The indexation of assets recorded at Fair Value

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Hopefully Code Update 17 can provide some guidance on the issue of Re-Valuations & Indexation, now that Councils have 4 Asset Classes in their balance sheet on a Fair Value basis.

In particular, AASB 116 does not require the actual booking of an Asset Classes Price Indexation - so why complicate things (incl. Asset Registers & Depreciation etc) by booking the Indexation escalations.

As well, the Code Guidelines indicated that Councils were required to book the Indexation of prices relating to Water & Sewer Assets by authority of the DEUS Best Practice Guide - but our reading of the Best Practice Guide interpreted it as requiring Councils to DISLCOSE the indexed asset values - but not to book them!!

We have listed below our review of the Indexation question below that we provided to Subscribers in the April 2008 edition of LG "Debits & Credits".

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NSW Councils now have 5 Asset Classes valued at either Fair Value or Deemed Fair Value;

At Fair Value:
- Water Infrastructure
- Sewer Infrastructure
- Buildings (both specialised & non specialised)
- Operational Land

At Deemed Fair Value
- Plant & Equipment


The question for the 08/09 YE (and beyond) is what to do with these asset classes from a revaluation point of view:

- on what regularity should Councils revalue these asset,
- should they be indexed (with such movements booked) & if so should these be common to the Industry,
- or can Councils retain the existing Fair valuations in this years accounts?

What the Standards say…

AASB 116 – Property, Plant & Equipment deals with Fair Value and in particular states (as regards revaluations) that:

“Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date”, paragraph 31

“The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required”, paragraph 34

Furthermore, AASB 116 on its initial issue included some Australian Guidance which stated that “An entity assesses at each reporting date whether there is any indication that a revalued asset’s carrying amount may differ materially from that which would be determined if the asset were revalued at reporting date” – paragraph G6

One suggested method of assessment was to determine whether “a price index relevant to the asset” had undergone a material change – paragraph G7 (c).

In accordance with AASB 1031 – Materiality, “an amount that is >= 10% of the appropriate base amount may be presumed to be material” - paragraph 15a, whilst “an amount that is <= 5% of the appropriate base is may be presumed not to be material” - paragraph 15b.

AASB 1031 goes on to state that the “appropriate base” for determination of the materiality relating to balance sheet items “the appropriate asset…class total” – paragraph 13 (a) (ii).

Our conclusions from the above is that in relation to ALL asset classes (other than Water & Sewer) that have already been fair valued in prior period YE Reports:

(i) Councils should adopt price indexes relevant to each Asset Class (if Industry ones are not advocated),

(ii) Councils should determine as at 30/6 each year whether the price index applicable to each asset class has increased by more than 10% (from the date of the last Fair Value) – a so called “desk top review”,

(iii) Where the index has increased by more than 10%, then in our opinion this would be a material change and Councils would be required to perform (& book) a full revaluation,

(iv) Where the index has NOT increased by more than 10%, then in our opinion Councils are NOT required to perform (& book) a full revaluation,

(v) Further, where the index has not increased by more than 10%, we believe there is no requirement under AASB 116 to actually adjust the fair values in the G/L to reflect the index movement. NB. This is not to say that you can’t book the index movements each year, but that such booking of indexation movements is not mandatory!


Water & Sewer Assets:

In relation to Water & Sewer Infrastructures Assets, the NSW DLG specifically commented as follows in Circular 06-75: Valuation of Assets at Fair Value;

“Councils are also reminded that water supply and sewerage asset values are to be annually indexed between revaluations in accordance with page 1 of the NSW Reference Rates Manual for Valuation of Water Supply, Sewerage and Stormwater Assets, 2003. National indexing valuations are being developed currently and once completed, indexing for other asset categories will be aligned.”

While on the face of it, the above statement would tend to suggest that Water & Sewer Index movements should be booked to the G/L & reported in the Balance Sheet, the publication in question does not specifically state or require Council do actually “book” the annually indexed movements to Council’s Balance Sheet!

As a further back up to this view; - the current Code 16 Guidelines (worked examples) have not revalued the Water & Sewer Infrastructure line items within Note 9a for 07/08!!

Special Schedules 4 & 6, being the Water & Sewer Balance Sheets still require disclosure of the Current Replacement Cost, Accumulated Current Cost Depreciation and Written Down Current Costs at the bottom of the page (but not as part of the Balance Sheet. This dislcosure would seem irrelevant if Council is required to book the Indexations to the actual Balance Sheet.

Accordingly, we would advocate not booking any price index movements relating to Water & Sewer (but instead only disclose them below the Balance Sheet at SS’s 4 & 6!

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Well, Code Update 17 was issued on 3rd July and we can happily report that the indexation of I,PP&E was covered & clarrified for NSW Councils.

Only Water & Sewer Assets need to be Indexed on an annual basis with such indexation being booked to both (i) GBV & (ii) Accumulated Depreciation.

All other assets that are currently in Councils books under the Valuation methodology including:

a. Plant & Equipment,
b. Buildings - Specialized & Non Specialized &
c. Operating Land

do not require any annual adjustments to their carrying values by way of indexation.

Instead, these assets will be revalued every 5 years providing that the assets carrying value is not materially different to it's actual Fair Value at teh end of every reporting year!!

This means of ocurse that Councils should keep an eye on an appropriate index for these other asset classes (& how much it's cumulative increase is), but until it increases by 10% or more since the last revaluation of an asset class, then there is no need to book any indexations!! Phew.

The actual wording can be found on page A-31 of the Code:

"Water and sewerage network assets are indexed annually between full revaluations in accordance with the latest indices provided in the DWE Rates Reference Manual.

For all other assets, Council assesses at each reporting date whether there is any indication that a revalued asset’s carrying amount may differ materially from that which would be determined if the asset were revalued at the reporting date.

If any such indication exists, Council determines the asset’s fair value and revalues the asset to that amount. Full revaluations are undertaken for all assets on a 5 year cycle."