Asset Accounting Policy

Approval Date: 05 March 2018

Background

In accounting for its assets Council must comply with the requirements of the Australian Accounting Standards and Victorian Government Legislation. Failure to do so may lead to the Victorian Auditor General providing qualified audit opinions, together with the ramifications of legislative non-compliance.

Objectives

The purpose of this policy is to provide a framework that ensures assets are recognised and accounted for in accordance with Australian Accounting Standards and State Government legislation. The Policy also assists Council’s commitment to Financial Sustainability.

Scope

This policy applies to non-current physical assets (i.e. Property, Infrastructure, Plant and Equipment) owned or controlled by Council. It applies to all staff  who are involved in the management, including the acquisition, construction and disposal of council assets, together with all staff or contractors responsible for maintaining and reporting on Council’s assets.

Principles of management

Capitalisation

Initial recognition

In accordance with AASB 116, the cost of an item of property, infrastructure, plant or equipment shall be recognised as an asset if and only if:

  • It is probable that the future economic benefits will flow to the Council; and
  • The asset has a cost or value that can be measured reliably.

Additionally:

  1. An item of property, plant and equipment or infrastructure that qualifies for recognition as an asset shall be measured at its cost.
  2. Not withstanding this where an asset is acquired at no cost, or for a nominal cost ( as is the case with developer and other contributed assets), the cost is its fair value as at the date of acquisition.

Existing assets identified as not being reported in the financial statements for the preceding reporting period (found assets) will be treated in accordance with b) above.

Acquisition/construction of assets

AASB 116 defines the cost of an item of property, plant and equipment as comprising:

  1. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;
  2. Any costs directly attributable to bring the assets to the location and condition necessary for it to be capable of operating in the manner intended by management;
  3. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurred either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

Activities associated with acquisition/creation of new assets are detailed in the table below.

Operating/Recurrent Expenditure

Capital Expenditure

  • Strategic Planning Reports
  • Feasibility Studies
  • Concept Plans
  • Project Scoping
  • Valuation reports
  • Planning approvals
  • Costs of opening a new facility (e.g. catering and promotion).
  • Administration and general overheads
  • Survey & Design
  • Professional fees
  • Site preparation
  • Construction
  • Council direct costs, wages, salaries, plant hire, materials, on-costs, traffic management
  • Supervision
  • Transport, assembly, installation and testing
  • Project Management
  • Future dismantling, removal and site restoration (where applicable)

Materiality (capitalisationthresholds)

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

Assets must have an expected  useful life of greater than one year in order for expenditure to be capitalised. Any expenditure considered to be Capital must also pass a materiality test. LCC has predetermined materiality thresholds which are set out in Appendix A. Capitalisation thresholds are set so as to provide a balance between efficiency of administrative effort whilst ensuring that  Financial Statements are not materially misstated.

The general principle applied to the capitalisation thresholds within this policy, is that if the asset has been replaced in full, then it is generally treated as Capital expenditure. If only part of the asset has been replaced, then the decision to capitalise or expense the costs will be based on the capitalisation threshold, for the relevant Asset Category / Asset Component.

Expenditure may still be capitalised on items that fall below materiality thresholds individually but operate together as a cohesive whole to form a substantial/significant total value.  Example is the computer network.

Classifying capital expenditure

For each capital project, which includes multiple asset Categories or Components, the capital expense for each Asset Category or Asset Component needs to be separated out in order to apply asset recognition rules within this Asset Accounting Policy. This process will be assisted via:

  • The implementation of a robust Project Handover procedure, which details the minimum data required to be entered into the corporate Asset Register for each asset type.
  • The analysis of post-construction contract schedules detailing actual values of assets, and components, and an appropriate allocation of costs.

Additionally for each capital project the expenditure must be able to be classified into whether it is renewal/replacement of an existing asset, upgrade of an existing asset, a new asset being created or expansion of an existing asset network.

System for capturing the asset

All recognised assets must be adequately recorded and detailed in Council’s asset management systems.

Componentisation

Assets are grouped together in the appropriate asset category; they are then further broken up by Financial Class, Financial Sub-class and Component levels where applicable. This is detailed in Appendix  A.

Fair Value Measurement/Revaluation

Measurement ubsequent to initial recognition

Subsequent to the initial recognition of an asset, non-current physical assets, other than plant and equipment are measured at fair value.  Council annually reviews the carrying value of the individual classes of assets within the land and buildings and infrastructure assets categories to ensure each asset materially approximates its fair value. Where the carrying value materially differs from the fair value the class of asset is revalued in accordance with section 4.4.4.

Assets not subject to revaluation

Assets under construction/development or plant and equipment are not subject to revaluation.

Assets under construction/development are measured at  actual cost.

Plant and equipment are recognised at actual cost less accumulated depreciation and any accumulated impairment.

Timing of revaluation

A formal revaluation of land and buildings and infrastructure assets will be undertaken at a minimum of every 5 years and earlier if it is assessed that there has been a material movement in the values for that class of assets (see section 4.4.4). A formal valuation is to be performed by an experienced independent expert. However, in the interim years a recommendation may be made by an experienced council officer.

Annual fair value assessment

Council will annually assess whether the carrying amounts for each Asset Class reflects its fair value at the end of the reporting period.  This assessment may be made using price indexes such as Rawlinsons Australian Construction Handbook together with reference to actual capital construction & materials costs incurred by Council. This assessment will also include assessment as to whether there is any material impairment to Council Assets.

When the annual fair value assessment results in a movement in fair value since the last revaluation (scheduled, interim or managerial) that is:

  • less than 10 per cent – no revaluation of the carrying amount of the asset class is required;
  • greater than 10 per cent and less than 20 per cent (referred to as material) – undertake a managerial revaluation. This involves the entity changing the carrying amounts of the asset class to the assessed fair value based on management (or internal) expertise; and
  • 20 per cent or more (referred to as exceptionally material) – undertake an interim revaluation. An interim revaluation follows the same process as the five year scheduled revaluation.

Revaluation Process

To perform a revaluation the following is required:

  • Assessment of fair value (i.e. market value or replacement cost)
  • Assessment of asset condition
  • Assessment of remaining asset life
  • Affirmation of depreciation method
  • Assessment of any asset impairment

Depreciation

All Property, Infrastructure, Plant & Equipment assets having a limited useful life are systematically depreciated over their useful lives to the Council in a manner which reflects the consumption of the service potential embodied in those assets. The depreciation method applied shall be the straight-line basis. Useful Lives/Depreciation rates shall be reviewed at the end of each financial year as per accounting standard requirements.

Various sub categories/components of asset classes have different estimated useful lives and therefore attract different depreciation rates.

Current useful lives and depreciation methods are included in Appendix A for all asset classes and components.

Residual values

Unless there is evidence to the contrary, all of Council’s depreciable physical assets, other than plant and equipment, have a residual value of zero.

Impairment of assets

At each reporting date an assessment must be made as to whether there is any indication that the carrying amount of an asset may exceed its recoverable amount. Where such an indication is identified, the recoverable amount of the asset must be measured

An impairment usually results in a reduction to the asset’s recoverable amount and can arise from a number of causes, as follows;

  • Decline in the market value of the asset
  • Severe damage to the asset
  • The asset has been rendered obsolete
  • Changes of a technological or economic nature

Fixed asset register

Council will maintain a Fixed Asset register to ensure completeness and accuracy for all fixed assets and provide adequate record keeping.

Disposal of assets

The difference between any net proceeds from disposal (after deducting selling costs) and the remaining carrying value of an asset will be treated as either a gain or loss in the year the asset is retired or disposed of.

Where existing assets are renewed the value of the component of the asset that has been renewed is to be disposed and a new asset created. If the part of the asset disposed of has been retained, its value needs to be recognised in the new asset or separated into a new asset component if its useful life differs materially to the new asset.

The cost of site restoration or remediation incurred after the disposal or retirement of the asset has already been included in the initial cost of the asset and depreciated over its useful life.

Further guidance and controls over the disposal of assets is provided under operational policy and procedures.

Minor assets

Council defines minor assets as those items acquired for a cost below the capitalisation thresholds. The acquisition of minor assets is treated as an expense and items are procured by each team within the requirements of the current procurement policy. Further guidance and controls over the purchase, use and disposal of minor assets is provided under operational policy and procedures.

Accountability and responsibility

Accountability and responsibility for this policy is outlined below.

Council

  • Responsibility to ensure this Policy is consistent with Latrobe City Council Strategic Direction and other Latrobe City Council Policy
  • Responsibility for the decision to approve this Policy by Council Resolution

Chief Executive Officer

  • Overall responsibility for compliance with this policy
  • Overall responsibility for enforcing accountability
  • Overall responsibility for providing resources
  • Overall responsibility for performance monitoring

General Manager

  • Responsibility for compliance with this policy
  • Responsibility for enforcing accountability
  • Responsibility for providing resources
  • Responsibility for performance monitoring

Manager Finance

  • Develop frameworks and procedures in compliance with this policy
  • Enforce responsibilities to achieve compliance with frameworks and procedures
  • Provide appropriate resources for the execution of the frameworks and procedures
  • Coordination of financial valuation process.Reporting fair value in the financial statements in line with accounting standards (including any impairment)
  • Assessment of asset impairments in conjunction with the Manager Infrastructure Development

Manager Infrastructure Development

  • Coordination of revaluation process for infrastructure asset categories.
  • Approval and verification of condition assessments and review of asset lives
  • Assessment of asset impairments in conjunction with the Finance Manager

Coordinator Infrastructure Planning

  • Coordination of condition assessments and data collection
  • Keeping the Infrastructure and building Asset Management System/registers up to date (including asset condition, asset characteristics and other related (non-financial valuation) data)
  • Undertaking annual infrastructure and buildings asset reviews, documenting findings and providing information to finance department
  • Collecting data through the asset handover process on Brownfield rates and reviewing / updating Brownfield unit rates annually

Coordinator Accounting Services

  • Keeping the non infrastructure Asset Management System/registers up to date ( asset characteristics and other related (non-financial valuation) data)
  • Keeping the Financial software System up to date through processing of all asset additions, renewals, disposals, impairments and depreciation – including all data related to financial control of assets into Council’s financial ledgers.
  • Processing annual revaluations for financial reporting purposes including implementing changes to asset remaining useful lives, depreciation and impairments
  • Collecting data and reviewing / updating Greenfield unit rates annually

Employees, contractors and volunteers

Participate where required in the development of frameworks and procedures in compliance with this policy.

Comply with frameworks and procedures developed to achieve compliance with this policy.

Evaluation and review

This policy will be reviewed on request of Council, in the event of significant change in the Executive team, significant changes to legislation applicable to the subject matter of the policy or, in any other case, during each Council term (generally four years).

Definitions

Asset classes: Latrobe City Council’s assets fall under three main categories; Property, plant and equipment and Infrastructure. These are further broken into classes and sub-classes as per Appendix A.

Brownfield Valuation: Valuation method where the revaluation of assets involves only the costs of renewing or replacing an asset it excludes some costs of the initial acquisition/construction of the asset that will never be incurred again.e.g earth & site formation works.

Componentisation: where an asset comprise of separate parts whose lives and associated depreciation charges are material, the components of the asset should be separately identified and depreciated.

Consideration: In the context of this policy, shall be recognised in “monetary terms” e.g. purchase cost.

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

Depreciable amount: the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation methods: those methods used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include:

  • straight-line
  • diminishing balance
  • units of production method

Depreciated replacement cost: the current replacement cost of an asset less accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired future economic benefits of the asset.

Expenditure – Capital:

  • Capital Expansion: expenditure that extends the capacity of an existing asset to provide benefits to new users at the same standard as is provided to existing beneficiaries.
  • Capital New: expenditure that creates a new asset that provides a service that does not currently exist.
  • Capital Renewal: expenditure that restores, rehabilitates or replaces an existing asset which returns the service potential or the life of the asset up to that which it had originally. Partial renewal is expenditure on an asset which increases the service potential of the asset but not up to its original service potential.
  • Capital Upgrade: expenditure which enhances an existing asset to provide a higher level of service or extends the life beyond that which it had originally. This includes expenditure on new assets or that part of the costs that relates to the upgrade, where existing assets are replaced at a higher level of service, that part of the cost that relates to upgrade.

Expenditure – Maintenance: Expenditure on a non-current asset that does not meet capitalisation criteria is considered maintenance expenditure and must be expensed as incurred. In general, maintenance expenditure will allow the asset to realise its expected service levels and estimated life.

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.  If there is no market-based evidence of fair value because of the specialised nature of the item of property, plant and equipment and the item is rarely sold, except as part of a continuing business, an entity may need to estimate fair value using an income or a depreciated replacement cost approach.

Greenfield Valuation: Valuation method where the initial recognition and subsequent revaluation of assets involves all the cost of initial acquisition/construction of the asset.

Impairment loss: the amount by which the carrying amount of an asset exceeds its recoverable amount.

Infrastructure assets: Physical assets that contribute to meeting the needs of organisations or the need for access to major economic and social facilities and services, eg. roads, drainage, footpaths and cycleways. These are typically large, interconnected networks or portfolios of composite assets. The components of these assets may be separately maintained, renewed or replaced individually so that the required level and standard of service from the network of assets is continuously sustained. Generally the components and hence the assets have long lives. They are fixed in place and are often have no separate market value.

Materiality: In relation to financial information, that information which is omitted, misstated or not disclosed has the potential to adversely affect decisions about the allocation of scarce resources made by users of the financial report or the discharge of accountability by the management or governing body of the entity.

Property, plant and equipment: Tangible items that are:

  • held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and
  • Expected to be used during more than one period.

Recoverable amount: the higher of the net selling price of an asset and its value in use.

Repairs and maintenance: costs of day-to-day servicing of property, plant and equipment that are primarily labour and consumables, and may include the cost of small parts.

Residual value: estimated amount that an entity would realise at disposal of an asset, after deducting the estimated costs of disposal, at the end of its useful life.

Revaluation: the assessment of an asset’s fair value and subsequent adjustment to Council’s asset register and balance sheet to ensure the book value is reflects the revalued amount (i.e. its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses).

Useful life: Useful life is considered in the context of time or service:

  • period over which an asset is expected to be available for use by the entity, or
  • number of production or similar units expected to be obtained from the asset by an entity.

Related documents

Asset Management Policy

Asset Management Strategy 2014-2018

Reference resources

AASB13 – Fair Value Measurement

AASB116 – Property, Plant and Equipment

AASB136 – Impairment of Assets

Australian Infrastructure Financial Management Guidelines (IPWEA)

Local Government: Accounting for non-current physical assets under AASB 116

Appendices

Appendix A   - Assets Table