Maintenance Accounting Framework

Maintenance Accounting Framework for immovable assets NATIONAL IMMOVABLE ASSET MAINTENANCE MANAGEMENT

Table of Contents

PART A: PURPOSE, DEFINITIONS AND SCOPE 1 1. PURPOSE OF THIS FRAMEWORK 2 2. TERMS, DEFINITIONS AND ACRONYMS 2 2.1 Terms and definitions 2 2.2 Acronyms 8 3. SCOPE 8 3.1 Functional scope 8 3.2 Application of this Maintenance Accounting Framework 9 3.3 Normative references 9 3.4 Limitations of this maintenance accounting framework 10 4. BUILDING BLOCKS FOR THE MAINTENANCE ACCOUNTING FRAMEWORK 10 4.1 Standard Chart of Accounts (SCOA) 10 4.2 Asset hierarchy 11 4.3 Fair value basis of measurement of assets 12 4.4 Depreciated replacement cost methodology 12 4.5 Costing of maintenance activities 14 PART B: MAINTENANCE ACCOUNTING PROCESSES 16 5. ASSET RECOGNITION 17 6. ASSET MEASUREMENT 17 6.1 Initial measurement 17 6.2 Subsequent measurement 18 7. TREATMENT SUBSEQUENT TO INITIAL RECOGNITION 19 7.1 Treatment of expenditure subsequent to initial recognition 19 7.2 Depreciation 21 7.3 Impairment testing, measurement and recording 23 7.4 Reversal of impairment transactions 25 8. PLANNING AND BUDGETING FOR MAINTENANCE AND RENEWAL 26 8.1 Costing maintenance activities: key principles 26 8.2 Maintenance prioritisation and deferred maintenance 26 9. TRANSACTING AND RECORDING OF MAINTENANCE AND RENEWAL EXPENDITURES 27 9.1 Supply chain management 27 9.2 SCOA principles and recording of transactions 27 10. REPORTING ON ASSET CARE TRANSACTIONS AND OTHER MATERIAL EVENTS 27 10.1 Reporting for purposes of the Annual Financial Statements 27 10.2 Monitoring and evaluation of asset care at boardroom level 28 ANNEXURES 30 Annexure A: An example of determining the cost of immovable assets 30 Annexure B: An example of a shadow valuation 31 Annexure C: Examples of various depreciation methods 34 Annexure D: Examples of disclosures in the Annual Financial Statements 35 Statements of Financial Position and Financial Performance Notes to the Annual Financial Statements Annexure E: Examples of ratio analysis for monitoring and evaluation 39 Asset consumption ratio: Asset sustainability ratio Asset renewal funding ratio % of PPE and intangible assets impaired Repairs and maintenance as a percentage of current replacement cost Annexure F: SCOA examples 41 Annexure G: Illustrative examples of asset accounting transactions 43 Capitalisation Recognition Impairment De-recognition of an asset Revaluation of an asset

PART A: PURPOSE, DEFINITIONS AND SCOPE 1

1. PURPOSE OF THIS FRAMEWORK This National Immovable Asset Maintenance Management Accounting Framework compliments the National Immovable Maintenance Management Standard. The principles of this framework are applicable to the accounting treatment and financial practices relating to the maintenance and renewal of all forms of public sector immovable assets. Notwithstanding this, the specific application of the framework is limited to assets under the custodianship of national and provincial government. The overarching objective of this accounting framework is the establishment and effective functioning of a system of accounting that fairly presents the value, level of consumption, and current and future asset care needs of immovable asset portfolios. Specific objectives of this Framework include: a. Describing of the scope of the accounting framework as it applies to immovable assets; b. The adoption of a suitable measurement basis for each accounting group of assets that fairly reflects the value vested in immovable assets; d. Determining future asset renewal needs, and to adequately provide for future renewal funding needs through depreciation charges; and e. Ensuring adherence to established principles of accounting with respect to the recognition of assets, measurement and subsequent treatment of expenditure. 2. TERMS, DEFINITIONS AND ACRONYMS 2.1 Terms and definitions Terms employed in this Standard have the meanings as defined below: TERM Asset Asset hierarchy (IIMM) Asset life (ISO 55000) Asset management (LGIAMG) Asset Management Information System (LGIAMG) Asset management plan Asset management objectives (IIMM) Asset management practices (IIMM) Asset management strategy (IIMM) DESCRIPTION A resource owned or controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. A framework for segmenting an asset base into appropriate classifications. The asset hierarchy can be based on asset function; asset type or a combination of the two. Period from asset creation to asset end-of-life. The process of decision-making, planning and control over the acquisition, use, safeguarding and disposal of assets to maximise their service delivery potential and benefits, and to minimise their related risks and costs over their entire life. A combination of processes, data and software applied to provide outputs required for effective asset management. A documented plan developed for the management of one or a portfolio of assets that combines multi-disciplinary management techniques (including technical and financial) over the lifecycle of the asset in the most cost -effective manner to provide a specified level of service. The plan specifies approaches, programmes, projects, activities, resources, responsibilities and timeframes across the lifecycle of the asset(s) planned for, or over a timeframe appropriate for robust lifecycle planning. A significant component of the plan is a long-term cash flow projection. Specific outcomes required from the implementation of the asset management framework. The asset management processes and techniques that an organisation undertakes, such as demand forecasting, developing and monitoring levels of service and risk management. The high level long-term approach to asset management including asset management action plans and objectives for managing the assets. 2

TERM Asset management system (ISO 55000) Asset register (LGIAMG) Asset system (ISO 55000) Asset type (ISO 55000) Audit (ISO 55000) Capacity (IIMM) Capital (financial concept of) Capital (physical concept thereof) Capital expenditure Carrying amount (GRAP) Capital upgrading Cash-generating assets (GRAP) Change in accounting estimate (GRAP) Class of assets (GRAP) Component (IIMM) Competence (ISO 55000) Condition (IIMM) Condition assessment or condition monitoring (IIMM) DESCRIPTION A management system for whose function is to establish the asset management policy and asset management objectives, as well as processes and organisational arrangements inclusive of structure, roles and responsibilities to achieve asset management objectives. A record of asset information considered worthy of separate identification for both asset accounting and management purposes including inventory, historical, financial, condition and construction, technical and financial information about each. Note: the unit of account in an asset register is a component (see definition of a component). Set of assets that interact or are interrelated. Grouping of assets having common characteristics that distinguish those assets as a group or class. Systematic, independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which the audit criteria are fulfilled. Maximum output that can be produced or delivered using existing network or infrastructure. Net assets of an organisation. The productive capacity of an organisation as measured in depreciated replacement cost. Expenditure used to create new assets, increase the capacity of existing assets beyond their original design capacity or service potential, or to returns the service potential of the asset or expected useful life of the asset to that which it had originally. CAPEX increases the value of capital asset stock. The amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. Enhances the service potential of the asset or the economic benefits that can be obtained from use of the asset and may also increase the life of the asset beyond that initially expected. Assets held with the primary objective of generating a commercial return. Is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Is a grouping of assets of a similar nature or function in an entity s operations that is shown as a single item for the purpose of disclosure in the financial statements. A component (Note 1) is a specific part of a complex item (Note 2) that has independent physical or functional identity and specific attributes such as different life expectancy, maintenance and renewal requirements and regimes, risk or criticality. Note 1: A component is separately recognised and measured (valued) in the organisation s asset register as an unique asset record, in accordance with the requirements of GRAP 17 to componentise assets. Note 2: A complex item is one that can be disaggregated into significant components. Infrastructure and buildings are considered complex items. The ability to apply knowledge and skills to achieve intended results. The physical state of the asset. The inspection, assessment, measurement and interpretation of the resultant data, to indicate the condition of a specific component so as to determine the need for some preventive or remedial action. 3

TERM Conformity (ISO 55 000) Continual improvement (ISO 55 000) Corrective maintenance Critical assets (IIMM) Current replacement cost (IIMM) Decommissioning (IIMM) Deferred Maintenance Depreciable amount (GRAP) Depreciated replacement cost (IIMM) Depreciation (GRAP) Disposal (IIMM) Economic life (IIMM) Exchange transactions (GRAP) Facility (IIMM) Failure Modes, Effects and Criticality Analysis (IIMM) Fair value (GRAP) Incident (ISO 55 000) Life (LGIAMG) Impairment loss (GRAP) Impairment loss of a non-cashgenerating asset (GRAP) DESCRIPTION Fulfilment of a requirement. Recurring activity to enhance performance. Maintenance carried out after a failure has occurred and intended to restore an item to a state in which it can perform its required function. Corrective maintenance can be planned or unplanned. Refer to Appendix A. Those assets that are likely to result in a more significant financial, environmental and social cost in terms of impact on organisational objectives and service delivery. The cost the entity would incur to acquire the asset on the reporting date. The cost is measured by reference to the lowest cost at which the gross future economic benefits could be obtained in the normal course of business or the minimum it would cost, to replace the existing asset with a new modern equivalent asset (not a second hand one) with the same economic benefits (gross service potential) allowing for any differences in the quantity and quality of output and in operating costs. Actions required to take an asset out of service. The portion of planned maintenance work necessary to maintain the service potential of an asset that has not been undertaken in the period in which such work was scheduled to be undertaken. The cost of an asset, or other amount substituted for cost, less its residual value. The replacement cost of an asset less accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired economic benefits of the asset. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Actions necessary to decommission and dispose of assets that are no longer required. The period from the acquisition of the asset to the time when the asset, while physically able to provide a service, ceases to be the lowest cost alternative to satisfy a particular level of service. The economic life is at the maximum when equal to the physical life, however obsolescence will often ensure that the economic life is less than the physical life. Transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange. A complex comprising many assets (e.g. a hospital, water treatment plant, recreation complex, etc.) which represents a single management unit for financial, operational, maintenance or other purposes. A systematic, logical risk-based maintenance approach aimed at maximising the reliability of plant and equipment assets. The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Unplanned event or occurrence resulting in damage or other loss. A measure of the anticipated life of an asset or component; such as time, number of cycles, distance intervals etc. An impairment loss of a cash-generating asset is the amount by which the carrying amount of an asset exceeds its recoverable amount. Is the amount by which the carrying amount of an asset exceeds its recoverable service amount. 4

TERM Infrastructure assets (LGIAMG) Incident (ISO 55000) Inventories (GRAP) Level of service (IIMM) Life (of an asset) Lifecycle (IIMM) Lifecycle asset management Lifecycle cost (IIMM) Maintenance Maintenance of capital Maintenance expenditure Maintenance plan (LGIAMG) Maintenance objectives (IIMM) Maintenance standards (LGIAMG) Maintenance strategy (IIMM) Material (GRAP) DESCRIPTION Stationary systems forming a network and serving whole communities, where the system as a whole is intended to be maintained indefinitely at a particular level of service potential by the continuing replacement and refurbishment of its components. Unplanned event or occurrence resulting in damage or other loss. Inventories are assets: (a) in the form of materials or supplies to be consumed in the production process; (b) in the form of materials or supplies to be consumed or distributed in the rendering of services; (c) held for sale or distribution in the ordinary course of operations; or (d) in the process of production for sale or distribution. Levels of service statements describe the outputs or objectives an organisation or activity intends to deliver to customers. The period over which benefits are derived from the use or availability of an asset. The time interval that commences with the identification of the need for an asset and terminates with the decommissioning of the asset or any liabilities thereafter. Encompasses all asset management strategies and practices associated with an asset or group of assets that results in the lowest lifecycle cost necessary to achieve stated service requirements within acceptable risk parameters. The total cost of an asset throughout its life including planning, design, construction, acquisition, operation, maintenance, renewal and disposal costs. All actions, planned and unplanned, intended to ensure that an asset performs a required function to a specific performance standard(s) over its expected useful life by keeping it in as near as practicable to its original condition, including regular recurring activities to keep the asset operating, but specifically excluding renewal. Note: Maintenance also specifically excludes restoring the condition or performance of an asset following a recognised impairment event, which would be classified as either renewal or upgrading, depending on the circumstances. Expenditure to ensure that the productive or operating capacity of the asset base is maintained over time. The value vested in capital assets is maintained when the organisation has at least as much capital at the end of the period as it had at the beginning thereof. Recurrent expenditure as required to ensure that the asset achieves its intended useful life. Maintenance is funded through the organisation s operating budget, and such expenditure is expensed in the organisation s Statement of Financial Performance. Describes the planned and unplanned maintenance actions for an asset, facility or portfolio of assets, with intended delivery methods and schedules, budget requirements and responsible parties. Objectives for what maintenance has to achieve to ensure the assets are in the right condition to meet the needs of the organisation. Maintenance performance measures and targets are the means of assessing whether the maintenance objectives are being met. The standards set for the maintenance service, usually contained in preventive maintenance schedules, operation and maintenance manuals, codes of practice, estimating criteria, statutory regulations and mandatory requirements, in accordance with maintenance quality objectives. Identifies the tactics and tools that will be used to deliver the maintenance plan, as well as defining the maintenance roles and responsibilities. Omissions or misstatements of items are material if they could, individually or collectively, influence the decisions or assessments of users made on the basis of the financial statements. Materiality depends on the nature or size of the omission or misstatement judged in the surrounding circumstances. The size of the information item, or a combination of both, could be the determining factor. 5

TERM Modern equivalent asset (IIMM) Monitoring (ISO 55000) Non-cash-generating assets (GRAP) Non-exchange transactions (GRAP) Objective (Adjusted from ISO 55000) Obsolescence (Optimised Decision-Making Guidelines) Optimised decision-making (IIMM) Performance (ISO 55 000) Performance measure (IIMM) Performance monitoring (LGIAMG) Policy (Adjusted from ISO 55 000) Predictive action (ISO 55 000) Preventative action (ISO 55 000) Preventative maintenance Process (ISO 55 000) Property, plant and equipment (PPE) (GRAP) Recoverable amount (GRAP) Reliability-centred maintenance (IIMM) Remaining useful life (IIMM) DESCRIPTION The most cost-efficient asset currently available that will provide equivalent functionality to the asset that will be replaced (or are currently being valued using the DRC methodology). Determining the status of a system, a process or an activity. Assets other than cash-generating assets. Transactions that are not exchange transactions. In a non-exchange transaction, an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. Result to be achieved at strategic, tactical or operational level. Objectives can be set in a variety of domains or outcome areas (e.g. economic, social or environmental outcomes), or can relate to elements of the organisation (e.g. corporate or units in the organisation), or can relate to processes, services, products, programmes and projects. The asset can no longer be maintained, or suffers a loss in value due to a decrease in the usefulness of the asset, caused by technological change, or changes in people s behavioural patterns or tastes, or environmental changes. Two definitions are: (1) A formal process to identify and prioritise all potential solutions with consideration of financial viability, social and environmental responsibility and cultural outcomes and (2) an optimisation process for considering and prioritising all options to rectify existing or potential performance failure of assets. The process encompasses NPV analysis and risk assessment. Measurable result of either quantitative or qualitative nature that can relate to the management of activities, processes, products or services, systems or organisations. A qualitative or quantitative measure used to measure actual performance against a standard or other target. Performance measures are used to indicate how the organisation is doing in relation to delivering levels of service. Continuous or periodic quantitative and qualitative assessments of the actual performance compared with specific objectives, targets or standards. Intentions and direction of an entity as formally expressed in a documented statement approved by top management and communicated throughout the entity. Action to monitor the condition of an asset and predict the need for preventative or corrective action. Also referred to condition monitoring or performance monitoring. Action to eliminate the cause of a potential nonconformity or other undesirable potential situation. Maintenance carried out at pre-determined intervals, or corresponding to prescribed criteria, and intended to reduce the probability of failure or the performance degradation of an item. Preventative maintenance is planned or carried out on opportunity. Set of interrelated or interacting activities which transforms inputs into outputs. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one reporting period. The higher of an assets fair value less costs to sell and its value in use. A process for optimising maintenance based on the reliability characteristics of the asset. The time remaining until an asset ceases to provide the required service level or economic usefulness. 6

TERM Renewal Residual value (GRAP) Risk (IIMM) Risk controls (IIMM) Risk exposure (IIMM) Risk management (IIMM) Risk register (IIMM) Routine maintenance (IIMM) Statement of Financial Performance Statement of Financial Position Unplanned maintenance (IIMM) Useful life (GRAP) Value in use (GRAP) DESCRIPTION Expenditure on an existing asset which returns the service potential of the asset or expected useful life of the asset to that which it had originally. Note 1: Renewal can include works to replace existing assets or facilities with assets or facilities of equivalent capacity or performance capability. Note 2: Expenditure on renewals is funded through the organisation s capital budget, and such expenditure is recognised in the organisation s Statement of Financial Position. Is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The effect of uncertainty on objectives. Risk events are events which may compromise the delivery of the organisation s strategic objectives. Measures to manage or mitigate identified risks. The level of risk to which an organisation is exposed to. Risk exposure is a function of the probability of an occurrence times the impact of that occurrence. The application of a formal process that identifies the exposure of an entity to service performance risk and determines appropriate responses. A record of information that stipulates risks identified, the levels of risk exposure before and after implementation of risk controls, and details of appointed risk owners as a minimum. Day to day operational activities to keep the asset operating (replacement of light bulbs, cleaning of drains, repairing leaks, etc.) and which form part of the annual operating budget, including preventative and periodic maintenance. The Statement of Financial Performance, also known as an income statement, shows the revenue and expenses of an organisation over a period of time. The Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. The statement comprises three main components, these being assets, liabilities and equity, and gives users of financial statements insight into the financial soundness of an entity in terms of liquidity risk, financial risk, credit risk and business risk. Corrective work required in the short term to restore an asset to working condition so that it can continue to deliver the required service or to maintain its level of security and integrity. The useful life of an asset is the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity. The present value of the asset s remaining service potential of a non-cash-generating asset or the present value of the estimated future cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life of a cash generating asset. 7

2.2 Acronyms Acronyms relevant to this Standard include: ABC AFS AM CAPEX CIDB CRC DRC ERF FAR FMECA GFMAM GRAP IAS Activity-based Costing Annual Financial Statements Asset Management Capital Expenditure Construction Industry Development Board Current Replacement Cost Depreciated Replacement Cost Economic Reporting Framework Fixed Asset Register Failure Modes, Effects and Criticality Analysis Global Forum for Maintenance and Asset Management Generally Recognised Accounting Practice International Accounting Standards IPSAS IPWEA ISBN ISO LGIAMG OPEX PAS PPE RUL SANS SCM SCOA International Public Sector Accounting Standards Institute of Public Works Engineering Australia International Standard Book Number International Standards Organisation Local Government Infrastructure Asset Management Guidelines Operating Expenditure Publicly Available Standard Property, Plant and Equipment Remaining Useful Life South African National Standards Supply Chain Management Standard Chart of Accounts IDMS Infrastructure Delivery and Management System IIMM International Infrastructure Management Manual 3. SCOPE 3.1 Functional scope This framework focusses on the financial and accounting aspects of asset care activities, these being maintenance and renewal, from the planning for and budgeting of maintenance, renewal or replacement, through to recording, reporting, monitoring and evaluation. Specific objectives include: a. to realistically quantify asset care (maintenance and renewal) needs, both now and in the future; b. to properly plan, budget and spend on asset care in a manner that supports fiscal stability, effective service delivery and a stable, robust maintenance industry; c. to provide for sufficient depreciation to fund asset renewal; or d. where sufficient funding is not available or is very constrained, to clearly understand the risks and costs associated with deferred maintenance and renewals. To achieve the above, this maintenance accounting framework adopts a componentised approach to assets, which requires guidance on the manner in which assets are recognised and measured. 8

Operating budget OPEX SCOA Statement of Financial Performance Plan Budget Transact Record Report Evaluate Capital budget CAPEX GL Statement of Financial Position This framework should be read in conjunction with the National Immovable Asset Maintenance Management Standard and the Maintenance Planning Guideline for Public Buildings. 3.2 Application of this Maintenance Accounting Framework This framework encompasses all immovable assets under the custodianship of national and provincial government. Notwithstanding this, the principles documented in this framework are able to be applied to all forms of public sector immovable assets. 3.3 Normative references The following documents, in whole or in part, are normatively referenced in this Standard: Relevant standards of Generally Recognised Accounting Practice, with specific reference to GRAP 17: Property, Plant and Equipment. Relevant International Accounting Standards (IAS), with specific reference to IAS 16: Property, Plant and Equipment. National Treasury. Chart of Accounts. National Treasury. Guidelines for Implementing the Economic Reporting Format, September 2009 National Treasury. Chart of accounts, December 2014. National Treasury. Accounting Manual for Departments. The Standard Chart of Accounts and Systems. National Treasury. Standard Chart of Accounts Project Summary Report. 2013. National Treasury. Public Finance Management Act No. 1 OF 1999 National Treasury. Guide for Accounting Officers Public Finance Management Act National Treasury. Budget Formats Guide for the Preparation of the Estimates of Provincial Revenue and Expenditure. 2015. National Immovable Asset Maintenance Management Standard Maintenance Planning Guideline for Public Buildings Descriptive Accounting, IFRS Focus. 19 th edition National Treasury. MFMA Circular No. 71, Uniform Financial Ratios and Norms. Government of Western Australia. Department of Local Government and Communities. Local Government Operational Guidelines. Number 18 June 2013. Financial Ratios. Institute of Management Accountants. Implementing Activity-Based Costing, 2006. Journal of Business Case Studies. Utilizing Activity-Based Costing To Manage The Maintenance Function In A Manufacturing Company National Treasury. Costing Methodology Guideline for Local Government. National Treasury Regulations for departments, trading entities, constitutional institutions and public, 2005 National Treasury Gazette 35939 National Treasury. Supply Chain Management A Guide For Accounting Officers / Authorities, 2004 9

3.4 Limitations of this maintenance accounting framework National Treasury regularly issues circulars and directives to update and clarify requirements as they change. This framework does not deal with these but rather focuses on principles and techniques. 4. BUILDING BLOCKS FOR THE MAINTENANCE ACCOUNTING FRAMEWORK 4.1 Standard Chart of Accounts (SCOA) SCOA comprises the coding of items used for classification, budgeting, recording and reporting of receipts and payments within the financial system. It serves to facilitate and systematise the recording of all transactions and is directly linked to the Economic Reporting Format (ERF). The coding structure comprises eight segments. A selection must be made from each of these segments when a transaction is recorded in the financial system; i.e. all segments must be used for recording any given transaction. Table 1: SCOA system of segmentation Segment Infrastructure segment Project segment Objective segment Fund segment Item segment Asset segment Responsibility segment Regional segment Main purpose To identify whether or not a spending item relates to infrastructure and to show the type of infrastructure it relates to To identify whether or not a payment is part of a project To identify the programme / activity against which any given transaction should be recorded. The segment reflects a department s programme and sub-programme structure in as much detail as is required both for reporting and management purposes To identify the source of funding from which payments are effected, and the nature of receipts To record receipt and payment transactions as well as transactions in assets and liabilities To identify asset classes to which a transaction is allocated when the purpose relates to an asset or the use of an asset. To identify the cost centre of any given transaction. As the location of cost centres varies across departments, depending on their organisational structure, this segment is not standardised and each department maintains the segment To identify which region benefits from government spending Considerations to establish appropriate classification code in the segments Does the transaction relate to an infrastructure or non-infrastructure asset? Does the transaction relate to a specific project and if so, what type of project? Against which programme / activity should the transaction be recorded? Against which source of funding should the payment be allocated and against which source should the receipt be allocated? What is the nature of the payment and what is the nature of the receipt? Does the transaction relate to an asset or the use of an asset and if so, which class of asset? To which cost centre should the transaction be allocated? In which region does the service get delivered and in which region is the beneficiary that benefits from the transaction? 10

4.2 Asset hierarchy 4.2.1 The basis for asset identification and measurement is the asset hierarchy that is a framework for segmenting an asset base into appropriate classifications to enable componentisation. Figure 2: Asset hierarchy structure Renewal Maintenance Accounting Group Eg. Property, Plant and Equipment Asset Category Eg. Other Property Asset Sub- Category Eg. Other Buildings Asset Group Type Eg. Offices Asset Type Eg. Building Elements Component Type Eg. Lifts Sub- Components Eg. Upgrade of cabling, motors etc 4.2.2 A component is a specific part of a complex item that has independent physical or functional identity and specific attributes such as different life expectancy, maintenance and renewal requirements and regimes, risk or criticality. A component is separately recognised and measured (valued) in the organisation s asset register as an unique asset record. 4.2.3 The criteria employed for determining significant asset components are: a. any component that in its own right meets the criteria for accounting recognition (EUL > 12 months with economic or service potential); b. coupled with the above, the value of the component itself can be fairly accurately determined; c. its useful life can be distinguished from that of the parent asset; d. the value of the component is material in relation to its parent asset; e. it carries a significant risk profile; f. it is a maintenance significant item; and g. for which there may be specific requirements for significant statutory tests or licensing. 4.2.4 An asset hierarchy structure consisting of six (6) levels applies that identifies asset components, groups them into types of assets (e.g. building elements), combines these into a facility or asset group (e.g. offices), groups facilities into a network or portfolio (e.g. buildings), and slots that network or portfolio into the appropriate category (e.g. other property) under the appropriate accounting group of assets, for example Property, Plant and Equipment, as shown in Figure 2. 4.2.5 On this basis, high value and critical assets are broken down into components, and low value, less critical assets may be grouped. 4.2.6 Each department should construct an asset hierarchy based on the principles described in 4.2.1 4.2.5 above, as appropriate to the nature and extent of immovable assets under its control. 11

4.3 Fair value basis of measurement of assets 4.3.1 The fair value of immovable assets can be determined in the following ways: a. the market approach; b. the cost approach; and c. the income approach. 4.3.2 The market approach is used when the fair value will be readily ascertainable by reference to quoted prices in an active and liquid market and is normally undertaken by a member of the valuation profession. However it is not a requirement that costs should be incurred in engaging external valuers for establishing the fair value of assets. This approach shall be applied to: a. investment property; and b. land assets held under property, plant and equipment, to the extent that market-based evidence is available. 4.3.3 The income approach uses discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. This approach shall be applied to investment property where these is no market based evidence of fair value. 4.3.4 The cost approach is used if there is no market-based evidence of fair value because of the specialised nature of the asset, in which case an entity may need to estimate fair value using either reproduction cost or depreciated replacement cost. The depreciated replacement cost (DRC) of an item of plant or equipment may be established by reference to the market buying price of components used to produce the asset or the indexed price for the same or a similar asset based on a price for a previous period. Current replacement cost (CRC) is the cost the entity would incur to acquire the asset on the reporting date. The cost is measured by reference to the lowest cost at which the gross future economic benefits could be obtained in the normal course of business, or the minimum it would cost to replace the existing asset with a new modern equivalent asset with the same economic benefits allowing for any differences in the quantity and quality of output and in operating costs. Depreciated replacement cost is the replacement cost of an asset less accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired economic benefits of the asset. DRC is an alternative fair valuation method allowed for in the accounting standards. 4.4 Depreciated replacement cost methodology 4.4.1 The DRC method is considered the most appropriate measurement basis for immovable assets applied for service delivery purposes, for the following reasons: a. the carrying value of an asset maintains the positive attribute of being a fair representation of the remaining value of the asset, regardless of the length of time that the asset has been in use or will remain in use; b. the level of depreciation is determined by the current replacement cost of the asset, the expected useful life, and the current condition of the asset. As a result there is at any time sufficient provision for depreciation to fund asset renewal or replacement; c. the DRC method lends itself to determining asset value, risk exposure and asset renewal needs at the asset component level, thus enabling both asset accounting reporting and asset lifecycle planning; d. the DRC method is particularly useful when dealing with assets whose initial values or age have not been recorded, or when dealing with assets whose aggregate values cannot easily be compared against market values; and e. since the DRC method employs condition assessment of assets, it also lends itself to impairment testing at the asset level. 12

4.4.2 The DRC approach requires information on the expected useful life (EUL), residual value (RV), current replacement cost (CRC), and remaining useful life (RUL) of each of the asset components. DRC is then calculated as follows (assuming that the straight line method of depreciation applies): Figure 3: Calculating DRC Carrying value Accumulated depreciation Current replacement cost Annual depreciation charge End of reporting period Depreciated replacement cost Assumed deterioration curve (in this case, straight line) Depreciable amount Residual value Estimated useful life Remaining useful life DRC = RUL EUL x (CRC RV) + RV where: CRC: DRC: EUL: RUL: RV: Current Replacement Cost Depreciated Replacement Cost Estimated Useful Life Remaining Useful Life Residual Value Note: An RV of zero can be used in the above formula to determine the DRC of assets that do not have an RV. 4.4.3 The CRC is the product of an appropriate unit rate and the extent of the component, and represents the cost of replacing the asset. The unit rate is based on the cost of replacing the asset under consideration with a modern equivalent asset which has the same functional capacity. 4.4.4 The depreciable portion of an asset is determined by subtracting the residual value from the CRC. The depreciated replacement cost (DRC) is established by proportionately reducing the depreciable portion based on the fraction of the remaining useful life over the expected useful life. 4.4.5 In the event that the entity must measure (value) an existing for the first time, such as when the asset in question has been transferred to this entity from another entity, but the age of the asset is not known, it still remains possible to calculate DRC. In such a case the condition of the asset is assessed using the asset condition rating scale described in the Maintenance Planning Guideline for Public Buildings. Each condition grade carries an indicative median RUL, allowing for calculation of the DRC, as follows: 13

Figure 4: Using DRC to determine carrying value where the age of the asset is unknown Current replacement cost/condition grade Very poor Poor Fair Good Very good Assessed condition: good, adopt median of RUL range for this condition grade (58%) Accumulated depreciation Depreciated replacement cost Depreciable amount Residual value 100-71% 70-46% 45-26% 25-11% 10-0% Remaining useful life 4.5 Costing of maintenance activities 4.5.1 Each entity shall cost the full scope of activities comprising the maintenance function to: a. understand the true cost associated with asset maintenance; b. budget appropriately for asset maintenance; c. make informed decisions on appropriate service standards and lifecycle strategies, and to d. support the drive towards progressive improvements in efficiency. 4.5.2 Costs assigned to cost objectives are classified as either direct or indirect costs. A direct cost is a cost that can be specifically associated with particular service, function or activity based on actual consumption. It is directly related to the cost objective. Indirect costs are those which are not directly attributable to the output, are often referred to as overheads and are normally incurred for multiple services. Indirect costs need to be apportioned to the cost objective. 4.5.3 Each entity shall employ the Activity-Based Costing (ABC) methodology that measures the both the direct and indirect costs of activities associated with the rendering of a service, and assigns cost based on the resources each activity consumes. 4.5.4 The four steps involved in designing an ABC system for asset maintenance are: a. Identify the work activities performed by people and equipment in relation to asset component type; b. Identify the elements of cost and performance measures; c. Determine the relationships between the various activities and elements of cost; and d. Identify and measure the activity drivers that determine the work load and cause accumulated activity costs to flow to other activities or to the services. 4.5.5 The work activity identification exercise should be guided by materiality and the objectives of the ABC system. Examples of typical maintenance work activities include: 14

Table 2: Typical maintenance activities Predictive maintenance Preventative maintenance Corrective maintenance Issue works order Issue works order Issue works order Issue notice of service interruption, if applicable Issue notice of service interruption, if applicable Issue work permit, where appropriate Issue work permit, where appropriate Issue work permit, where appropriate Emergency or temporary services provision, as appropriate Prepare equipment Prepare equipment Prepare equipment Undertake inspection/diagnostic testing Order parts Order parts Further testing if applicable, e.g. laboratory analysis of sample materials Perform work Perform work Analysis of inspection/diagnostic/ predictive results Inspection of results Inspection of results Report on results.of inspection/ diagnostic activity and/or issuing of Return asset to operation Return asset to operation safety/compliance certificate/license Close works order Close works order Close works order 4.5.6 Typical elements of maintenance costs are indicated below. The general ledger is typically the source of information about these cost elements, but it does not break those cost elements down by activity performed this is the purpose of cost accounting, using the ABC methodology to reassign these expenses into activity costs using resource drivers. a. salaries, employee benefits and overtime; b. staff training; c. protective clothing, d. rental/lease of workshop or depot space; e. vehicles and other specialist capital equipment; f. general tools and equipment; g. parts and other consumables; h. contractors; i. electronic maintenance management system (e.g. annual licensing fees); j. utilities (e.g. water and electricity); k. general administration (including management, customer support center, administrative support, office stationary, communication expenses etc.); and l. laboratory testing. Assign the expense data contained in the general ledger to activities. This assignment is determined by the relationships between the various work activities and the elements of cost. The elements of cost or resource pools can be assigned to activities by assigning them in some directly measurable manner (e.g. maintenance via a work order). 4.5.7 Activity drivers are the usage-based variables that explain the behaviour and magnitude of activity costs. They reflect the consumption of expenses by activities and the consumption of activities by other activities, products, or services. An example of a cost driver is the number of direct labour hours required to perform the maintenance work. 4.5.8 With the cost drivers identified, the next step is to measure the extent thereof (e.g. the number of work orders for each category and the associated direct labour hours). 4.5.9 The process of cost allocation can be performed once cost drivers have been measured. The value associated with each cost driver must be calculated, and the average cost to perform the defined activity be determined. These values inform the charge out rates used in allocating costs according to the cost drivers in each category of maintenance. 4.5.10 With the categories of maintenance functions defined along with the accompanying activities in each category and their costs, the unit cost per work order can be calculated. This unit cost can then be utilised to generate the cost allocation for each work order type and provide a more accurate depiction of the maintenance cost associated with each activity. 15

PART B: MAINTENANCE ACCOUNTING PROCESSES 16

5. ASSET RECOGNITION 5.1 An immovable item is recognised as an immovable asset if: a. it is a resource controlled by the entity as a result of past events; b. it is probable that future economic or service benefits will flow to the entity, over more than one reporting period; and c. the item has a cost or value that can be measured reliably. The general recognition criteria apply to both initial and subsequent recognition. 5.2 The identification of components forms the basis for the recognition and de-recognition of immovable assets. The significant parts of an immovable asset must be identified on initial recognition. The following criteria should be applied: a each component must meet the criteria for accounting recognition; b. its value is material in relation to its parent asset and can be reliably measured; c. its useful life and/or criticality can be clearly distinguished from that of its parent asset; and/or d. it is a significant element of the department s prevailing life-cycle strategy for capital renewal. The Maintenance Planning Guideline for Public Buildings provides additional guidance on determining the components of a facility. 5.3 The asset hierarchy adopted, inclusive of a list of components indicating the estimated useful life and residual value, if applicable, for each component, shall be included in an annexure to the Asset Management Policy. 6. ASSET MEASUREMENT 6.1 Initial measurement 6.1.1 The general rule is that immovable assets that qualify for recognition are initially measured at cost. The cost of immovable assets is the amount of cash or cash equivalents paid or the fair value consideration given to acquire an asset at the time of its acquisition or construction. 6.1.2 The following items are elements of cost: a. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; b. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Examples of directly attributable costs are: costs of employee benefits (as defined in the Standard of GRAP on Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment; costs of site preparation; initial delivery and handling costs; installation and assembly costs; costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); professional fees; and c. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. 17

6.1.3 Capitalisation of costs ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. 6.1.4 Examples of costs that are not to be included in the capital cost of an item of property, plant and equipment are: a. costs of opening a new facility; b. costs of introducing a new product or service (including costs of advertising and promotional activities); c. costs of conducting business in a new location or with a new class of customers (including costs of staff training); d. administration and other general overhead costs; e. costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity; f. initial operating losses, such as those incurred while demand for the item s outputs build up; and g. costs of relocating or reorganising part or all of the entity s operations. Refer to Annexure A for an example of determining the cost of immovable assets. 6.1.5 Where an immovable asset is acquired through a non-exchange transaction from a non-government entity, its cost must be measured at its fair value as at the date of acquisition. 6.1.6 The cost of a self-constructed asset is determined using the same principles as for an acquired asset. The cost of abnormal amounts of wasted material, labour or other resources incurred in self-constructing an asset is not included in the cost of the asset. Costs incurred to acquire an immovable asset through construction by way of a project that spans over more than one financial year should be accumulated and will be added to determine the cost of the ultimate asset once available for use based on the principles above. During the stage where the capital asset is being constructed, all costs will be shown as capital work in progress. 6.1.7 The allocation of costs to components ( componentisation ) is straight forward where single components have been established or replaced. However, for complex construction projects comprising several components and/or cost elements, the breakdown into components and the method of allocation of the actual total project cost to components is to allocate actual costs by way of a shadow valuation using the DRC methodology. 6.1.8 Constructed assets shall be unbundled from source documents (such as as built plans, bill of quantities, project close out reports, project invoices, etc.) by means of the shadow valuation method. In using this method, assets are componentised according to the asset hierarchy and approved unit rates established at the component level. Following determination of the values of the various components, they are adjusted on a pro rata basis to be in line with the actual total cost. Therefore, the components and associated amounts that are recorded in the asset register will not be reflected in the invoices per se, however, the total project costs will agree. Refer to Annexure B for an example of a shadow valuation. 6.2 Subsequent measurement 6.2.1 After initial recognition, measurement of asset classes shall done as follows note that the measurement model must be consistently applied to the entire class of assets: 18

Table 3: Measurement models applied to asset classes Accounting group Asset category Measurement model Comments Property, plant and equipment Investment property Heritage assets Normal buildings and building elements Land associated with buildings Element that can be replaced with modern equivalent assets Elements with particular historic character Revaluation model: DRC Revaluation model Fair value Revaluation model: DRC Revaluation model: reproduction cost method N/A Market, cost or income approach Market, cost or income approach e.g. plumbing e.g. the sandstone wall of the Union Buildings 6.2.2 In terms of the revaluation model, the immovable asset will be carried at fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses, provided that its fair value can be measured reliably. Revaluations must be done on a regular basis to ensure that the carrying amount of the asset at the end of the reporting period does not differ substantially from the fair value at the end of the reporting period. 6.2.3 The frequency of revaluations depends upon the changes in the fair values of the items of immovable assets being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. If an immovable asset is revalued, the entire class, or asset category per the asset hierarchy, to which that asset belongs shall be revalued. 6.2.4 This approach is especially appropriate to immovable assets that typically have long lives (average of around 50 years) and high values where the effects of escalation are material. 6.2.5 The advantages of adopting the revaluation method are as follows: a. more realistic and accurate reporting on the value of the community s assets, and, in general, improved solvency; b. more realistic and accurate reflection of the condition of the asset portfolio, and accordingly improved decisionmaking on life-cycle management (such as maintenance and capital renewal); c. more realistic and accurate reflection of the value of infrastructure being consumed by the community which better informs assessments of revenue needs and sustainability; and d. in view of the above, improved transparency. 6.2.6 Based on the above, the revaluation model should be applied as far as possible. 7. TREATMENT SUBSEQUENT TO INITIAL RECOGNITION 7.1 Treatment of expenditure subsequent to initial recognition 7.1.1 In many instances subsequent expenditure will be incurred on assets following initial measurement. 7.1.2 The impact of any given expenditure on a component recorded in the asset register must be examined. Subsequent expenditure is considered to be capital in nature if it extends the life of a component, or increases its service potential (for example its capacity or performance). All the expenditure that relates to actions to either operate or to enable the asset to achieve its intended useful life of components is expensed. 19

Figure 5: Treatment of subsequent expenditure Is it probable that the expense will create future economic benefits or service potential over and above that which the asset was designed for? YES NO Add the expense to the carrying amount of the asset Recognise as an expense when it occurs Capitalise the expense Operating expenditure 7.1.3 Parts (or components) of some assets require periodic replacement. Provided that the recognition criteria are met, the costs associated with the following actions or outcomes shall be capitalised: a. contributes to the increase in the useful life of an asset which is beyond the original useful life expectation; b. increase productivity of the asset; c. expands capacity of the asset; d. significantly reduces operating or maintenance costs whilst delivering the same or increased level and standard of output; e. increase size; and f. change its shape and use. 7.1.4 When capitalising subsequent expenditure of a renewal nature, the entity shall: a. recognise the cost of replacing a component when that cost is incurred, if the recognition criteria are met, in the carrying amount of the asset; and b. derecognise the carrying amount of the component that is replaced. 7.1.5 Examples of renewal include provided that the intent is to extend useful life, not to increase capacity: a. resurfacing of a road; b. relining of a furnace; and c. replacing the interior walls of a building. 7.1.6 When expenditure relates to sub-components at any level below the 6 level hierarchy, such expenditure is not capitalised even if the sub-components are expected to be used for a period longer than twelve months. Painting of a building, or replacing only a portion of a defined component will be classified and treated as Operating Expenditure (OPEX). 7.1.7 The entity shall not recognise the costs of the day-to-day servicing of the asset in the carrying amount of the asset. Rather, these costs are recognised in surplus or deficit as incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the repairs and maintenance of the item of property, plant and equipment. This expenditure is of an operational or current nature. 20

Table 4: Examples of typical maintenance expenditure on selected components Component Walls Electrical installation Roof Floor Fire protection Parking area Perimeter protection Typical maintenance activity Filling of paint cracks. Repainting of walls. Replacement of individual sections of burnt wiring. Repair of worn waterproofing. Repainting of ceilings and roof tiles. Replacement of individual roof tiles. Replacement of individual cracked tiles. Routine inspection and maintenance of fire protection every 2 years Repainting of parking bay lines. Repair of loose paving blocks. Replacement of individual broken panels. 7.2 Depreciation 7.2.1 The aim of depreciation is to allocate the depreciable amount (original cost less the residual value) of an asset over its useful life (the period during which the depreciable asset will be used) to represent the consumption of assets. The depreciable amount is recovered through use, and the residual value is recovered through sale. The depreciation charge for each period is recognised in surplus or deficit unless it is included in the carrying amount of another asset. 7.2.2 In order to determine the amount of depreciation that should be realised, the following three aspects should be considered: a. useful life; b. expected residual value; and c. the method of depreciation. 7.2.3 Depreciation commences from the date on which the asset is available for use (when it is in the location and condition necessary for it to be capable of operating in the manner intended by management). Depreciation of an asset ceases at the date that the asset is derecognised. Depreciation does not cease when the asset becomes temporarily idle or when it is retired from active use and held for disposal unless the asset is fully depreciated. However, if the unit-of-production method of depreciation is applied the depreciation charge can be zero while there is no production. 7.2.4 The following factors are considered in determining the useful life of an asset: a. the expected usage of the asset, determined by referring to the asset s expected capacity or physical output; b. the expected physical wear and tear (consumption), which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, as well as the care and maintenance of the asset while idle; c. the technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset; and d.legal or similar limitations on the use of the asset, such as the maturity dates of related leases (normally finance leases). 7.2.5 The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. If the residual value of an asset is equal to or exceeds its carrying amount at any time, no depreciation will be provided for on that asset unless and until the residual value declines below the carrying amount. The vast majority of immovable assets have negligible or no residual value. 7.2.6 The accounting standards require that the residual value and the useful life of an asset be reviewed at least at each reporting date. If there is a change to the useful lives or residual values, the annual depreciation charge of the respective 21

immovable assets are adjusted and the assets are depreciated thereafter on the new remaining useful life and/or residual value. For any change in useful lives and residual values a change in accounting estimate should be disclosed in the annual financial statements. Such changes will be effective from the first day after the changes occurred (or prospectively). The opening balance of the accumulated depreciation is not adjusted because of the change in useful life or residual value. 7.2.7 The pattern of consumption is not the same for all assets. As the aim of depreciation is to allocate the depreciable amount of an asset over its useful life, it follows that the depreciation method used should reflect the pattern of consumption. Figure 6: Asset consumption patterns and depreciation methods Cost or current replacement cost Depreciable amount Residual value Estimated useful life/number of production units Increasing consumption Units of consumption (Production units DPRN) Constant consumption (Straight line DPRN) Declining consumption (Diminishing amounts DPRN) Depreciation can be calculated using a variety of methods, including: a. the straight-line method; b. the diminishing balance method; and c. the units of production method. 7.2.8 The assumption of the straight-line method is that the asset is used equally in each year of use. Therefore an equal amount of depreciation will be allocated to each year over an asset s useful life. This is usually adopted for assets where the income produced by the asset or its service potential is a function of time rather that usage. This method is particularly applicable to long life assets such as immovable assets. 7.2.9 The diminishing balance method results in a decreasing depreciation charge over the useful life of the asset is calculated on its carrying value at the beginning of the year. The depreciation allocated declines on an annual basis and is used where there is uncertainty about the future service potential or income potential of the asset. When applying this method the information about the technical or commercial obsolescence of the asset is relevant for estimating the pattern of consumption and the useful life of the asset. 22

7.2.10 The units of production method results in a depreciation charge that is based on the expected use or output of the asset. It provides the best approximation of the consumption of economic benefits or service potential but the total production units that the asset can produce in its life time and the total units that the asset can produce per annum must be identified. This method is most applicable to a manufacturing environment where machinery with defined production potential is used. Refer to Annexure C for examples of the application of the various depreciation methods. 7.2.11 The depreciation method applied to an asset shall be reviewed at least at each reporting date (annually) and, if there has been a significant change in the expected pattern of consumption, the method shall be changed to reflect the changed pattern. A change in the depreciation method shall be accounted for as a change in an accounting estimate and disclosed as such in the AFS. Such changes will be effective from the first day after the changes occurred (or prospectively). 7.3 Impairment testing, measurement and recording 7.3.1 Each entity shall review assets for impairment when one of the indicators below occurs or at least at the end of each reporting period. In assessing whether there is any indication that an asset may be impaired, an entity shall consider as a minimum the following indicators: a. External sources of information: decline or cessation in demand; decline in market value; significant long-term changes in the technological, legal or government policy environment; the carrying amount of the net assets of the entity is more than its market capitalisation; or market interest rates have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset s value in use and decrease the asset s recoverable amount materially. b. Internal sources of information: evidence of physical damage; evidence of obsolescence; significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or a manner in which, an asset is used or is expected to be used, including an asset becoming idle, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite; cash flow for maintenance cost of an asset is higher than originally budgeted; a halt in construction could indicate an impairment. Where construction is delayed or postponed to a specific date in the future, the project may be treated as work in progress and not considered as halted; or evidence that indicates that the performance of an asset is, or will be, significantly worse than expected. 7.3.2 An impairment is recognised where the recoverable amount is less than the carrying amount, i.e. where its value has reduced. In turn, the recoverable amount is the higher of an assets fair value less costs to sell (the value if the asset were to be sold to a third party) and its value-in-use (i.e. the value to the entity). 7.3.3 There is however generally not an active market for assets of a specialised nature such as infrastructure and public amenities, and the value to the entity in such an instance is considered likely to be more than the sale value. Consequently, the recoverable amount is considered to be the same amount as the value in use to the entity. 7.3.4 The model used for calculating the value-in-use depends on the type of impairment, guidelines for which are as indicated in the following table. 23

Table 5: Determining value in use Impairment indicators Utilisation usage lower than norms/ design expectations, e.g. due to decline or non-realisation of demand Condition worse than expected from normal wear and tear e.g. due to damage, theft, vandalism, poor maintenance Functional performance impaired core functionality Obsolescence design no longer fit for purpose, excessive cost of operations Data sources Asset Register Periodic inspections Annual structured reviews with officials familiar with the assets Specific site surveys Operations reports Disaster reports Technical reports Annual structured reviews Technical reports Stores reports Triggers Assets under/not utilised (Gr 1 or 2) excluding new assets initially under-use according to design expectations, or assets required for strategic redundancy. Condition grade worse than expected due to age (based on condition deterioration model), or where damaged, or unsafe. Assets identified as being substantially noncompliant (Gr 5) with the requirements Change in policy or regulatory environment Change in national policy or industry norms Spares and technical support not readily available Cost records and cost norms Value-in-use (Non-cash Generating Assets) ODRC eliminate unused components, over-design expressed as % of DRC (based on unit rates for lower spec). DRC less cost of restoration / rectification - expressed as % of DRC. Optimised DRC adjust system configuration for equivalent functionality (based on unit rates for lower performance). Optimised DRC eliminate obsolescent technology (DRC based on modern / new required configuration expressed as % of DRC guided by unit rates for modern spec). Value-in-use (Cash Generating Assets) The following elements shall be reflected in the value in use calculation: An estimate of the future cash flows the entity expects to derive from the asset Expectations about possible variations in the amount or timing of those future cash flows The time value of money, represented by current market risk-free rate of interest The price for bearing the uncertainty inherent in the asset, and Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset 24

Figure 7: Approach to impairment assessment, calculation and disclosure AM Policy Interpretation Non-cash generating Cash generating Evidence of impairment? (Refer to indicators ) Evidence of impairment? (Refer to indicators ) Detailed calculation of impairment amount ODRC, DRC or restoration method Detailed calculation of impairment amount (based on value in use calculation of the future cash flows) Recognise impairment and adjust carrying value in FAR Disclose in AFS Consider effect on useful life Recognise impairment and adjust carrying value in FAR Disclose in AFS 7.4 Reversal of impairment transactions 7.4.1 At each reporting date the entity shall assess whether there are any indications that impairment losses recognised in previous financial years have decreased or no longer exist. The recoverable amounts are calculated only on those assets where there are indications that impairment losses may have been reversed. 7.4.2 Where there has been a reversal of an impairment loss, the carrying amount is increased to its recoverable amount (providing that it does not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior periods). 7.4.3 In assessing whether there is any indication that an impairment loss recognised in prior periods for an asset may no longer exist or may have decreased, the entity shall consider, as a minimum, the following indications: a. External sources of information: resurgence in demand; increase in market value; significant long-term changes in the technological, legal or government policy environment that will have a favourable effect; or market interest rates have decreased during the period, and those decreases are likely to affect the discount rate used in calculating an asset s value in use and increase the asset s recoverable amount materially. b. Internal sources of information: significant changes with a favourable effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or a manner in which, an asset is used 25

or is expected to be used these changes include costs incurred during the period to improve or enhance an asset s performance, restructure the operation to which the asset belongs or a decision to use rather than dispose of an asset; a decision to resume construction of the asset that was previously halted before it was completed or in a usable condition; or evidence that indicates that the performance of an asset is, or will be, significantly better than expected. 8. PLANNING AND BUDGETING FOR MAINTENANCE AND RENEWAL 8.1 Costing maintenance activities: key principles 8.1.1 Immovable assets should be planned and budgeted for throughout their life-cycle, from planning through to disposal, and the results thereof documented in the entity s asset management plan(s). 8.1.2 The following life-cycle activities must be estimated for the current and following three financial years (medium term estimates) for all immovable assets in the payments of infrastructure by category table: a. new and replacement assets; b. upgrades and additions; c. renewals (previously classified as rehabilitation, renovations and refurbishments); and d. maintenance and repair actions 8.1.3 Budgeting for asset maintenance shall be done on the basis of the demonstrated estimated current costs involved in achieving stated maintenance objectives. Budgeting shall not be based on historic budget provisions or some normative allocated percentage of the total operating budget. 8.2 Maintenance prioritisation and deferred maintenance 8.2.1 In line with The Maintenance Planning Guideline for Public Buildings, when the relevant treasury allocates lower budgets than requested, the lower budget allocation should be prioritised as follows: a. firstly to preventative and condition-based maintenance for highly critical components and corrective maintenance for all components with a condition rating 1; b. secondly to preventative maintenance of moderately critical components and deferred maintenance actions from the previous budget cycle; and c. thereafter be allocated to the remaining corrective maintenance. 8.2.2 In the event that insufficient budget is available for maintenance, or that such budget is not fully spent in a financial period, the entity shall record the amount of deferred maintenance in its annual financial statements, and shall furthermore: a. indicate the impact of insufficient spending on maintenance on the useful life expectations of assets; and b. indicate whether the lack of spending on asset maintenance has affected business operations, customer commitments and/or legislative requirements regarding the availability of asset-based services, and operating income projections. 26

9. TRANSACTING AND RECORDING OF MAINTENANCE AND RENEWAL EXPENDITURES 9.1 Supply chain management 9.1.1 The acquisition of goods and services, including the procurement of immovable assets (infrastructure and buildings) is done through the supply chain management as prescribed by the National Treasury. 9.1.2 Each entity shall implement and operate a supply chain management system in the manner prescribed by the National Treasury in terms of the Public Finance Management Act, supply chain management regulations, the Infrastructure Delivery Management Standard to be finalised, and practice notes, circulars and guidelines as issued by the National Treasury from time to time. 9.1.3 All bid documents should specify clearly and precisely the work to be carried out, the location, the goods to be supplied, the place of delivery or installation, the schedule for delivery or completion, minimum performance requirements and the warranty and maintenance requirements, as well as any other terms and conditions. 9.2 SCOA principles and recording of transactions 9.2.1 The level of detail of transaction recording across all eight segments of SCOA lends itself to an ABC costing methodology. 9.2.2 Examples of recording renewal and maintenance transactions in SCOA are detailed in Annexure F. 10. REPORTING ON ASSET CARE TRANSACTIONS AND OTHER MATERIAL EVENTS 10.1 Reporting for purposes of the Annual Financial Statements 10.1.1 The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making and evaluating decisions about the allocation of resources. Figure 8: Financial statements Start of the year Ongoing stream of business activity End of the year Opening statement of financial position Transactions for the year Statement of financial performance Closing statement of financial position Income Expenses = Surplus/(Deficit) Assets Liabilities = Net Assets/(Liabilities) Assets liabilities = net assets/(liabilities) Operational Expenditures Profit is a measure of performance Capital Expenditures Indicates economic resources, financial structure and solvency and liquidity Assess potential changes in economic resources Predicts: Ability to generate cash, future borrowing needs, ability to meet commitments 27

10.1.2 Refer to Annexure D for examples of asset specific disclosures in the annual financial statements. 10.2 Monitoring and evaluation of asset care at boardroom level 10.2.1 Financial ratio analyses involve the use of ratios and norms in assessing the financial performance and the financial position of an entity. Beyond determining the status quo, they assist an entity to predict, identify, prevent, avoid, and resolve financial problems timeously (early warning mechanisms), but more importantly, supports the entity to make strategic decisions on a more informed, predictive and sustainable basis. 10.2.2 Each entity shall annually conduct ratio analyses using the ratios listed in this sub-section, report the results thereof in its annual report, and consider these results and the norms provided for each ratio in its strategic plan, asset management plan and budget. Refer to Annexure E for examples of ratio analysis. Table 6: Asset management ratios Ratio Purpose Formula Norm Asset consumption Measures the percentage of asset consumption compared to the CRC 40% - 60%, depending on ratio of the asset portfolio. The result is DRC performance indicative of the state of the asset CRC standards adopted portfolio and risk of a deteriorating asset portfolio for service delivery Asset sustainability Establishes the extent to which an entity replaces the assets used 100% while demand for the ratio during a period of review in order to Capital renewal and replacement expenditure service remains maintain service delivery capabilities. Depreciation expense constant, or is growing (Note 1) Asset renewal Measures the extent to which asset renewal is accommodated in the long 90% - 100% (Note 2) funding ratio term financial plan, as identified in the asset management plan NPV of planned capital renewals over 10 years NPV of required capital expenditure over 10 years % of PPE and intangible Determines the significance of assets impaired and reduction of future 0% assets impaired benefits of the utilisation of assets Impairment on PPE and Intangible assets Carrying value of PPE and Intangible assets Repairs and maintenance as a % of CRC Measures the adequacy of repairs and maintenance provisions. Considered the best test, as 1.8% - 2.2% for civil structures, depending provisions are directly linked to the on portfolio Repairs and maintenance asset portfolio CRC of immovable assets composition and performance standards (Note 3) Note 1: Asset sustainability ratio If the investment in renewal of assets does not at least equal the consumption of those assets, the entity is likely to experience future reduced service delivery capacity, breakdown in assets and significant increase in repairs and maintenance expenditure. If more than 100% is spent it could indicate that the entity is addressing a renewal backlog following a period of asset sweating. 28

Note 2: Asset renewal funding ratio If the target not materially achieved on ongoing basis then there is likely to be implications for future service standards and financial sustainability. This ratio is dependent on reliable forecasts of future renewal needs, as expressed in the entity s asset management plan(s). Note 3: Repairs and maintenance as a % of CRC A ratio below the norm indicates that insufficient monies are being spent on repairs and maintenance to the extent that it could increase impairment of useful assets. An increasing expenditure trend may be indicative of high asset-usage levels, which can prematurely require advanced levels of repairs and maintenance or a need for asset renewal. If an increasing expenditure trend suddenly drops to lower levels without an increase in the fixed asset value, this may be indicative of challenges in spending patterns. This may be the result of lack of planning, funding constraints or delivery capacity. 29

Annexures Annexure A: An example of determining the cost of immovable assets Description of cost Costs incurred Costs included in the cost of the asset Cost to purchase land R4 500 000,00 R4 500 000,00 Architect fees R620 000,00 R620 000,00 Site preparation R1 650 000,00 R1 650 000,00 10 of the department s employees were used to assist with site preparation for one week. Bi-weekly wage per employee is R5,000.00 R25 000,00 R25 000,00 Locally sourced materials R7 800 000,00 R7 800 000,00 Imported materials R500 000,00 R500 000,00 Cost paid to deliver the imported materials to the harbour R50 000,00 R50 000,00 Import taxes levied on imported materials at the harbour R45 000,00 R45 000,00 Cost paid to a transport company to transport the materials from the harbour to the building site R25 000,00 R25 000,00 Consultant fees for construction R11 200 000,00 R11 200 000,00 Legal fees for property transfer R240 000,00 R240 000,00 Cost to relocate office furniture to the new building R27 000,00 - After completion of the building the department invited VIPs and dignitaries to a function to officially open the building R50 000,00 - TOTAL COST OF THE ASSET R26 655 000,00 30

Annexure B: An example of a shadow valuation Based on extract from project to extend an existing library building available project cost information: Bill of Quantities for demonstration purposes Item No. Component Unit of Measure Quantity Unit Rate (R) Total (R) Walls A Excavation m³ 24 80 1920 B Foundation Concrete including reinforcing, formwork, spaces, DCP, etc. m³ 6 500 3000 C Bricks 1000 15 2 500 37 500 Finishing including, plaster and paint. m² 120 180 21 600 D Labour Hours 900 120 108 000 172 020 Electrical Installation E DB Box No. 2 5 000 10 000 F Wiring m 100 80 8 000 G Labour Hours 180 120 21 600 39 600 Roof H Trusses No. 25 450 11 250 I Wall Plates, Purlins, etc m 50 125 6 250 J Roof Tiles m² 160 95 15 200 K Labour Hours 250 120 30 000 62 700 Floor L Backfilling and compaction m³ 100 40 4 000 M Concrete including reinforcing mesh, formwork, spacers, DPC etc. m³ 10 500 5 000 N Finishes (screed and tiles) m² 100 350 3 500 O Labour Hours 150 120 18 000 30 500 Fire Protection P Pipe work m 100 65 6 500 Q Sprinklers No. 5 350 1 750 R Fire Alarm No. 1 600 600 S Fire Extinguisher No. 2 1 000 2 000 T Labour Hours 150 120 18 000 28 850 Parking Area U Backfilling and compaction m³ 300 40 12 000 V G5 filling in compacted layers of 150mm m³ 90 100 9 000 W Paving Bricks 1000 10 2 500 25 000 X Labour hours 300 120 36 000 82 000 Perimeter Protection Y Excavation m³ 55 80 2 800 Z Backfilling and compaction m³ 12 40 480 AA Precast Concrete Wall units No. 80 600 48 000 31

Item No. Component Unit of Measure Quantity Unit Rate (R) Total (R) BB Labour hours 150 120 18 000 69 280 TOTAL 484 950 ARCHITECT S FEE (10%) 48 495 QUANTITY SURVEYOR S FEE (4%) 19 398 PROJECT MANAGEMENT FEE (5%) 24 247,50 PRELIMINARIES & GENERAL (20%) 96 990 SUB-TOTAL 674 080,50 VALUE ADDED TAX (14%) 94 371,27 GRAND TOTAL 768 451,77 32

Shadow valuation using the CRC allocation method: Asset Accounting Group category Property, Plant and equipment Property, Plant and equipment Property, Plant and equipment Property, Plant and equipment Property, Plant and equipment Property, Plant and equipment Property, Plant and equipment Community Assets Community Assets Community Assets Community Assets Community Assets Community Assets Community Assets Asset sub category Community Capital Expenditure (CAPEX) Asset Group Type Asset type Component type Extent Extent unit Unit rate CRC sqm floor Shadow ratio Apportioned cost Facilities Libraries Building Walls 100 area R 2 596,02 R 259 602,00 0.92 R239 107,80 Community Facilities Libraries Building Community Electrical installation 100 Facilities Libraries Building Roof 100 Community Facilities Libraries Building Floor 100 Community sqm floor area R 597,62 R 59 762,00 0.92 R55 044,00 sqm floor area R 946,23 R 94 623,00 0.92 R87 153,00 sqm floor area R 460,29 R 46 029,00 0.92 R42 395,00 Facilities Libraries Building Fire protection 100 sqm R 435,39 R 43 539,00 0.92 R40 101,50 Community Facilities Libraries Community Facilities Libraries External facilities Parking area 300 sqm R 412,50 R 123 750,00 0.92 R113 980,00 External facilities Perimeter protection 95 linear m R 1 100,56 R 104 553,20 0.92 R96 299,20 R 731 858.20 R 674 080,50 33

Annexure C: Examples of various depreciation methods The entity has the following asset: Cost of the asset (1 April 201X) R350 000,00 Residual value (unchanged over the useful life) R10 000,00 Useful life 5 years Year end 31-Mar Units produced year 1 8000 Units produced year 2 6000 Units produced year 3 3000 Units produced year 4 2000 Units produced year 5 1000 The asset was available for use as intended by management 1 April 201X. Using the allowed depreciation methods the depreciation charge for years 1 to 3 will be as follows: Year 1 Year 2 Year 3 Straight-line (350 000-10 000)/5 R68 000,00 R68 000,00 R68 000,00 Diminishing balance Assume a depreciation rate of 25% Year 1: (350 000-10 000) x 25% R85 000,00 Year 2: (350 000-10 000) x 75% x 25% R63 750,00 Year 3: (350 000-10 000) x 75% x 75% x 25% R47 812,50 Units of production method Year 1: (350 000-10 000) x 8000/20000 R136 000,00 Year 2: (350 000-10 000) x 6000/20000 R102 000,00 Year 3: (350 000-10 000) x 3000/20000 R51 000,00 34

Annexure D: Examples of disclosures in the Annual Financial Statements The example below is not a model set of financial statements. It is an illustrative example of a set of financial statements highlighting asset disclosure and condensing other disclosures. Statements of Financial Position and Financial Performance Statement of Financial Position 20x2 R 000 20x1 R 000 Current assets 2 629 339 3 601 134 Non-Current Assets Property, plant and equipment 6 377 686 - Investment property 3 947 603 - Heritage assets 4 - Intangible assets 1 - Finance lease receivables 12 958 12 049 TOTAL ASSETS 12 967 591 3 613 183 Current Liabilities 4 469 618 5 489 474 Non-Current Liabilities 26 536 44 342 Total Liabilities 4 469 154 5 533 816 NET ASSETS/(LIABILITIES) 8 471 437 (1 920 633) Statement of Financial Performance 20x2 R 000 20x1 R 000 Revenue from exchange transactions 9 584 166 9 105 304 Revenue from non-exchange transactions 1 403 718 673 233 TOTAL REVENUE 10 987 884 9 778 537 Operating expenses 7 504 017 9 805 487 Interest expense 2 739 1 880 Employee costs 621 468 17 869 Impairment loss - - TOTAL EXPENDITURE 8 128 224 9 825 236 SURPLUS FOR THE YEAR 2 859 660 (46 699) 35

Notes to the Annual Financial Statements Property, plant and equipment Cost 20X2 Accumulated depreciation and accumulated impairment Carrying value Coat 20X1 Accumulated depreciation and accumulated impairment Carrying value R 000 R 000 R 000 R 000 R 000 R 000 Immovable properties 3 826 187 (1 837) 3 824 350 - - - Dual purpose heritage assets 1-1 - - - Assets under construction 2 553 335-2 553 335 - - - 6 379 523 (1 837) 6 377 686 - - - Opening balance Additions and Transfers Depreciation Disposals Transfer of completed assets Impairment R 000 R 000 R 000 R 000 R 000 R 000 R 000 Immovable properties - 3 531 236 (1 837) (5 865) 300 816-3 824 350 Dual purpose heritage assets - 1 - - - - 1 Assets under construction - 2 854 151 - - (300 816) - 2 553 335-6 385 388 (1 837) (5 865) - - 6 377 686 Investment property Cost 20X1 Accumulated impairment Carrying value Cost 20X1 Accumulated impairment Carrying value Investment property 3 947 603-3 947 603 - - - Opening balance Additions Transfers Disposals Impairment Closing balance R 000 R 000 R 000 R 000 R 000 R 000 Vacant land - 3 947 634 (32) - 3 947 602 Other investment property - 1 - - 1-3 947 635 (32) - 3 947 603 36

Heritage assets Cost 20X2 Accumulated impairment Carrying value Coat 20X1 Accumulated impairment Carrying value R 000 R 000 R 000 R 000 R 000 R 000 Historical monuments 1-1 - - - Conservation areas 1 - - - - - Historical buildings 1-1 - - - Cemeteries 1-1 - - - 4-4 - - - Opening balance Additions and Transfers Disposals Impairment Closing balance R 000 R 000 R 000 R 000 R 000 Historical Monuments - 1 - - 1 Conservation areas - 1 - - 1 Historical buildings - 1 - - 1 Cemeteries - 1 - - 1-4 - - 4 Intangible assets 20X2 20X1 Cost Accumulated amortisation and impairment Carrying value Cost Accumulated amortisation and impairment Carrying value R 000 R 000 R 000 R 000 R 000 R 000 Servitudes 1-1 - - - Opening balance Additions and Transfers Amortisation Disposals Impairment Closing balance R 000 R 000 R 000 R 000 R 000 R 000 Servitudes - 1 - - - 1 37

operating expenses 20X2 R 000 20X1 R 000 Operating leases 3 346 389 3 158 730 Property maintenance 2 296 129 3 093 343 General expenses - 2 404 426 Property rates 682 437 494 324 Cleaning and gardening 168 571 167 863 Impairment on receivables 651 474 242 635 Security 42 555 40 892 Under recovery of leases expenses 174 338 184 457 Losses incurred 25 056 14 935 Bursaries - 2 362 Administrative expenses 91 101 1 363 Municipal services expenses 23 986 - bank charges 132 116 Advertising 12 41 Depreciation on property, plant and equipment 1 837-7 504 017 99 805 487 38

Annexure E: Examples of ratio analysis for monitoring and evaluation Figures used for ratio analysis were extracted from Annexure D as far as possible, other figures were assumed. The following are estimates assumed for demonstration purposes that were not included in Annexure D: Assumed Information required for ratio Source of information amount analysis R'000 Capital renewal and replacement expenditure Actual figures in historical budgets 1 700 NPV of planned capital renewals over 10 years Long term budgets or asset management plans 18 000 000 NPV of required capital expenditure over 10 years Long term budgets or asset management plans 22 000 000 CRC Asset management plan/experts 34 100 000 DRC Asset management plan/experts 21 000 000 Asset consumption ratio Formula: Or DRC CRC Calculation: Carrying value Cost Or 21 000 000 34 100 000 = 62% 6 377 686 + 3 947 603 + 4 + 1 6 379 523 + 3 947 603 + 4 + 1 = 100% Interpretation: The norm is between 40% and 60%. The first formula is considered to be more accurate, the first formula indicates that the state of assets is good as the ratio is above the normal range. There is a sound asset base for service delivery. Asset sustainability ratio Formula: Capital renewal and replacement expenditure Depreciation expense Calculation: 1 700 1 837 = 93% Interpretation: The norm is 100%. The ratio result appears to be good as it is not far from the target of 100% but there is room for improvement. 39

If the investment in renewal of assets does not at least equal the consumption of those assets, the entity might encounter future service delivery problems due to breakdown in assets and significant increase in repairs and maintenance expenditure. Asset renewal funding ratio Formula: NPV of planned capital renewals over 10 years NPV of required capital expenditure over 10 years Calculation: 18 000 000 22 000 000 = 82% Interpretation: The norm is between 90% and 100%. There is a fair level of investment in capital renewal, but over the 10-year period a renewals backlog is mounting, assuming that the demand for immovable assets is not waning. More should be invested into renewals. % of PPE and intangible assets impaired Formula: Impairment on PPE and Intangible assets Carrying value of PPe and Intangible assets Calculation: 0 6 377 686 + 1 = 0% Interpretation: The norm is 0%. The ratio is on target as no asset impairment was recognised. This is however unlikely to be the case, and it may be necessary to review impairment testing practices. Repairs and maintenance as a percentage of current replacement cost Formula: Repairs and maintenance CRC on immovable assets Calculation: 2 296 129 34 100 000 = 7% Interpretation: The norm is between 1.8% and 2.2% for civil structures, depending on portfolio composition and performance standards 2.2%, and could be as high as around 4.5% for electrical infrastructure. Expenditure on repairs and maintenance expenditure is substantially above the norm, which may be indicative of any or a combination of the following: The entity has a deteriorating asset base requiring high levels of major reactive maintenance; Renewals expenditure is incorrectly classified as repairs and maintenance expenditure, thus incorrectly bloating reported repairs and maintenance expenditure; New assets are purchased and incorrectly classified as repairs and maintenance expenditure, also incorrectly bloating reported repairs and maintenance expenditure; There are high levels of inefficiency in the maintenance management function; and/or Amounts calculated for either/or repairs and maintenance or CRC are incorrect. 40

Annexure F: SCOA examples Example 1 DPW outsources the construction of a new wing as an addition to an existing office building in Pretoria to a construction company. The invoice is paid using departmental appropriation, voted funds discretionary. (Infrastructure assets outsourced) Fund segment 1. Expenditure: voted 2. Departmental appropriation 3. Voted funds discretionary Objective segment Responsibility segment 1. Payments 1. Departmental responsibilities 2. National payments 3. National departments 2. The department should create own responsibilities under Departmental Responsibilities Item segment Asset segment Infrastructure segment Project segment Regional identifier segment 1. Payments 1. Tangible assets 1. Expenditure 1. Projects 1. Regional identifier 2. Purchase/construction of capital assets 3. Buildings and other fixed structures 4. Voted funds 4. Public works 4. Buildings and other fixed structures 5. DPW: Administration 6. DPW: Office accommodation 5. Existing buildings and other fixed structures 6. Outsourced contractor, upgrade and add building and other 2. Buildings and other fixed structures 3. Non-residential buildings 2. Infrastructure assets 3. Existing infrastructure 4. Office buildings 4. Upgrade and additions capital 5. Existing infrastructure: upgrade and additions: outsourced 2. Project 2. National function: whole country domain 41

Example 2 DPW outsources the maintenance of an existing office building in Pretoria. The invoice is paid using departmental appropriation, voted funds discretionary. (Infrastructure assets maintenance and repair current) Fund segment 1. Expenditure: voted 2. Departmental appropriation 3. Voted funds discretionary Objective segment Responsibility segment 1. Payments 1. Departmental responsibilities 2. National payments 3. National departments 2. The department should create own responsibilities under Departmental Responsibilities Item segment Asset segment Infrastructure segment Project segment Regional identifier segment 1. Payments 1. Tangible assets 1. Expenditure 1. Projects 1. Regional identifier 2. Payments 2. Buildings and other fixed structures 3. Goods and services 3. Non-residential buildings 2. Infrastructure assets 3. Existing infrastructure 4. Voted funds 4. Public works 4. Property payments 4. Office buildings 4. Maintenance and repair current 5. DPW: Administration 6. DPW: Office accommodation 5. P/p: contractd maint prop 6. Outs p/p: contractd maint 5. Ex infra: maint and rep: outsourced 2. Project 2. National function: whole country domain 42

Annexure G: Illustrative examples of asset accounting transactions Capitalisation a. Construction of a capital improvement to an existing state-owned building occupied by a national department. PMTE obtains the financing for the total costs of the improvement from the client department (budget holder). PMTE leased a state-owned office building to Department A for a period of 10 years (1 April 20X0-31 Mar 20X10). During this period Department A required capital improvements to the building, which PMTE completed over a two year period, and PMTE obtained the financing for the required improvement from Department A as part of the lease agreement. Construction of the capital improvement commenced on 1 Apr 20X5 and was completed on 31 Mar 20X7 and was available for use by Department A from 1 Apr 20X7. The useful life of the completed capital improvement asset is 4 years. The costs incurred over the two years for the capital improvement were as follows: Year 1: 31 Mar 20X6 R20 000 construction; R5 000 professional fees Year 2: 31 Mar 20X7 R70 000 construction; R4 000 professional fees Total construction expenditure = R90 000 Total professional fees = R9 000 Total costs of capital improvement = R99 000 The entries in the books of PMTE will be as follows as and when the progress payments are made by PMTE to the vendors, and on completion of the contract (capitalisation entries) Year Description Debit Credit 31 Mar20X6 PPE: Assets under construction R25 000 Bank R25 000 Capitalisation of progress payments made to vendors by PMTE Accommodation debtor (Dept A) R25 000 Operating lease creditor (Deferred revenue) R25 000 Finance for Capital improvement receivable from Dept A per lease agreement 31 Mar20X7 PPE: Assets under construction R74 000 Bank R74 000 Capitalisation of progress payments made to vendors by PMTE Accommodation debtor (Dept A) R74 000 Operating lease creditor (Deferred revenue) R74 000 Finance for Capital improvement receivable from Dept A per lease agreement PPE: Other properties R99 000 PPE: Assets under construction R99 000 Transfer of assets under construction to complete assets contract completed 31 Mar 20X7 43

b. Fully constructed assets completed in the current financial year by PMTE. Costs financed by PMTE. Year 1 R1 500 for construction; R500 for professional fees Year 2 R2 500; R200 for professional fees Year 3 R1 000; R300 for professional fees The journal entries in the books of PMTE will be as follows: Year Description Debit Credit 1 PPE: Assets under construction (R1 500 + R500) R2 000 Bank / Creditor R2 000 2 PPE: Assets under construction (R2 500 + R200) R2 700 Bank / Creditor R2 700 PPE: Assets under construction (R1 000 +R300) R1 300 Bank / Creditor R1 300 3 PPE: Other properties (R2 700 + R2 000 + R1 300) R6 000 PPE: Assets under construction R6 000 c. Department B spent R5 000 000 on improvements to a state-owned office building, and the costs were not recovered by PMTE during construction. After completion of project Department B transferred the improvement asset to PMTE with a Section 42 certificate in terms of PFMA: Description Debit Credit PPE : Other properties R5 000 000 Revenue from Non-exchange Transactions R5 000 000 Recognition Recognition of an immovable asset acquired at cost. The PMTE purchased a non-residential property for R1 000 000 and further paid R100 000 for legal fees (transfer fees). The journal is as follows: Description Debit Credit PPE: Other properties (Building / Land ) (R1 000 000 + R100 000) R1 100 000 Bank / Creditor R1 100 000 Impairment a. The following are examples of indications of impairment: Cessation, or near cessation, of the demand or need for services provided by the asset: - A building whose principal occupant does not renew its occupancy agreement with the result that the facility is expected to close. - A building closed because of a lack of demand for accommodation services arising from a population shift to other areas. It is not anticipated that this demographic trend affecting the demand for the accommodation services will reverse in the foreseeable future. A building designed for 1 500 occupants currently has 150 occupants the building cannot be closed because the nearest alternative building is 100 kilometres away. The PMTE does not envisage an increase in number of occupants. At the time of establishment occupation was 1 400 occupants the PMTE would have acquired a much 44

smaller facility had future accommodation been envisaged to be 150 occupants. The PMTE determines Significant long-term changes with an adverse effect on the PMTE in the technological, legal or government policy environment in which it operates. - A building that can no longer be used for accommodation purposes due to new safety regulations regarding its building materials or emergency exits. - A drinking water plant that cannot be used because it does not meet new environmental standards. - that demand has nearly ceased and the recoverable service amount of the building should be compared with its carrying amount. Evidence is available of physical damage of an asset. - A building damaged by fire or flood. - A building that is closed due to identification of structural deficiencies. - A water treatment plant whose capacity has been reduced by an intake blockage and the removal of the blockage is not economical. Significant long-term changes, with an adverse effect on the PMTE, in the extent to which an asset is used, or is expected to be used: - If the asset is not being used in the same way as it was when originally put into service, the asset may be impaired. An example of an impaired asset that might be identified by this indication is a training facility that is being used for storage rather than for training purposes. A decision to halt the construction of the asset before it is complete or in a usable condition: - Construction was stopped due to identification of an archaeological discovery or environmental condition such as a nesting ground for a threatened or an endangered species; and - Construction was stopped due to a decline in the economy. Note - The circumstances that led to the stopping of construction will also be considered. If construction is deferred, that is, postponed to a specific future date, the project could still be treated as work in progress and is not considered as halted. Evidence is available from internal reporting that indicates that the service performance of an asset is, or will be, significantly worse than expected: - The expenditure report for a building may indicate that the building is impaired because the cost of maintaining the building has significantly exceeded that originally budgeted. b. Calculation of Impairment loss: Depreciated replacement cost approach Significant long-term change with adverse effect on the PMTE in the manner of use training facility used as storage facility: PMTE constructed a training facility at a cost of R10 million. The estimated useful life of the facility is fifty years. In 20X7, the facility is closed because enrolments declined unexpectedly due to a population shift caused by the insolvency of a major employer in the area. The facility is converted to use as a storage warehouse, and management has no expectation that enrolments will increase in the future such that the building would be reopened for use as a training facility. The current replacement cost for a warehouse with the same storage capacity as the school is R4,2 million. Evaluation of Impairment Impairment is indicated because the purpose for which the building is used has changed significantly from a place for instructing students to a storage facility, and this is not anticipated to change for the foreseeable future. An impairment loss using Depreciated Replacement cost approach would be determined as follows: 45

Historical Cost 20x1 R10 000 000 Accumulated Depreciation, 20x7 (R10 000 000 x 6 / 50) R1 200 000 Carrying Amount R8 800 000 Replacement cost of a storage facility of similar capacity R4 200 000 Accumulated Depreciation (R4 200 000 x 6 / 50) R504 000 Recoverable Service Amount R3 696 000 Impairment loss (R8 800 000 R3 696 000) R 5 104 000 Journal in books of PMTE is as follows: Description Debit Credit Impairment Loss R5 104 000 Accumulated Depreciation and Impairment: Buildings R5 104 000 c. Reversal of impairment loss: Reversal of impairment loss on asset carried at cost In 20X1, PMTE constructed a 20 storey office building for use by the Department of Public Works at a cost of R80 million. The building was expected to have an useful life of 40 years. In 20X16, after 15 years of use, fire safety regulations required that the top four stories of high rise buildings should be left unoccupied for the foreseeable future. The building has a fair value less costs to sell of R45 million in 20X16 after regulations came into force. The current replacement cost of a similar 20 story building is R85 million. At the end of 20X18, after 17 years of use, the government decided to uplift the regulations. PMTE consequently can occupy the top four stories. Thus, there is an indication that the impairment loss might be reversed, and consequently the PMTE re-estimates the recoverable service amount. The calculations and relevant journal are as follows: Acquisition Cost 20X1 R80 000 000 Accumulated Depreciation, 20X16 (R80 000 000 15 / 40 years) R30 000 000 Carrying Amount, before impairment loss R50 000 000 Less Impairment loss 20X16 (R50 000 000 R45 000 000) (R5 000 000) Carrying amount after impairment loss 20X16 R45 000 000 Remaining useful life at 20x16 (40 15 years) 25 years New annual depreciation after 20X16 impairment loss R1 800 000 R45 000 000/25 years Carrying amount at the end of 20X18 after 17 years of use R45 000 000 - (R1 800 000 x 2 years) R41 400 000 What carrying amount would have been 20X18 if no impairment loss was recognised in 20X16 Acquisition Cost 20X1 R80 000 000 Accumulated Depreciation, 20X18 (R80 000 000 17 / 40 years) R34 000 000 Carrying Amount, 20X18 R46 000 000 Replacement cost (20 story building) R85 000 000 Accumulated Depreciation, 20X18 (R85 000 000 x 17/40 years) R36 125 000 Depreciated replacement cost before adjustment for remaining service units R48 875 000 Value in use after uplifting of regulation R48 875 000 R48 875 000 x 20/20 floors Recoverable service amount (higher of value in use and fair value less cost to sell) R48 875 000 Impairment loss reversal limited to what the carrying amount would have been - should be limited as R4 600 000 R46 000 000 is less than R48 875 000: (R46 000 000 - R41 400 000) New annual depreciation based on new carrying amount (R46 000 000/23 years remaining useful life) R2 000,000 46

Journal in PMTE books is as follows: Description Debit Credit Accumulated depreciation and impairment R4 600 000 Impairment loss reversal R4 600 000 Note: As the recoverable service amount is more than the carrying amount, the impairment loss will be reversed to increase the carrying amount of the asset, but the increase will be limited to what the carrying amount of the asset would have been if no impairment loss had been recognised. De-recognition of an asset PMTE sold a property during the financial year ending 31 March 20X4. Historical cost 1 Apr 20X0 R10 000 000 Useful life 20 years Accumulated depreciation 31 Mar 20X3 (R10 000 000 X 3/20) R1 500 000 Date of disposal 28 Feb. 20X4 Selling price R9 500 000 Calculations as follows: Depreciation for the year 20X.4 (R10 000 000/20 years x 334 / 365 days) R457 534,25 Accumulated Depreciation 28 Feb 20X4 (R1 500,000 + R457 534,25) R1 957 534,25 Carrying amount 28 Feb 20X4 R8 042 465,75 Surplus on disposal (R9 500 000 R8 042 465,75) R1 457 534,25 Journals in PMTE books are as follows: Description Debit Credit Depreciation R457 534,25 Accumulated depreciation R457 534,25 Depreciation for year till disposal date Bank R9 500 000 Accumulated depreciation R1 957 534,25 PPE: Other Property Cost R10 000 000 Surplus on sale of property R1 457 534,25 Disposal of property Recognition of proceed on sale, and derecognition of asset cost and accumulated depreciation Revaluation of an asset PMTE purchased a property on 1 April 20X4 for R100,000. The asset had an useful life at that date of 40 years. On 1 April 20X6 PMTE revaluated the building, the CRC of the building at that date is R126 315,79. Calculations as follows: Accumulated depreciation on 1 April 20X6 (R100 000/40 years x 2 years) R5 000,00 Carrying amount on 1 April 20X6 (R100 000 R5 000) R95 000,00 DRC on 1 April 20X6 (R126 315,79 x 38 years / 40 years) R120 000,00 Accumulated depreciation on 1 April 20X6 based on DRC (R126 315,79 R120 000) R6 315,79 47

Journals in PMTE books are as follows: Description Debit Credit PPE: Other Property Cost (R126 315,79 R100 000) R26 315,79 Accumulated depreciation (R6 315,79 R5 000) R1 315,79 Revaluation surplus (R120 000,00 - R95 000,00) R25 000,00 Revaluation of property Restatement method. Depreciation (R120 000,00 / 38 years) R3 157,89 Accumulated depreciation R3 157,89 Depreciation for the year, after the revaluation 48

Notes 49

Notes 50

Notes 51

COMPETENCY FRAMEWORK for immovable assets under the custodianship of National and Provincial Departments of Works 52 44

Maintenance Accounting Framework This publication is brought to you by The Department of Public Works and The Construction Industry Development Board (cidb). This book is number two in the following series: 1. Maintenance Management Standard 2. Maintenance Accounting Framework 3. Maintenance Monitoring and Evaluation Protocol 4. Maintenance Planning Guidelines 5. Maintenance Competency Framework 6. Contractor Development in the Maintenance Industry www.publicworks.gov.za www.cidb.org.za May 2017