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Depreciation Why it’s time to think a little differently

Depreciation Why it’s time to think a little differently. SA LGFMG Conference March 2009 David Edgerton FCPA. Outline. Background Prescribed Requirements Comparison of Methods Condition Assessment? Material Misstatement? Implications. Background.

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Depreciation Why it’s time to think a little differently

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  1. DepreciationWhy it’s time to think a little differently SA LGFMG Conference March 2009 David Edgerton FCPA

  2. Outline • Background • Prescribed Requirements • Comparison of Methods • Condition Assessment? • Material Misstatement? • Implications

  3. Background • 2005 Inquiry into Financial Sustainability had concerns with Depreciation • Three papers commission June 2008 • Costing of Assets (Feb 2009) • Depreciation (Feb 2009) • Object to provide a Technical Resource • Consistent with NAMS AIFMGs

  4. Prescribed Requirements 6 "Depreciation“ is the systematic allocation of the depreciable amount of an asset over its useful life. 6 "Depreciable amount“ is the cost of an asset, or other amount substituted for cost, less its residual value. 43 Each part .... shall be depreciated separately. 50 Allocated on a systematic basis over its useful life. 51 The residual value and the useful life of an asset shall be reviewed at least at the end of each annual reporting period 60 The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. 61 The depreciation method applied to an asset shall be reviewed at least at the end of each annual reporting period and...... the method shall be changed to reflect the changed pattern.

  5. Key Issues • High Level • Relationship with future funding requirements • Allowable Methods (AASB 116 & UIG 1030) • Specific Level • The Pattern of Consumption • Useful Life • Residual Value • Depreciable Amount

  6. Allowable Methods • Must comply with all aspects of AASB 116 and UIG 1030 • UIG Interpretation 1030 - • Depreciation is calculated by reference to the “depreciable amount” • Appropriate consideration is given to technical and commercial obsolescence • Maintenance and Capital expenditure are separably identified and accounted for in accordance with AASB 116. • The “renewals annuity” method is not used • Depreciation is calculated separately for each component.

  7. Pattern of Consumption

  8. Useful Life • Be Careful with formulas ! • Useful Life = Age + RUL (Remaining Useful Life)

  9. Residual Value

  10. Depreciable Amount

  11. Putting it all Together

  12. Comparison of Methods

  13. Cost to renew back to 100 = 60 Therefore Residual = 40 Straight-Line v Advanced SLAM (Consumption Based Depreciation) Very High High 100 Adequate 1 Adequate ? 2 3 Barely Adequate 4 60 5 Unacceptable LoS MUST be Closed

  14. Condition Assessment? • Must relate to factors that drive the consumption or • Indicate the level of remaining service potential • Don’t Assume !

  15. Example: Be Careful

  16. Material Misstatement? • Depreciation as % of Total Expenses • What if calculation > 10% ? • Depreciation is • allocation of the Depreciable Amount as an expense • over the useful life • Sustainability Assessments?

  17. Single Asset Comparison • Do you “expense” too much depreciation via the Statement of Financial Performance? • Is this a “true and fair view”?

  18. Portfolio Comparison • SL v Advanced SLAM (Consumption Based Depreciation) • Not just a timing difference

  19. Summary of Prescribed Requirements 6 "Depreciation“ is the systematic allocation of the depreciable amount of an asset over its useful life. 6 "Depreciable amount“ is the cost of an asset, or other amount substituted for cost, less its residual value. 43 Each part .... shall be depreciated separately. 50 Allocated on a systematic basis over its useful life. 51 The residual value and the useful life of an asset shall be reviewed at least at the end of each annual reporting period 60 The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. 61 The depreciation method applied to an asset shall be reviewed at least at the end of each annual reporting period and...... the method shall be changed to reflect the changed pattern.

  20. Implications • Compliance with AASB 116 • Audit Evidence • Asset Management Planning • Material Misstatement • Corporate Governance • Public Accountability

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