidence to enable reasonable conclusions to be drawn on the financial information. Councils should hold discussions with their auditors at the time that systems, documentation issues and accounting policies are being developed.
Set out below are specific information details for identification and recording purposes. For engineering purposes information comprising physical and condition data, maintenance costs and restoration costs can be held on a PMS or equivalent system. Additional information, comprising replacement cost and depreciation, may need to be determined for financial reporting purposes. Some PMS's can provide depreciation figures based on condition and age parameters. Road data collection details for a typical basic inventory: Identification: road name and description segment number classification area code or ward lengths carriageway, pavement width road reserve area pavement and surfacing type year of construction details of treatment since construction
Description:
Condition assessment: The assessment of road condition should consider: Footpaths: roughness rutting cracking texture construction type and area condition rating type and length condition rating
Kerb and channel:
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PMS's generally provide for a more comprehensive approach with additional details recorded. Additional inventory items which may be included under a comprehensive approach are: culverts and drains - inclusion would mean these could be considered as part of the road assets. rights of way. Bicycle and wheelchair paths. Road furniture - school crossings, crash beamers, road signs, speed bumps, roundabouts, parking meres, landscaping, seats, etc. Bus stops and shelters.
Sufficient details need to be maintained to ensure that accounts can be prepared in accordance with AAS 27. Typical details normally recorded in a fixed asset register for each asset for accounting purposes are referred to in Section 6 of this Manual. These details include: Valuation details - date of valuation - name and qualifications of person conducting the valuation - basis of valuation Cost details - cost/revalued amount - depreciable amount - annual depreciation expense - accumulated depreciation - written-down cost
For both engineering and accounting purposes it is important that the appropriate degree of detail is recorded. An illustrative inventory of local road pavement which incorporates replacement cost and depreciation information is included as Attachment A. Valuation and measurement The valuation of existing inventory can be completed once the information has been collected and recorded. The valuation exercise involves the application for unit replacement costs and the calculation of depreciation and is performed in two steps. The first step involves the application of unit replacement costs to determine the gross replacement cost at a particular date. The second step is the determination of the depreciation on the current cost by using straight line depreciation. It should be noted that this task needs to be completed by 30 June, 1996. Guidelines on valuation and measurement: unit costs should be determined - unit costs are the replacement costs at the valuation date for specific lengths of road. The costs may be obtained from construction contracts in place as at the valuation date. The development of internal benchmarks may be of assistance in this part of the exercise.
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unit costs should be considered for components - for example a road pavement cost in $ per square metre (for a given pavement thickness) would be used as a reference cost to establish the gross replacement cost of the existing pavement. existing roads are being measured - replacement cost of the existing road can be measured based on the identical or modern equivalent road. the basis of depreciation needs to be determined - depreciation of the existing road is determined by using straight line depreciation. earthworks costs should be included - earthworks costs are included as part of the formation costs.
Details normally maintained in accounting records which are additional to PMS details are set out below. Depreciation method this would be stated in councils accounting policies (refer Section 9.3.12 for alternative depreciation methods). expressed as a percentage per annum. refer to Section 9 of this Manual refer to Section 7. this is the gross current replacement cost, less the net amount expected to be recovered on disposal of the road at the end of its useful life.
Depreciation rate Useful life and residual life Cost/revalued amount Depreciable amount -
Annual depreciation expense - calculated by applying the depreciation rate to the depreciable amount Accumulated depreciation Written-down cost the amount of depreciation calculated as at the reporting date. the value of the road as at the reporting date. The gross current value of a road network less accumulated depreciation as at the reporting date.
Deferred future planned maintenance costs should be included in the total depreciation expense charged in the current year. Experience has confirmed that an automated PMS greatly assists with the determination of valuations for accounting purposes. A PMS provides more assurance that the road inventory in a council is complete. It provides the engineer with better information for determining road maintenance and replacement costs. The integration of an accounting system with a PMS provides a more efficient means of obtaining information. Accounting systems are not designed to record detailed engineering information or to generate PMS style reports.
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Depreciation Depreciation of roads is the loss of service potential or future economic benefits embodied in the roads through use. The basis for calculating depreciation needs to reflect the pattern of benefits yielded by a road. For accounting purposes councils must use a method of depreciation which is appropriate to the nature of the respective assets and their expected use (refer Section 9). The actual deterioration of individual roads can vary due to a variety of factors. Factors which can lead to a more rapid deterioration than originally estimated include: poor standard of design and construction; greater traffic volume and axle weight loadings; adverse weather conditions such as heavy flooding and severe frosts in a year; and, failure to carry out regular maintenance.
The depreciation rate should be regularly reassessed and adjusted where necessary. PMS information can be used annually to determine the remaining useful life. A PMS enables maintenance costs, in terms of the cost of restoring the existing road pavement to a given condition, to be determined. Such information would be incorporated in maintenance costs forecasts. It should be noted that the cost of restoring the road to a given condition is not depreciation. An illustrative inventory of local road pavement which includes replacement cost and depreciation is included as Attachment A. When the remaining economic life of a road is reassessed, future depreciation expense should be calculated in accordance with the reassessed life. No retroactive adjustment should be made to the accumulated surplus and accumulated depreciation. This calculation is illustrated in Attachment B. Practical issues This section has been designed to illustrate practical issues which are likely to arise. Reference should be made to the Asset Accounting Manual Q. A. When does maintenance finish and asset improvement start? Cost of routine maintenance, resurfacing, resealing and re-sheeting would normally be expensed. Cost of major reconstruction greater than the council's threshold limit would be capitalised. How is the residual economic life assessed? The residual economic life of a road is the remaining useful economic life of the road at a specified point in time. It is assessed by considering the following:
Q. A.
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Q. A.
the condition, accepting that normal maintenance is taken into consideration; a council's capital works programme; and the date when reconstruction of the road is estimated.
How are the cost of earthworks considered? Bulk earthworks are considered as land improvements and are valued by council valuers as part of land valuation. Formation earthworks are included as part of the cost of individual roads and are taken into consideration when determining replacement cost. How is the value of the existing road asset determined? Consistent with the methodology in the Asset Accounting Manual the value of an existing road is determined as its current replacement cost less the accumulated depreciation up to the reporting date. Are footpaths to be considered as "transport" assets and how are they to be valued? Footpaths are considered as transport assets (refer Section 4). To what extent should the "road" asset be disaggregated? Councils will find it helpful to disaggregate assets into the largest component that would normally be renewed in isolation. For roads, examples of these components are: Land Structure Seal Kerb and channel Footpath substructure Footpath seal Drainage (council's need to decide whether road or drainage asset) Road furniture
Q. A.
Q. A. Q. A.
Disaggregation means that valuation and accounting for these components is simplified. Asset condition Other sections of this manual have discussed the relevance and impact of asset condition as described in section 10 of the manual on the whole recording and valuation process. Asset condition has no impact on determining either the gross current cost or the acquisition cost of an asset. However asset condition assessment is essential to the determination of residual asset life and therefore to depreciation. For these reasons, asset condition has not been considered in this section as part of the valuation process.
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ATTACHMENT A INVENTORY OF LOCAL ROAD PAVEMENT AS AT 30 JUNE, 199X (illustration)
Road ID YP ROSB YP RPIN YP RPIN YS AUST YS COPP YS EVAN
Street Osborne Crt Pine St (1) Pine St (2) Austin St. Coppin Grove Evandale Rd
Pavement Width m 4.75 9.20 9.14 5.75 11.00 9.10
Reserve Length m 223.96 136.70 71.03 118.35 60.05 142.96
Area * m2 1,064 1,258 649 681 661 1,301
Expired Useful Life Years 70 50 25 20 15 42
PAYMENT SUB-STRUCTURE Accumulated Replacement Residual Depreciation * Cost * @$94 Life (100 yr life) sq.m % $ $ 30 100,000 70,000 50 118,219 59,110 75 61,025 15,256 80 63,967 12,793 85 62,096 9,314 58 122,286 51,360
Written Down Cost * $ 30,000 50,109 45,769 51,174 52,782 70,926
TOTAL:
527,593
217,833
309,760
* = Allows for rounding
TOTAL ROAD ASSETS
199 x '000
Road pavements - at local government valuation of current cost 199 x Less: Accumulated depreciation
528
218 * 310
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ATTACHMENT B ACCOUNTING ISSUES A road useful life is confirmed as 100 years, with a remaining useful life at the reporting date of 20 years at 30 June, 1996. Road At June 1996 80/100 of the useful life of the structure has expired. Current replacement cost is determined as $100,000 (assume that the residual value is zero). Accumulated depreciation is calculated as follows: 80 x $100,000 = $80,000 100 $100,000 100 = $1,000
Annual depreciation expense for 1995/96 recorded in the operating statement is calculated as follows: Initial recognition of road at 1/7/95 Cost of asset - road Accumulated depreciation to 1/7/95 Depreciation for 1995/96 Written down cost of road structure Depreciation expense of $1,000 for 1995/96 is recorded. Reassessment of Useful Life
$100,000 $79,000 $ 1,000 $ 80,000 $ 20,000
In 1996/97 a reassessment of the condition and remaining useful economic life of the road is made. The council engineer determines that the remaining life is 10 years, including 1996/97 (this, for example, may occur if there is severe flooding). Prospective method - the written down cost of the road surface is expensed over its remaining life of 10 years. This is summarised as follows: 1/7/96 Cost of asset - road Accumulated depreciation to 30/6/96 Depreciation for 1996/97 Written down cost of road substructure $100,000 $80,000 $ 2,000 $ 82,000 $ 16,000
Annual depreciation expense for 1996/97 recorded in the operating statement is calculated as follows: ($100,000 - $80,000) $20,000 = $2,000 10 yrs.
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Appendix 9 Annual Reports by Councils (LGA s.428)
APPENDIX 9 - ANNUAL REPORTS BY COUNCILS (LGA s.428) Introduction Within five months after the end of each year, a council must prepare a report as to its achievements with respect to the objectives and performance targets set out in its management plan for that year [LGA s.428(1)]. The report must contain, among other things, a number of particulars applicable to asset management. These include: the assets acquired by the council during that year; and the assets held by the council at the end of that year, for each of the councils principal activities (refer Note 2 Councils Annual Financial Reports) [LGA s.428 (2)(a)(iii)&(iv)]. Additionally, councils are also required to report on the condition of the public works (including public buildings, public roads & water, sewerage & drainage works) under the control of the council as at the end of that year, together with: an estimate (at current values) of the amount of money required to bring the works up to a satisfactory standard; and an estimate (at current values) of the annual expense of maintaining the works at that standard; and the councils program of maintenance for that year in respect of the works; [LGA s.428(2)(d)(i)-(iii)]. councils should endeavour to ensure that their asset management system can readily if not automatically prepare the annual reporting requirements pertaining to council assets pursuant to s.428(2)(d). Review of Councils 1994/95 Annual Reports The Department has undertaken a review of reports provided for the 1994/95 year in order to provide some guidance to councils of what has emerged as good practice and to identify some issues in relation to individual council reports. A letter was sent to each council in late July 1996 which contained a summary of the review of reports undertaken. Included in the review was the following commentary and case study. Points to note in respect of s.428(2)(d):Section 428(2)(d) - Condition of Public Works: This should report on the condition of public works in conjunction with the implementation of AAS 27. This means that all non-current assets should be commented upon. Transport and communication assets must be recognised by June 1996 and referred to in annual reports from 1995/96. Drainage assets must be recognised by June 1997 and referred to in annual reports from 1996/97.
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Councils should report on the condition of public works as at the end of the reporting period, together with an estimate of the amount of money to bring the works to a satisfactory standard; an estimate of the annual expense of maintaining the works at that standard; and the programme of maintenance for that year in respect of the works. Estimates should be at current values. Explanatory notes should be provided where necessary. Please refer to the attached case study of bridges and drainage as an indication of good practice. This information is presented in the following order of presentation:-
Explanatory Notes Materiality Section 428(2)(d) in context Case Study Condition of Public Works - Detailed Supplementary Information - Bridges - Drainage Condition of Public Works - Summary Table
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Section 428(2)(d) report - EXAMPLE
EXPLANATORY NOTES Example of Annual Infrastructure Reports Under Section 428 of the Local Government Act. The example sets out an approach for reporting under Section 428 that allows a summary table to give the community an understanding of potential or known problem areas for infrastructure assets. The annual reports can be carried out in two parts. The first part is the summary report, refer to pages A908-910 above. The second part allows for the provision of detailed reports for areas where problems are suspected or have been identified. The attached case study shows an example of more detailed reporting for bridge and drainage assets. The case study was based on work conducted at a rural council in New South Wales. Some explanatory notes on the two parts of the reporting follow: Part 1 Summary Table (refer to pages A908-910)
As a general rule, the benchmark or base level for a "satisfactory" standard is the sustainable service potential provided by infrastructure. This definition assumes that the existing service potential complies with acceptable standards of safety and risk minimisation. The case study on bridges shows an upgrade cost that would be shown in the summary report. Work is required to progressively replace assets that are predicted to either fail or incur potential load limits associated with deteriorating condition. The work will maintain the existing standard of transport services.
Part 2
Detailed Supplementary Information
Where the existing infrastructure provides inadequate service, supplementary notes to the summary report should outline: the upgrade cost to provide a higher service level than currently exists (for example, increasing pipe size or adding lanes to a road or bridge); the additional maintenance associated with this higher level of service. The intention of the Local Government Act 1993 is to link the level of service provided by infrastructure with the objectives set out in the management plan. It would be expected that upgrading infrastructure to provide a higher level of service would be linked to management plan objectives.
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Materiality The concept of "materiality" should apply to Section 428(2)(d) reports to ensure that the cost benefit of management information is considered.
Section 428(2)(d) in context Annual reporting to the community is an important part of transparent and accountable local government. The information provided should be simple, relevant and current. It is recognised that in some areas of infrastructure the current level of information could be inadequate. In this case the explanatory notes provided with the "Part 2 document can provide a brief outline of the level of management information currently available to council and the actions to improve that information. Determining satisfactory and sustainable levels of service will be subject to continual refinement and consultation between council and the community. Section 428(2)(d) report should flow directly from the management plan which should define performance indicators and how these will be measured for both existing and proposed levels of service. These performance levels can be used to quantify the upgrade costs (or degree of over-servicing) between existing and target service levels.
CASE STUDY Report on the Condition of Bridge and Drainage Assets under Section 428 of the Local Government Act 1993 Introduction Section 428 of the Local Government Act deals with the preparation of annual reports. These reports must be prepared by 30 November each year. 428(2)(d) requires the following: "(d) a report on the condition of the public works (including public buildings, public roads and water, sewerage and drainage works) under the control of council as at the end of that year, together with: an estimate (at current values) of the amount of money required to bring the works up to a satisfactory standard; and an estimate (at current values) of the annual expense of maintaining the works at that standard; and the council's programme of maintenance for that year in respect of the works.
(i) (ii) (iii)
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Condition of Public Works - Detailed Supplementary Information It should be noted the council in the example has embarked on a programme of establishing an asset management system in accordance with the asset accounting manual. This has been prompted by a recognition that past systems have been unable to identify the location, condition, and value of assets. This has been largely due to the complexity of asset networks and the limitations of affordable technology. The implementation programme set by the asset accounting manual required the capitalisation of transport assets by June 1996 and drainage assets by June 1997. Councils asset management plan has adopted these milestones and asset inventories are still under preparation. Accordingly, this years annual report contains only approximate estimates of the status of infrastructure assets in these categories. These estimates will be refined as asset registers and condition inspections are completed over the next two years.
Bridges 428(2)(d): a report on the condition of the public works A report on the condition and utility of council's bridges was submitted in 1990 by the then Bridge and Drainage Engineer. This is an update of that report. Council is currently the custodian of 126 bridges. Of these, 83 are timber and 1 is a composite timber/concrete bridge. It is estimated that all of these are in excess of 6 metres in length. The majority of timber bridges are estimated to be more than 60 years old. The theoretical design life for a timber bridge deck is 10 years and the substructure is 40 to 50 years. The current rate of replacement remains at 1 per year. As part of the asset management programme, a structural testing programme will confirm whether load limits are needed on some bridges. This will be known in the next 2-3 years and it is expected that load limits will be required in the next 3-5 years. Council currently has a full-time bridge carpentry crew who monitor bridges and make urgent repairs as necessary. The condition of bridges is such that rectification is becoming a matter of urgency and is likely to be beyond the financial capacity of the local community. In the interests of public safety, Council may have no alternative but to increasingly apply load limits. This will have adverse regional and local impacts and a strong case can be made for significantly increasing external funding. This has been partly recognised by the Bridge Replacement Reserve funding from the Commonwealth Government. The bridge reserve currently holds $315,000 which includes the
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1995/96 allocation of $125,000. The annual report shows that $700,00 per year (indexed) is required over the next 20 years and even this will not avoid load limits for a significant number of bridges. 428(2)(d) (i) an estimate (at current values) of the amount of money required to bring the works up to a satisfactory standard
In the absence of condition data or structural testing, it is estimated that all timber bridges should be replaced within the next 20 years. This assumes extensive use of load limits during that period. The estimated cost of replacing the 83 timber bridges with more economical composite bridges is $14 million, or $700,000 per annum (indexed) over the next 20 years During the latter half of the 20 year period, it can be expected that bridge deck maintenance will climb steeply and load limits will apply to a large proportion of these bridges. (ii) an estimate (at current values) of the annual expense of maintaining the works at that standard;
The Organisation for Economic Cooperation and Developments publication "bridge maintenance" recommends that the annual maintenance expenditure for timber bridges should be around 3% of the asset value. This equates to $420,000 for the timber bridges and assumes no maintenance of concrete and composite bridges. The total value of all bridges was estimated in the 1992 report at $52 million. The 3% figure is probably low in this case since all bridges are nearing the end of useful life. It should be noted that this amount will gradually reduce as timber bridges are replaced with composite bridges to a final annual estimate of $300,000. (iii) the council's programme of maintenance for that year in respect of the works.
Council's programme of maintenance of based on a full time bridge crew of bridge carpenters making urgent repairs. Current labour and plant costs are $250,000 for 1995 leaving $20,000 for materials. Councils maintenance budgets over the past 3 years is shown below; 1993 - $160,000 1994 - $210,000 1995 - $270,000 No allowance has been made for the establishment of the asset register, condition monitoring and structural testing.
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Drainage 428(2)(d) a report on the condition of the public works Council manages 16 urban areas. Council's records on existing drainage are incomplete and a data capture project will complete an asset inventory of existing drainage assets overt the next 2 years. This will include an assessment of condition to confirm the expected remaining life of drainage assets. The report by the Council's Bridge and Drainage Engineer in 1990 estimated that 50% of existing drainage assets had reached the end of their useful life. 428(2)(d) (i) an estimate (at current values) of the amount of money required to bring the works up to a satisfactory standard
The 1990 report estimated that 50% of these assets had reached the end of their design life with an estimated restoration cost of $13 million in 1990. This is subject to confirmation during the asset management project. In addition to the deterioration of existing drainage works, there are 250 areas identified as having inadequate drainage. This includes both areas where there is no existing stormwater drainage and areas where existing capacity is inadequate. Council is currently completing an average of one project per year. The average cost of these projects is $350,000 per project, however further work needs to be done to define acceptable levels of service for stormwater drainage. This will be included in the asset management project. (ii) an estimate (at current values) of the annual expense of maintaining the works at that standard;
Without an asset register and management system, is only possible to make an estimate on the basis of percentage of asset value. The 1990 report estimated that the annual expense of maintaining drainage work at an acceptable standard was $500,000 per annum, being 0.5% of asset value. This may be too high for concrete pipe systems, however this will be confirmed as the asset register is established. (iii) the council's programme of maintenance for that year in respect of the works "
Council's current maintenance budget is $42,000 for the 1995/1996 financial year which is used for clearing blockages and minor repair works. In addition to the maintenance budget, $450,000 was allocated for drainage construction (one project). The Department of Local Government wishes to acknowledge the contribution made by Jeff Roorda of Jeff Roorda and Associates for the information provided.
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Section 428(2)(d) report - EXAMPLE CONDITION OF PUBLIC WORKS - SUMMARY TABLE Condition of Public Buildings
Category Condition At End of 30/6/96 Satisfactory Satisfactory Satisfactory Satisfactory Roof Repair Required To Community Centre Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory General Repairs Required Satisfactory Satisfactory Satisfactory Satisfactory Satisfactory Estimate of Cost to Bring to Satisfactory Standard (Current $ Value) Estimate of Cost to Maintain Standard (Current $ Value) Maintenance Programme for 1995/96
Sporting Clubs Amenities/Toilets Fire Stations Child Care Centres Community/ Neighbourhood Centres Surfing Clubs Residences Scout / Guide Halls Public Halls Senior Citizens Centres Public Bldgs / Civic Centre/Library Theatres Commercial Swimming Pools Rec. Ground Buildings Showground Buildings Old Council Chambers (Museum) Bush Fire Sheds (8) Saleyards Buildings
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Section 428(2)(d) report - EXAMPLE Condition of Public Roads
Site
Condition at End of 30/6/96 Pavement Rehabilitation Works Required Gravel Resheeting Works Required Pavement Rehabilitation and resealing Works required Pavement Rehabilitation and resealing Works Required Satisfactory Replacement and Major Repairs Required
Estimate of Cost to Bring to Satisfactory Standard (Current $ Value)
Estimate of Cost to Maintain Standard (Current $ Value)
Maintenance Programme for 1995/96
Urban Roads Local Roads Unsealed Local Roads Sealed
Regional Roads
Concrete Bridges Timber Bridges
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Section 428(2)(d) report - EXAMPLE Condition of Water Works

Site Condition at End of 30/6/96 Satisfactory Estimate of Cost to Bring to Satisfactory Standard (Current $ Value) Estimate of Cost to Maintain Standard (Current $ Value) Maintenance Programme for 1995/96
Water Supply Schemes
Condition of Sewerage Works

Site Condition at End of 30/6/96 Construction of new Trunk Main Required Estimate of Cost to Bring to Satisfactory Standard (Current $ Value) Estimate of Cost to Maintain Standard (Current $ Value) Maintenance Programme for 1995/96
Sewerage Scheme
Condition of Drainage Works

Site Condition at End of 30/6/96 Satisfactory Estimate of Cost to Bring to Satisfactory Standard (Current $ Value) Estimate of Cost to Maintain Standard (Current $ Value) Maintenance Programme for 1995/96
Stormwater Drainage System
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Local Government Asset Accounting Manual Update No. 4

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Department of Local Government

Local Government Asset Accounting Manual

Update No. 4 July 1999

Asset Accounting Manual - Foreward

Asset Accounting Manual - Structure

Asset Accounting Manual - Structure

ASSET ACCOUNTING MANUAL - STRUCTURE

A101 A201 A301 A401 A501 A601 A701 A801 A901

Asset Accounting Manual Table of Contents

ASSET ACCOUNTING MANUAL - TABLE OF CONTENTS

201 201 202 203 203 203 204

301 301 302 304 304 304 305 305 311

Asset Accounting Manual Table of Contents

ASSET ACCOUNTING MANUAL - TABLE OF CONTENTS

Page 401 401 402 404 404 404 408 417

Asset Accounting Manual Table of Contents

ASSET ACCOUNTING MANUAL - TABLE OF CONTENTS

Asset Accounting Manual Table of Contents

ASSET ACCOUNTING MANUAL - TABLE OF CONTENTS

Asset Accounting Manual Table of Contents

ASSET ACCOUNTING MANUAL - TABLE OF CONTENTS

A101 A201 A301 A401 A501 A601 A701 A801 A901

Accounting standards & concept statements

Ref: 1.3.1, 1.3.2

Internal accounting procedures manual

Topics in this Manual

Planning for Implementation

Section 2 Planning and Implementation

SECTION 2 - PLANNING AND IMPLEMENTATION

Section 2 Planning and Implementation

Planning for implementation

Ref: 2.3.2, 2.3.3

Councils should identify the:

It is essential that councils establish policies to cover the following:

Asset recognition timetable

Section 2 Planning and Implementation

Implementation team Timetable Supporting Systems Identification and allocation of tasks

Section 2 Planning and Implementation

Section 2 Planning and Implementation

Section 3 Asset Control and Ownership

SECTION 3 - ASSET CONTROL AND OWNERSHIP

Section 3 Asset Control and Ownership

Determination of control over assets

Ref: 3.3.3, 3.3.4

Section 3 Asset Control and Ownership

Control over Roads and Crown Land (a) Roads

Ref: 3.3.3, 3.3.4

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

Valuation of Crown land is discussed in Section 8.2.2 of the Manual.

Regulate access economic benefit

Exchange Service Potential Bear Risks

Section 3 Asset Control and Ownership

Section 3 Asset Control and Ownership

DESCRIPTION OF ASSET: Outdoor Swimming Pool Land

Section 4 Asset Classification and their Use

SECTION 4 - ASSET CLASSIFICATION AND THEIR USE