3.3 4 Approach to calculating asset value

The approached used to calculate the value of an asset must be repeatable and consistent because it is collected according to accounting rules and is subjected to robust internal controls and a formal audit regime. Applying these principles to the production of data for road assets not only ensures that the data is fit for use for reporting the value of the asset, but also provides high-quality information to support the management of the assets and maximize the value delivered from both past investment and future expenditure.

Within accounting, depreciation is used to provide a measure of the cost of the economic benefits embodied in an asset that have been consumed during the accounting period. Depreciation can be measured in various ways. For commercial undertakings, a key aim should be to reflect changes in market value or income generating potential, but for long-life public sector infrastructure, a more appropriate measure is what needs to be spent to maintain the asset in a stable condition. The principles of calculating asset depreciation and asset deterioration are not always the same. This may lead to differences in future asset investment and future asset value.

An historical cost-based approach to valuing road infrastructure assets may be used as a starting point. However, this approach is not a good basis for dealing with assets that have very long lives. It provides some information about what is being spent on the assets, though even this is not necessarily consistent between organizations, but it says nothing about the effect the expenditure has on the condition of the assets or how much it matches spending needs. For those organizations starting asset management, this may be adopted as a basis for providing some simple financial information.

A more advanced approach is to adopt depreciated replacement cost (DRC), which is a method of valuation that provides the current cost of replacing an asset with its modern equivalent asset, minus deductions for all physical deterioration and impairment. Gross replacement cost (GRC) is based on the cost of constructing an equivalent new asset, and the difference between the gross and depreciated cost is the cost of restoring the asset from its present condition to “as new” condition. Annual depreciation is calculated by identifying all the capital treatments needed to maintain assets or key components over their lifecycles and then spreading the total cost evenly over the number of years in the lifecycle. Calculated in this way, annual depreciation not only represents the annual consumption of service benefits, but also provides a measure of what, on average, needs to be spent year to year to maintain the assets in a steady state.

The methodology used to calculate the asset value depends on the asset under consideration. International Accounting Standard 16 requires that where an asset can be broken down into identifiable components with different useful lives, those components should be accounted for separately. For practical purposes, this means breaking assets down into their key parts at a sensible level of materiality, not trying to separately identify and account for every individual element. Components need to be distinguished in terms of those that have a finite life, at the end of which they will be replaced, and those that, given appropriate capital maintenance (replacement of subcomponents), will last indefinitely.