Understanding Depreciation:Where to from here? David Spearritt Director, ORION Consulting Network Pty Ltd LGAAQ Conference November 2006
Basic Concepts • Are roads an asset or liability?? • Dr Depreciation Expense • Cr Provision for Depreciation (liability) • i.e Depreciation is the liability, the road is not • Depreciation is a simple estimate of the consumption of the asset • Depreciation = (Asset Value – Residual) / Economic Life i.e (Guess – Guess) / Guess (for non-market assets)
Depreciation Calculations Educated guess Minus a stab in the dark Divided by a figure plucked out of the air But it’s ok if you pay some a lot to do it for you and provide a document for a green tick
Sustainability • Until QTC say you are unsustainable • (or the Spearritt Report)
Funding Depreciation • Depreciation expense ≠ replacement need • Depreciation Expense = estimated asset consumption • Replacement funding = asset mgt
Impact of assumptions • Worst case (engineering conservatism) • ($14M - $0M)/10yrs = $1.4M pa depreciation • Average • ($12M - $2M)/12yrs = $0.8M pa depreciation • Best Case (good asset management) • ($10M - $4M)/10yrs = $0.6M pa depreciation • The approach for estimating individual costs & lives should not be aggregated
Road pavement • Pavement depreciation is not: • Deterioration from neglecting the seal • Damage – eg from over-weight trucks • Bad construction • (These are really impairment) • Technology impacts • Pavement stabilisation • Geo-technical advances • Crack sealing • Good asset management • These can repair pavement damage/extend asset life
Thoughts • Straight line depreciation makes no sense when deterioration depends on so many factors • Why not assume good asset management? • Why not do good asset management?
Other Issues • Funding the gap • Asset inflation
Conclusions • Challenge the assumptions • Know the condition of your assets • A stitch in time saves nine • base your assumptions on good asset mgt • Eg. Why depreciate road pavement?
Further Info David Spearritt 0421 046 446 email@example.com www.orionco.net