Methods

In the world of infrastructure accounting, the key methods of depreciation are:

• Straight-line depreciation
• Condition based depreciation
• Renewal annuity depreciation
• Accelerated (tax) depreciation.

Straight-line Depreciation

Although straight-line depreciation in a replacement cost accounting environment gives a far more accurate assessment of asset consumption than our previous historical base systems, in the case of infrastructure assets it does tend to exaggerate the true depreciation in the early lives of these infrastructure assets and underestimate it in later years.

Condition-Based Depreciation

By looking at the actual decay of the asset and the reduction in value caused by this decay, we can develop a condition based depreciation rate by the development of decay curves. This gives us a more accurate estimation of the true asset consumption however it is difficult to use and account for from a pure accountancy perspective, however it can be used for intervention decision making (ORDM).

Renewal Annuity Depreciation

Renewal accounting and the adoption of an average annual annuity of the cash flow required to sustain the asset at acceptable levels of service or condition is the most logical method for assessing consumption of these infrastructure assets.

However, we also need to be able to report on the overall condition of our asset stocks. From this perspective a book value is derived from accurate decay curves to give a better representation of current asset condition.

Accelerated (Tax) Depreciation

Accelerated depreciation is an artificial incentive used by taxing authorities to encourage investment in capital assets in private sector organizations. This technique allows a much higher expensing of depreciation in early years than would be recognized by other methods. Since depreciation is a non-cash expense, this incentive frees up cash in the early years of the asset’s life for use by the private sector organization.