Transition from Straight Line to Condition Based Depreciation
Condition Based Depreciation (CBD) recognizes that depreciation of an asset is a decline in value that is best measured by the cost of restoring it to its "almost" new condition.
CBD has been recommended as the most appropriate method for infrastructure assets since they are not so much replaced but renewed.
Interim Approach to CBD
Straight-line depreciation is presently performed by most organizations by use of either PC based or mainframe software systems.
These systems usually offer the facility to perform depreciation by:
- Straight line
- Reducing balance
- Constant value.
The typical shape of the curve of depreciation over asset life for these depreciation methods is shown in the figure below:
One of the aims of good infrastructure asset management is to identify the true value of an asset at any point in its life. To achieve this in an efficient and effective way, depreciation of an asset should aim at matching the actual deterioration or decay of the asset over its life.
Some assets will decay uniformly over their life, so straight-line depreciation will be the most appropriate method to use for these assets. In the majority of cases however, long-life, passive assets will have a deterioration that starts slowly, then will accelerate over time (i.e. the gradient of the line will become steeper the older the asset becomes).
A typical example of this is a road pavement whose condition will remain virtually unchanged for many years after construction; however, when signs of deterioration begin to appear, such as potholing and cracking. These cause a compounding effect and accelerate the decay, allowing water to penetrate the pavement, and compounded by vehicles impacting on the pothole, result in disintegration of the surface around the pothole.
To properly address the true deterioration of assets, a software system that records and predicts the actual condition of an asset over time is required. Typically these systems allow the user to define or develop the shape of the deterioration curve. As the user obtains more information about his or her assets, the user can better match the curve's shape to the actual decay of their assets.
In the interim however, organizations can modify their current financial based software systems to mathematically mimic condition-based depreciation in a relatively quick and simple way. The attached diagram shows the possible shape of the depreciation curve by following this technique.
Most financial systems will presently record the year purchased and the effective life of assets to allow some form of depreciation. Using these two figures we can generate condition based curves.
Life to Date (n) Effective Life | x | Current Replacement Value | = | Total Depreciation to Date | = | Current Years Depreciation |
The above equation will produce a depreciation curve that bows outwards and hence increases depreciation over time.
Raising the (Life to Date/Effective Life) portion to a higher power will produce a parabolic curve of steeper gradient.
In conclusion, this method allows an approximation of condition-based depreciation where the client is not in a position to accurately plot the true decay of the asset (typical of most agencies). With appropriate recording of information over time, the user can “tweak” the curves to suit their assets.
This is an appropriate interim method that could be used until full decay curves or condition based ratings are developed.
The following is suggested:
- Major passive civil assets n = 4
- Architectural passive assets n = 3
- Mechanical electrical assets n = 2