Residual Value in Asset Management

1. Residual Value

2. Concept of Residual Value • Similar to a Salvage Value Concept. • Most infrastructure will have residual value. • Reason for applying residual and method of residuality is a function of Asset Management and Renewal Practice

3. Cost to renew back to original = 60K Therefore Residual = 40k or 40% Snapshot View • AASB 116 • Depreciation reflects pattern of Consumption. • Must only depreciate depreciable amount. $100,000 $60,000 1 2 3 4 5

4. What is the Residual? –Million $ Question • Residual depends on renewal practice. • When we replace the component: • Do we renew it back to original LoS? • Do we renew it to a ‘just acceptable’ threshold? • Has the new component got the same expected life as original, less life or more life?

5. Computing Residual isn’t Rocket Science Let us look at some scenarios. Reezeedool Council - Pavement Component Baseline Case: Typical Structure - 300mm pavement base and 30mm Asphalt. Typical Renewal point: • pavement defect rating 6 and/or • crocodile cracking and ravelling at condition 5 and beyond. Optimal Treatment at this point: • Mill 100mm off the top and mix. • Stabilise. • Roll, Compact and Resurface.

6. Computing Residual isn’t Rocket Science

7. Residual Errors – Common ones • Computing residuals in isolation to AM practice. • Assumption that there is no residual. • Assumption that we can look for a state-wide figure to apply for residual. • Assumption that residual is depreciable. • Assumption that residual is an accounting figure, unrelated to asset management.

8. Suggestions • Understand your context. • Look in the AM plan – what is our standard practice? • Do I have pockets of practice that are statistically valid samples (CBD, outer rural, inner rural). • If my our practice of renewal is fairly consistent, one residual figure across the lot makes sense. • Do not use a sledge hammer to kill a fly !