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Understanding Depreciation: Where to from here?

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)

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Understanding Depreciation: Where to from here?

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  1. Understanding Depreciation:Where to from here? David Spearritt Director, ORION Consulting Network Pty Ltd LGAAQ Conference November 2006

  2. 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)

  3. 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

  4. Sustainability • Until QTC say you are unsustainable • (or the Spearritt Report)

  5. Funding Depreciation • Depreciation expense ≠ replacement need • Depreciation Expense = estimated asset consumption • Replacement funding = asset mgt

  6. Assumptions

  7. 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

  8. 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

  9. 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?

  10. Other Issues • Funding the gap • Asset inflation

  11. 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?

  12. Further Info David Spearritt 0421 046 446 david@orionco.net www.orionco.net

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