Accounting for Infrastructure Assets - Facts and Fiction
The purpose of this document is to outline common misconceptions about the application of
GRAP 17 Property, Plant and Equipment, GRAP 21 Impairment of Non-cash-generating
Assets and GRAP 26 Impairment of Cash-generating Assets to infrastructure assets. This
document has been prepared by the Secretariat and not the Board and has no authority.
1.
To what level should assets be separated into their component parts?
GRAP 17.53 requires the following: “Each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item shall be
depreciated separately”. [own emphasis added]
The objective of this requirement in GRAP 17 is to (a) provide a more accurate cost of
depreciation in the financial statements and (b) to facilitate derecognition of parts that
might need to be replaced (although replacement is still possible even if parts of
assets need to be replaced and they were not historically identified as separate
components of an asset).
The Standard only requires the separate identification of significant parts of an asset.
This does not require an entity to break assets down into all their components (for
example, nuts and bolts on a substation) for accounting purposes. If entities choose to
manage assets to that level for management purposes then that is a management
decision. This level of detail is not necessary for financial reporting purposes.
2.
Must an entity revalue its infrastructure assets at depreciated replacement cost
at every reporting date?
No. GRAP 17 allows an entity a choice of measurement after initial recognition. An
entity can measure infrastructure assets using either the cost or revaluation model.
The cost model measures assets at their initial cost less accumulated depreciation and
accumulated impairment losses. The revaluation model measures assets at their fair
value, or replacement cost where the assets are specialised in nature, less
accumulated depreciation and accumulated impairment losses. If there is an indication
that an asset is impaired, an entity may need to calculate a depreciated replacement
cost in determining the recoverable service amount1, but only if there is an indication
that an asset is impaired and such a calculation is necessary. See question 5 below.
3.
Must an entity apply the depreciation rates/useful lives in the National Treasury
Guide2?
No. The depreciation rates/useful lives indicated in the National Treasury Guideline are
merely provided as guidance to entities. Management, which may include an expert
such as an engineer associated with an entity, may have different views about the
rates of depreciation or useful lives of assets, based on their knowledge of the
1
Recoverable service amount is determined as the higher of fair value less costs to sell and value in use. If the
assets are non-cash generating, then value in use can be calculated using depreciated replacement cost,
restoration cost or by applying a service units approach.
2
Local Government Capital Asset Management Guideline, Chapter 5
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environment within which the assets are used. Where better information is available
about the depreciation rates/useful lives based on management’s assessment, that
information is more appropriate to use in preparing the financial statements. The Guide
does however require that preparers engage with the National Treasury before
applying different rates.
4.
Are all assets of a public sector entity non-cash-generating?
No. An entity should assess whether different types of assets are cash or non-cash
generating based on how they are managed by the entity. For example, an entity may
hold a variety of assets and use these assets to undertake a variety of activities. An
entity should assess whether it uses assets in particular activities to generate a
commercial return. This assessment should be made based on assets held and the
activities undertaken, and not at an overall entity level. As a result, it may be possible
for a single entity to have both cash and non-cash-generating assets.
A commercial return means that the return charged by the entity is commensurate with
the risk associated with holding the asset and the asset is intended to generate
positive cash inflows. Note: An asset can generate positive cash inflows and not be a
cash generating asset and vice versa.
5.
Must an entity calculate the recoverable amount/service amount at each
reporting date?
No. GRAP 21 and GRAP 26 require that an entity only considers, at every reporting
date, whether there is any indication that an asset is impaired. The Standards do not
require an entity to undertake detailed impairment calculations at every reporting date,
i.e. an entity does not need to determine a recoverable amount or a recoverable
service amount based on the higher of fair value less costs to sell and value in use –
which may include depreciated replacement cost, reproduction cost or a service units
approach - at every reporting date, unless there is an indication that the asset is
impaired. Indicators of when an asset might be impaired are listed in paragraphs .21
and .22 of GRAP 21 and 26 respectively. These indicators are examples only and an
entity should identify additional indicators based on its own activities.
In assessing whether there is any indication that an asset might be impaired, an entity
should develop procedures that use information available internally to manage assets.
For example, an entity may have management information available about the
expected3 and actual volume of water supplied over its water network for the year.
Where the volume of water supplied is in line with the expected supply then this may
be sufficient to indicate that the asset is not impaired and that no detailed impairment
testing is required (i.e. no calculation of recoverable [service] amount). Other types of
information that may be useful in considering whether there is any indication that an
asset is impaired, includes information about the use of assets over the reporting
period, reports on the expected and actual performance of assets, maintenance
schedules, interruptions in supply of services, customer complaints etc.
3
Note: This example assumes that the expected capacity of the asset is at an optimised level, i.e. it
does not include capacity that is not necessary for the entity to meet its objectives.
2
6.
Are damaged assets always impaired?
No. Damaged assets are not necessarily always impaired. An asset is impaired if there
is a loss in future economic benefits or service potential. Even though an asset might
be damaged, it might not necessarily mean that there is a loss in service potential or
future economic benefits.
Parts of an asset could be repaired or replaced, resulting in the same level of
economic benefits or service potential being maintained. For example, if the roof of a
pump station has been damaged by severe storms, the roof can be replaced without
the pump station suffering any loss of future economic benefits or service potential.
7.
When an entity calculates depreciated replacement cost to test for impairment,
does this represent the value of the current asset or a new asset?
The objective of testing assets for impairment is to assess whether the future
economic benefits or service potential of the assets initially acquired by an entity have
declined. Consequently, depreciated replacement cost is determined based on the
value of the assets held by the entity. Depreciated replacement cost is not based on
the value that an entity would pay to replace the asset with a new one.
8.
Does depreciated replacement cost include excess capacity or overdesigned
features?
No. GRAP 21.42 and .43 note the following:
.42
.43
The replacement cost and reproduction cost of an asset are determined on an
“optimised” basis. The rationale is that the entity would not replace or
reproduce the asset with a like asset if the asset to be replaced or reproduced
is an overdesigned or overcapacity asset. Overdesigned assets contain
features which are unnecessary for the goods or services the asset provides.
Overcapacity assets are assets that have a greater capacity than is
necessary to meet the demand for goods or services the asset provides. The
determination of the replacement cost or reproduction cost of an asset on an
optimised basis thus reflects the service potential required of the asset.
In certain cases, standby or surplus capacity is held for safety or other
reasons. This arises from the need to ensure that adequate service capacity
is available in the particular circumstances of the entity. For example, the fire
department needs to have fire engines on standby to deliver services in
emergencies. Such surplus or standby capacity is part of the required service
potential of the asset. [own emphasis added]
From reading these paragraphs, it is clear that, when an entity calculates depreciated
replacement cost, it excludes any excess capacity or overdesigned features from the
value. Assessing what is regarded as excess capacity or overdesigned features may
be a matter of judgement as consideration would need to be given to emergency
capacity, possible expansion etc.
9.
What is the link between asset management and the asset-related Standards of
GRAP?
Asset management deals with the process of managing assets through their lifecycle
and includes their purchase, maintenance, use, disposal and the management of risks.
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These actions are decisions aimed at the internal management of assets to ensure
that entities meet their objectives.
The Standards of GRAP merely report on certain actions, or the effects of certain
actions taken by management, in the financial statements. For example, decisions
about how assets are used impact on how assets are classified in the statement of
financial position (e.g. properties could be classified as investment property, property,
plant and equipment or inventories); and decisions to delay maintenance of assets
may decrease their useful life resulting in more depreciation being charged during a
particular period.
Accounting standards merely reflect what has happened historically, or what impact
historical events and decisions have had on an entity’s financial performance and
financial position. Accounting standards in themselves do not drive management
decisions; instead it is an entity’s strategy, decisions, policies and processes that drive
decision-making.
10.
Can the statement of financial performance be used to set tariffs charged by an
entity for goods and services provided?
Yes and no. The expenses reflected in the statement of financial performance can be
used to inform the tariffs charged by entities. It is however unlikely that the complete
cost of providing goods and services reflected in the statement of financial
performance will be used in calculating the tariffs charged by entities. The tariffs
charged are often driven by, for example, specific policy decisions (e.g. providing a
level of free basic services, or providing services to indigent consumers), the type of
service provided, and what management’s objectives are in providing that service (e.g.
to generate a profit, or to provide services to the community).
Concepts such as intergenerational equity are also often considered in determining
tariffs. These concepts are not used in accounting for revenues and expenses in the
statement of financial performance.
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