Title AAS27 and accountability with emphasis on depreciation as the critical test by Allan Molland B.(Acc/Eco), Grad Dip Ed. School of Accounting and Law 2006 A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy from RMIT University Declaration The content of this thesis is my own work, except where otherwise indicated. The work has not been submitted previously by me, in whole or in part, to qualify for any other academic award. The content of the thesis is the result of work which has been carried out since the official commencement date of the approved research programme.
Allan Molland ii Acknowledgements I wish to thank Professor Sheila Bellamy and Professor Robert Clift for being supervisors. Professor Robert Clift (affectionately known as Bob) has been an inspiration. He was always questioning and furthering my learning process. A special thank you is extended to all these who participated in the research.
I dedicate this work to my mother and late father who were always there for me. Allan Molland iii Abstract The purpose of this study is to investigate how senior accounting staff in Victorian local councils are recording and reporting infrastructure assets (IAs) with their relevant depreciation in General Purpose Financial Reports (GPFRs). Infrastructure assets are long-lived assets such as roads, drains and bridges. Historically, the purpose of public sector accounting in Western countries has been to demonstrate that funds have been raised and expended strictly within the authority of the annual budget.
This short-term charge/discharge objective, involving the use of a cash-based system of accounting, has effectively prevented the provision of information for long-term decision making and the assessment of those decisions. The major disadvantage for management purposes is the loss of information relating to the long- term benefits of expenditures with one of the major issues being the failure to record IAs and their relevant depreciation. The introduction of Australian Accounting Standard No. 27 Financial Reporting by Local Governments (AAS27), which applies to all Australian local authorities and the Statements of Accounting Concepts (SACs) require IAs to be reported in the Statement of Financial Position and depreciation to be charged in the Statement of Financial Performance in order to reflect the loss of service potential in the operating period concerned.
It is anticipated that the study will report the implications for the accountability of the implementation of IA accounting and the utility and relevance of IA information and depreciation for decision-making by both internal and external users. Conclusions on the consequences of current practices and recommendations for change will be developed to assist local government authorities and accounting bodies. iv Abbreviations Abbreviation Name of Abbreviation AAM Asset Accounting Manual AARF Australian Accounting Research Foundation AAS Australian Accounting Standard AAS27 Financial Reporting by Local Governments AASB Australian Accounting Standards Board CBD Condition-Based Depreciation CCA Current Cost Accounting Method CCF Consolidated Capital Fund CF Conceptual Framework GASB Government Accounting Standards Board GPFRs General Purpose Financial Reports IAs Infrastructure Assets IAS International Accounting Standards ICAA Institute of Chartered Accountants Association IMM Victorian Institute of Municipal Management NCA Non-Current Assets NCGA National Council on Government Accounting NZSA New Zealand Accounting Research and Standards Board PSACE Public Sector Accounting Centre of Excellence PSASB Public Sector Accounting Standards Board v SACs Statement of Accounting Concepts VOLG Victorian Office of Local Government UIG Urgent Issue Group vi Table of Content Title. v Table of Content.
vii List of Tables .1 Introduction and Rationale .2 Relevance of Depreciation.3 Local Government Accounting Information .4 Reporting the Cost of IAs and Relevant Depreciation.5 Purpose of IA Depreciation in Local Authorities’ GPFRs .6 Local Government Depreciation Issues .7 IA Depreciation Implications .9 Overview of Thesis .2 Developments in the 19 and 20 Centuries for Depreciation.1 19 Century Private Sector IA Accounting Practices .2 19 Century Municipal IA Accounting Practices .3 20 Century IA and Depreciation Accounting Practices .5 Argument for Change to Asset Accounting.4 The Past—Fund Accounting .1 Cash and Modified Accrual Accounting Practices.5 Change to Accrual Accounting in the Public Sector .6 The Standard AAS27 Financial Reporting by Local Governments.7 Victorian Local Government Developments on Financial Reporting .8 Development of Financial Reporting in the Public Sector .8 Statement of Accounting Concepts (SACs) and GPFRs.1 Service Potential or Future Economic Benefits.2 Control by an Entity .3 The Result of a Past Transaction or Event .9 IA Accounting and User Needs under SACs.1 Definitions of Infrastructure Assets (IAs).2 Private and Public Sectors are Different .3 IAs are Different from Other NCA .11 Identification of Infrastructure Assets.12 Valuation of Infrastructure Assets.1 Current Market Value .2 Current Reproduction Cost .3 Current Replacement Cost .4 Net/Realisable Value .1 Generational Equity Issues.2 Accounting Records and Policies .3 Effect of Depreciation in GPFRs .4 Depreciation of Infrastructure Assets .5 Alternative Viewpoints on Depreciation .2 Condition-Based Depreciation (CBD) Method .1 Motivation for Study .3 Preliminary Data Gathering.1 What information is necessary and sufficient for decisions relating to the use, maintenance and replacement of infrastructure assets? .2 Has the charging of depreciation on IAs affected budgets, rating estimates and policy decisions?.3 Has the charging of depreciation on IAs affected day-to-day management decisions? .4 What are the implications of depreciation charges on IAs for intergenerational equity?.3 Responses from Interviewees.1 Technical Issues in Financial Reporting of IAs under AAS27 .2 Benefits of IA Information .3 Identification and Valuation Problems with IAs .4 Education for AAS27 IA Requirements.6 Information Systems for IAs.8 Accounting Policies for IAs .9 Depreciation of IAs .10 Auditors Opinion of GPFRs .1 Design of the Questionnaire .3 Administration of the Questionnaire .4 Aggregation of IAs .11 Technical Issues in Financial Reporting under AAS27.1 Valuations were Completed Internally or Externally.2 The Asset Accounting Manual (AAM) .3 Method of Valuation Used .4 Are IA Valuations Fully Justified .5 Current Cost of Replacing Infrastructure Assets.6 The Current Valuation Methods .1 Fully Reflects Asset Usage in the Financial Statement.2 Has Depreciation of IAs been a Problem.3 Attitudes to Depreciation.4 The Depreciation Rates Fully Reflect the Use IAs .5 The Depreciation Rates were Mainly Straight-line Calculations.6 Engineer and Accountant Depreciation Issues. 227 Analysis of the Questionnaire Responses.2 Method of Analysis .3 Respondent Profile Analysis .1 Identification of Resources .6 Infrastructure Asset Differences .1 When Valuing IAs under AAS27 .3 Council Depreciation Rates .5 Traditional Depreciation Methods .6 Respondent’s Ideological Views .7 Optional Comments Section. 291 General Purpose Financial Reports Analysis.1 Review of General Purpose Financial Reports (GPFRs) .2 Inner Metropolitan Municipalities IAs Review.1 Inner Metropolitan Municipalities Depreciation Rate Review .2 Inner Metropolitan Municipalities Reconciliation Review .3 Inner Metropolitan Municipalities Non-financial Review.3 Outer Metropolitan Municipalities IAs Review.1 Outer Metropolitan Municipalities Depreciation Rate Review .2 Outer Metropolitan Municipalities Reconciliation Review.3 Outer Metropolitan Municipalities Non-financial Review .4 Regional City Municipalities IAs Review .1 Regional City Municipalities Depreciation Rate Review.2 Regional City Municipalities Reconciliation Review .3 Regional City Municipalities Non-financial Review .5 Large Shire Municipalities IAs Review .1 Large Shire Municipalities Depreciation Rate Review .2 Large Shire Municipalities Reconciliation Review.3 Large Shire Municipalities Non-financial Review .6 Small Shire Municipalities IAs Review .1 Small Shire Municipalities Depreciation Rate Review.2 Small Shire Municipalities Reconciliation Review .3 Small Shire Municipalities Non-financial Review. 336 Summary, Conclusion and Recommendations .2 Summary on the Up-dating of IA Information for Efficient Decision Making.1 Conclusion on the Use of IA Information .2 Recommendations on the Use of IA Information .3 Summary of the Technical Knowledge on AAS27 IA Information .1 Conclusions of the Technical Knowledge on AAS27 towards IA Information .2 Recommendations of the Technical Knowledge on AAS27 IA Information .4 Summary on the Valuation of IAs .1 Conclusions on the Valuation of IAs .2 Recommendations on the Valuation of IAs.5 Summary of Depreciation Issues .1 What information is necessary and sufficient for decisions relating to the use, maintenance and replacement of infrastructure assets? .2 Has the charging of depreciation on IAs affected budgets, rating estimates and policy decisions?.3 Has the charging of depreciation on IAs affected day-to-day management decisions? .4 What are the implications of depreciation charges on IAs for intergenerational equity?.5 Conclusion to Depreciation Issues.6 Recommendations to Depreciation Issues .6 Summary of IA Accounting Theory .1 Conclusion for IA Accounting Theory.2 Recommendations for IA Accounting Theory .7 Future Research Issues.8 Limitations in Research.
376 xvi List of Tables Table 2.1 Prescribed Bases of Accounting .2 Local Government Publications.3 Capitalisation of Non-Current Assets .4 Measurement of Non-Current Physical Assets.12 Infrastructure Asset Differences .21 Council Depreciation Rates.23 Traditional Depreciation Methods.24 Respondent’s Ideological Views.1 Inner Metropolitan Municipal’s Roads and Bridges .2 Inner Metropolitan Municipal’s Drains .3 City of Melbourne Depreciation Rates.4 City of Yarra Depreciation Rates .5 City of Stonnington Depreciation Rates.6 City of Melbourne IAs Accounts Reconciliation .7 City of Stonnington Non-financial Information .8 Outer Metropolitan Municipal’s Roads and Bridges.9 Outer Metropolitan Municipal’s Drains.10 City of Melton Depreciation Rates .11 City of Frankston Depreciation Rates.12 City of Whittlesea Depreciation Rates .13 Melton Shire Council IAs Account Reconstruction .14 Roads, Bridges and Drains Reconciliations .15 Regional City Municipal’s Roads and Bridges .16 Regional City Municipal’s Drains .17 City of Greater Bendigo Depreciation Rates .18 IA accounts Depreciation Reconstruction.20 City of Greater Bendigo Non-financial Information .21 Large Shire Municipal’s Roads and Bridges.22 Large Shire Municipal’s Drains .23 Ararat Rural City Depreciation Rates .24 Swan Hill Depreciation Rates .25 Swan Hill Rural Council IA Accounts Reconstruction .26 Swan Hill Rural Council Non-financial Information .27 Small Shire Municipal’s Roads and Bridges .28 Small Shire Municipal’s Drains .29 Indigo Shire Council Depreciation Rates.30 Loddon Shire Council Depreciation Rates.31 Loddon Shire Council Change of Economic Life of Roads.32 Moyne Council Depreciation Rates .33 Indigo Shire Council Non-financial Information .34 Loddon Shire Council Non-financial Information .1 Accounting Theory for the Recording and Reporting of IAs .2 Acceptance by Preparers for the Recording and Reporting of IAs. 369 xix Chapter 1 Introduction 1.1 Introduction and Rationale In July 1991, the Australian Accounting Research Foundation (AARF) released Australian Accounting Standard No. 27 (AAS27) Financial Reporting by Local Governments, which applies to all Australian local authorities. The Standard took effect for reporting periods ending on or after 1 July 1993, but was not fully implemented until mid–1997.
Local authorities were given a three-year period before it became mandatory to report infrastructure assets (IAs) and relevant depreciation in General Purpose Financial Reports (GPFRs). This indicated the serious issues faced by local government in valuing and depreciating IAs that previously were not included in financial statements. In recent years, Victorian newspaper headlines have highlighted significant problems in relation to local authorities’ IAs—for example: council crisis looms, the dilapidated state of council owned roads, buildings and infrastructure has been revealed in a major report released by State Government (Herald Sun Wednesday, 12th January 2000, p. The report referred to in the quotation, Facing the Renewal Challenge (Burns, P., 1998), revealed some startling statistics on IAs.
Only eight out of the seventy-eight Victorian councils were spending the amount required to maintain their IAs beyond the next decade; the total value of these assets was estimated to be $23.3 billion or $13,000 per Victorian household (1998, p. This report (Burns et al., 1998) produced in Victoria indicated the scope of IA investment for local authorities: this is the first study that gives the overall picture of the size, condition and value of its local council infrastructure—its roads, bridges, footpaths, drains, parks and recreation and public building. The Victorian local government infrastructure asset base is worth around $23.3b in current replacement values (exclusion of land holdings), 64% of this is in transport—roads, bridges and footpaths. Drainage constitutes 15%, buildings 19% and parks despite covering a large landmass, represent only about 2% of replaceable infrastructure assets (1998, p.
Also the report Facing the Renewal Challenge (Burns et al., 1998), revealed some startling statistics on IAs: maintenance, on an aggregate level (all Victorian councils), is currently $225m. Many argue that this is not sufficient, but in doing so, they frequently fail to make a distinction between day to day maintenance and periodic renewal. Others argue that the maintenance dollar is ill-spent, with as much as one quarter to one third being wasted.