Asset Accounting and Economics
This element looks at how the organization uses Asset Economics to continually determine the real cost of owning and operating assets, and in particular long term costs and future liabilities.
Valuations
The method of valuation used by the organization, its appropriateness and the accuracy with which the valuations have been developed. It also assesses the methods used to update this information.
Best appropriate practice includes:
To be able to value assets at all levels of the hierarchical data/system structure.
To be able to value assets and to update total value, unit rates and / or effective residual lives effectively.
Depreciation and Effective Lives
The methodology used to establish the effective lives of individual assets and, if necessary, their components, and the appropriateness of the depreciation methods used.
Operational Costs
The quality with which the organization can assess the operational costs of individual facilities and assets and the break up of these operational costs in terms of labor, energy, chemicals, plant etc.
Best appropriate practice includes:
To be able to understand the operational costs of individual facilities in terms of the break out of costs, together with special costing for smaller plant or equipment that may incur high power costs, etc.
Maintenance Costs
How the organization assesses its maintenance costs (planned and unplanned), including a break up of these costs into labor, materials, plant and equipment etc. It also looks at the records for and methods of allocating indirect business costs.
Best appropriate practice includes:
To be able to identify the maintenance cost for all levels of the hierarchy down to the Maintenance Management Item (MMI).
Renewal Liabilities
The processes used to identify future CIP renewal liabilities, including backlog maintenance. This element also assesses the way the business reports on its risk exposure.
Best appropriate practice includes:
To be able to identify the future renewal program and the associated residual risk exposures.
Residual Risk Assessment
The process used to understand and report the residual risk carried by the organization as the asset systems age.
Best appropriate practice includes:
Residual Risk exposure is understood on all asset sub system elements and is monitored for change.
Historical Cost Data
How the organization identifies historical cost data for individual assets.
Best appropriate practice includes:
Historical Cost Data is stored (archived) in suitable data warehouses.
Case Studies Australia
Historic Costs
For over 70 years the agency had kept meticulous historic cost records. Their fixed financial asset register showed that the wastewater system had cost over $ 490M. They had even given all assets an estimated effective life and had depreciated their assets.
In 1998 they had over $120 M in reserves. They were justifiably proud of their efforts and had been able to keep rates very low.
The assets had been built in open fields that were now fully built out metropolitan areas.
They then completed an asset revaluation and found that the asset portfolio now had a replacement value of $2.4 billion and their future renewals amounted to over $43M per year.
The reserves would be gone in 3 years and ratepayers would have to generate the necessary funds.
Understanding the replacement value of your assets is vital to any understanding of the true cost of infrastructure service delivery.
Knowledge of Assets Reduces Life Cycle Costs
A State Transport Authority realized that its policy of replacing buses every 12 years had been based on rules of thumb that had never been rigorously analyzed.
When they did so with a study that looked at the full life-cycle costs of buses over 25 year period, it showed that the overall cost of making a bus available for traffic operation was substantially reduced by holding buses for up to 20 and 21 years.
Taking into account customer comfort, vehicle image and driver morale, the STA chose a replacement period of between 15 and 18 years.
The changed policy deferred the ‘due immediately’ bus purchases for almost four years, representing a one-off saving of between $10m and $15m in interest payments and ongoing savings of over $3m per year on the bus fleet.
Overall it has reduced the net present cost of operating the bus fleet over a period of 22 years by almost 50%.
The Case of the Disappearing Surplus
The Roseworthy Agricultural College had spent the last three committee meetings animatedly discussing how they would spend their surplus. When the basis of the accounts was switched from cash to accrual and they took accrued costs into account, they realized that there was no surplus to spend! They had consumed it already.