Asset Valuation and Revaluation Procedures

Infrastructure Services

1. Purpose and Scope of the Policy

This Policy specifies Council’s approach, in accordance with relevant Australian Accounting Standards and other State Government requirements, to undertaking financial valuations of non-current assets.

The Policy also assists Council’s commitment to sustainable financial planning.

The Policy covers financial valuation of non-current physical assets subsequent to initial recognition, including method of revaluation and frequency of revaluation

This Policy excludes insurance valuations and ‘held for sale’ valuations.

1. Policy

Council willundertake periodic revaluation ofall non-current physical assets owned or managed by Council in accordance with relevant Australian Accounting Standards and State Government Guidelines.

This Policy and the associated Asset Valuation and Revaluation Procedure direct Council officers who are charged with accounting for Council’s Assets and related purposes.

In implementing this Policy, Council will:

• Review annually the need for revaluation of Council owned or controlled non-current asset classes, based on the materiality of valuation movement.
• Require revaluations in accordance with the Asset Valuation and Revaluation Procedure, ensuring that each Asset Class is revalued in a consistent manner and with appropriate frequency.
• Apply the valuation method for each Asset Class as specified in the Asset Valuation and Revaluation Procedure.
• Require that frequency of condition assessments for each Asset Class are conducted in accordance with the Asset Valuation and Revaluation Procedure.

1. Related Legislation/Policies/Guidelines

The Asset Valuation and Revaluation Procedure associated with this Policy fully complies with relevant State Government Legislation and Guidelines and with Australian Accounting Standards, including:

Local Government Act 1989, Section 131, which provides that Council must prepare Financial Statements in accordance with the Act.

Australian Accounting Standards Board (AASB)Standards:

• AASB 116Property, Plant and Equipment;
• AASB 1041Revaluation of Non-Current Assets;
• AASB 136Impairment of Assets;
• AASB 1051Land Under Roads;
• AASB 138, Intangible Assets
• AASB 5, Non-current Assets Held for Sale and Discontinued Operations
• AASB 1049Whole of Government and General Government Sector Financial Reporting.

State Government Guidelines:

Department of Treasury and Finance - Financial Reporting Directions and Guidance Notes

• FRD 19, Private Provision of Public Infrastructure - 2003
• FRD 100, Financial Reporting Directions – Framework – 2005
• FRD 103D, Non-Current Physical Assets - 2009
• FRD 106,Impairment of Assets - 2005
• FRD 109, Intangible Assets - 2005
• FRD 118B, Land Under Declared Roads – 2010

Department of Planning and Community Development Guidelines:

• 2004, Guidelines for Developing an Asset Management Policy, Strategy and Plan
• 2005, Guidance Note – Fair Value Asset Valuation Methodologies for Victorian Local Governments
• 2006, Guidelines for Reporting and Measuring the condition of Road Assets
• 2006, Accounting for non-current physical assets under AASB 116
• 2006, Accounting for non-current physical assets under AASB 116
• 2010, Model Financial Report

Victorian Auditor-General's Office Reports

• 2004, Beyond the Triple Bottom Line – Measuring and Reporting on Sustainability
• 2004, Local Government: Results of the 2006-07 / 2007-08 / 2008-09 / 2009-10 Audits

1. Council Plan Reference – Key Performance Area

Key Result Area 1 - Representation and Leadership of our Community

• Good governance througheffective systems andprocedures

1. Roles and Responsibilities

Council

•Responsible for Policy approval

CEO

•Responsible for Procedure approval

General Manager Corporate Services

•Responsible for coordination of corporate financial valuation process

•Responsible for valuation of building and land assets.

Manager Finance

•Responsible for managing corporate Finance system up to date

•Responsible for reporting Fair Value in the financial statements, including impairment

Manager Assets

•Responsible for managing corporate Asset Management System

•Responsible for coordinating collection of asset inventory and condition data

•Responsible for valuation of all Council assets except for building and land assets.

•Responsible for assessment of asset impairment.

1. Review

This policy will be reviewed Jul 2015

1. References

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Asset ValuationandRevaluation Procedure

2012-2015

Ver. 1.0

Revision History

Approvals

1. Primary number changes to Versions (e.g. Ver 1.01 to Ver 2.00) will be made when the document undergoes its regular review or when significant changes are made to capitalisation rules.
2. Secondary number changes (Ver 1.00 to Ver 1.01) will apply to minor amendments that do not materially impact the document and are intended to clarify or update issues.

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Table of Contents

1Purpose

2Definitions

3Background

4Framework

5Definitions

6Corporate Systems

7Specification of Asset Classes

8Valuation Inputs

8.1Age

8.1.1Construction Date

8.1.2Assumed Age

8.2Current Replacement Cost

8.2.1Modern Equivalent Asset

8.2.2Optimisation

8.2.3Unit Rates for Estimating Fair Value Replacement Cost

8.3Residual Values

8.4Remaining Useful Lives

8.4.1Overview

8.4.2Age Based Approach – Average Service Lives

8.4.3Condition Based Approach

8.4.4Treatment of Assets with Zero Remaining Useful Life

8.5Depreciation Curves

8.6Depreciation Methods

8.6.1Depreciation Method 1 – Straight Line Depreciation

8.6.2Depreciation Method 2 – Condition Based depreciation

9Frequency of Valuation

9.1.1Annual Review of Fair Value / Assessing Material Change

9.2Frequency of Asset Condition Assessments

9.2.1Periodic Condition Assessments

9.2.2Rolling Condition Assessments

10Found or Gifted Assets

11Measurement Model

11.1Cost Model – Historical Cost

11.2Revaluation Model

11.2.1Depreciated Replacement Cost

11.2.2Income Approach

12Indexation

13Impairment

Appendix A – Standards and Guidance Documents

AASB Standards and Victorian Government Guides/Directives

Australian Accounting Standards Board Documents

Department of Treasury and Finance - Financial Reporting Directions and Guidance Notes

Department of Planning and Community Development Guidelines Documents:

Victorian Auditor-General's Office

Technical Resources

Other Resources

Appendix B – Asset Service Lives

Appendix C – Valuation Method, Revaluation & Condition Audit Frequency

TABLES

Table 1: Delivery of Council Valuations

Table 2: Current Asset Hierarchy

Table 3: Proposed Asset Hierarchy - To be Implemented 2012-2015

Table 4: Difference Between Greenfield and Brownfield Costs

Table 5: Asset Condition Rating Scale

Table 6: Common Depreciation Methods by Local Government

FIGURES

Figure 1: Residual Value and depreciable Amount

Figure 2: Typical Form of asset depreciation Curve

Figure 3: Depreciation - consumption of asset service potential assumed constant over time

Figure 4: Depreciation – Change to asset service potential based on condition survey

Asset Valuation and Revaluation Procedure

1Purpose

Comply with Asset Valuation and Revaluation Policy.

2Definitions

Assets:- are resources controlled by the entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. An essential characteristic of an asset is that the entity must have control over the future economic benefits or service such that it is able to enjoy those benefits or services and deny or regulate the access of others to the benefits.

Asset Class:- A group of assets having a similar nature of function in the operations of an entity, and which, for the purposes of disclosure, are shown as a single item without supplementary disclosure. The Asset Class is the material level at which Council will prepare the annual balance sheet for reporting in the Annual Report; for example, the Roads Asset Class might include Asset Categories such as sealed roads, unsealed roads, sealed car parks, unsealed car parks, aerodrome runways and traffic control.

Cost:- The amount of cash paid or the fair value of the other consideration given to acquire an asset at the time of its original acquisition or construction. Where an asset is acquired at no cost, or for a nominal cost (as the case with developer and other contributed assets), the cost is its fair value as at the date of acquisition.

Depreciation Expense:- The systematic allocation of the depreciable amount of an asset over its useful life. A systematic charge against revenue made for the purpose of allocating the depreciable amount of a depreciable asset over its useful life. Also known as Annual Depreciation or Depreciation Charge.

Fair Value:- The amount for which an asset could be exchanged, or liability settled between knowledgeable, willing parties in an arms length transaction.

Impairment:- The amount by which the carrying amount of an asset exceeds it recoverable amount.

Non Current Asset:- A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Any asset which is not expected to be fully consumed, realised, sold or otherwise disposed of within one financial year.

Revaluation:- The act of recognising a reassessment of values of non-current assets at a particular date.

Valuation:- The process of determining the worth of an asset or liability. Different valuation methods may be appropriate in different circumstances.

3Background

It is a requirement that Councils complete financial valuations of their non-current assets. This requirement is governed by a legislative and state government framework, which is summarised in Section 4.1 below. A primary outcome of this requirement is that Council’s Balance Sheet will reflect the Fair Value of Council’s portfolio of non-current assets.

Knowledge of current asset values is essential for the efficient and effective management of assets. Current asset valuation information can assist in making decisions regarding the allocation of resources to those assets.

Application of this Policy (in conjunction with associated Procedures document) will drive consistent processes to produce comparable valuations from year to year for both financial reporting and asset management.

Accounting Standard AASB 116, Property, Plant & Equipment, prescribes the accounting treatment for property, plant and equipment and provides for assets initially recognised at cost to be subsequently measured at either Fair Value or Cost. Whichever valuation basis is selected, Council shall apply that approach to an entire Asset Class.

Accounting Standard AASB 1049, Whole of Government and General Government Sector Financial Reporting (October 2007) limits the choice by requiring all non-current physical assets to be measured using the revaluation model. Note that for some Asset Classes, this direction outlines reasonable approximations that can be used as a proxy for fair value, where the entity can demonstrate that there is no evidence that a reliable market-based Fair Value exists for these assets, or gives a significantly different value.

AASB 1041, Revaluation of Non-Current Assets, outlines the application of the Fair Value approach to valuation, prescribes the method of accounting for revaluation increments and decrements and specifies rules relating to the frequency of revaluation.

For non-current assets, indexed Historical Cost will generally not provide a reliable measurement of Fair Value. Typically, only relatively short lived or low value assets such as plant and equipment, office furniture and vehicles will continue to be carried at Historical Cost, as this is expected to provide a reasonable approximation of Fair Value for these short lived assets.

All other Asset Classes will typically be recognised at Fair Value. The Fair Value basis of recognition ensures that the consumption of non-current assets (i.e. depreciation expense) approximates the expected long term average costs to renew or replace those assets. This depreciation expense is accounted for via Council’s Balance Sheet and the Profit and Loss Statement.

For infrastructure assets there is a requirement to use “Greenfield” rates, as opposed to “Brownfield” rates. Greenfield rates do not include ‘asset destruction’, ‘asset disposal’, ‘traffic management’ and ‘site restoration’ costs. As such, unit rates used for financial valuation may understate the actual costs to renew / replace assets. As Greenfield rates vary from Brownfield rates, financial valuation information is generally not optimal for use in renewal modelling to determine needs based cash flow forecasts. This Policy does not cover Councils renewal requirements, which are reflected in Council’s Cash Flow Statement.

4Framework

This section describes the delivery process for Council Valuations.

In general, valuations will be delivered as indicated in Table 1. In the event that a valuation is highly sensitive (for example, under review by an official enquiry, under legal dispute, subject to compulsory acquisition) the services of an external certified valuer would be sought.

Table 1: Delivery of Council Valuations

5Definitions

Assets:- are resources controlled by the entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. An essential characteristic of an asset is that the entity must have control over the future economic benefits or service such that it is able to enjoy those benefits or services and deny or regulate the access of others to the benefits.

Asset Class:- A group of assets having a similar nature of function in the operations of an entity, and which, for the purposes of disclosure, are shown as a single item without supplementary disclosure. The Asset Class is the material level at which Council will prepare the annual balance sheet for reporting in the Annual Report; for example, the Roads Asset Class might include Asset Categories such as sealed roads, unsealed roads, sealed car parks, unsealed car parks, aerodrome runways and traffic control.

Asset Condition Assessment: The process of continuous or periodic inspection, assessment, measurement and interpretation of resultant data to indicate the condition of a specific asset so as to determine the need for some preventative or remedial action.

Current Replacement Cost (CRC):- The cost the entity would incur to acquire the asset on reporting date. The cost is measured by reference to the lowest cost to replace the existing asset with a technologically modern equivalent new asset with the same economic benefits.

Depreciation:- The systematic allocation of the depreciable amount of an asset over its useful life.

• Annual Depreciation: A systematic charge against revenue made for the purpose of allocating the depreciable amount of a depreciable asset over its useful life. Also known as Depreciation Charge or Depreciation Expense.
• Accumulated Depreciation:- The aggregate, at a given point of time, of the depreciation charges made in respect of a particular depreciable asset or class of depreciable assets since acquisition.

Depreciable Amount:- The cost of the asset less its residual value.

Fair Value:- The amount for which an asset could be exchanged, or liability settled between knowledgeable, willing parties in an arms length transaction.

Impairment:- The amount by which the carrying amount of an asset exceeds it recoverable amount.

Market Value:The estimated amount at which an asset would be exchanged on the date of valuation between knowledgeable, willing parties in an arms length transaction.

Materiality:- The margin of error acceptable and the extent of disclosure required when preparing general purpose financial reports. Information is considered material if its omission, misstatement or non-disclosure has the potential to influence the economic decisions of the users of these reports.

Modern Equivalent Assets: Assets that replicate what is in existence with the most cost-effective asset performing at the same level of service.

Residual Value (RV):- The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Revaluation:- The act of recognising a reassessment of values of non-current assets at a particular date.

Useful Life (UL):- The period over which an asset is expected to be available for use by an entity. Also known as Service Life or Functional Life.

• Remaining Useful Life (RUL):- The time remaining until an asset ceases to provide the required service level or economic usefulness. Age plus remaining useful life is useful life. Also known as Remaining Life or Remaining Economic Life.
• Economic Life:- The period over which an asset is expected to be economically useable by one or more users.

Valuation:- The process of determining the worth of an asset or liability. Different valuation methods may be appropriate in different circumstances.

• Greenfield valuation: Valuation method where the unit valuation rates are based on the cost to acquire / construct the asset in an undeveloped (‘green field’) location.
• Brownfield valuation: Valuation method where the unit valuation rates are based on the cost to replace the asset in its existing developed or built up location.

Written Down Value (WDV):- The amount at which an asset is recognised after deducting any accumulated depreciation and any accumulated impairment losses. Also known as Carrying Amount, Written Down Replacement Cost or Book Value.

6Corporate Systems

Council currently maintains all asset data on Excel Spreadsheets, and undertakes revaluation computations on those spreadsheets. Council is in the process of calling tenders for the implementation of a fully integrated Asset Management System (AMS). It is expected that all road and road related assets will be incorporated into the new AMS by end June 2012. Other asset classes will be incorporated progressively onto the new system over the period Jul 2012 to Jun 2014.

7Specification of Asset Classes

The optimum number of classes of assets is that which provides adequate disclosure information to users of financial statements, balanced with the practicality of reviewing information such as revaluations, which must be undertaken for an entire class of assets.