Sustainable Infrastructure Management

Submitted by Silbert on Tue, 07/22/2008 - 19:08. RenewCanada Infrastructure Magazine
www.brittenwoods.com

If the experience of Australian Accounting Standard Board (AASB 116: Property, Plant and Equipment) in the implementation of infrastructure accounting is any indication of how this process might play out in Canada, municipalities are in trouble.

Audit results out of local Australian governments, particularly in Queensland and Victoria, have been studied in current and past financial reporting periods. In most cases the audits found that inaccurate definition and methodology were used in valuing and depreciating infrastructure assets. More importantly, they give no significant supporting evidence to justify key assumptions in the valuation processes, particularly road pavements. These audit results show that some local Australian governments are not correctly defining fair value and are applying the simplified straight-line depreciation method to infrastructure assets.

In the absence of cash inflows and an active market for infrastructure assets such as roads and bridges, the most reliable estimate of future economic benefit or service potential is condition-based depreciation—and not the stable condition state method being used in the United States. The condition-based valuation method is more likely to produce a lower annual depreciation rate than the simplified straight-line method. What’s needed is an asset consumption model that can predict the effective age of successive capital improvements on a declining balance ratio (or factor) correlated to an assessed condition index.

The cost of maintaining infrastructure assets often represents a significant portion of a municipality’s operating budget, so it’s important to agree on depreciation estimates. For a municipality to determine whether or not it’s financially sustainable, managers need to calculate the ratio of capital spending to annual depreciation charges. Both sides of the equation are affected by the state and condition of municipal assets like roads and bridges. Equally important in this equation is the public’s expectation of service levels within the context of current social, economic, political and environmental realities. These are the dynamics in the infrastructure investment gap that are causing disagreement between engineers and accountants. Asset management and financial accounting are out of sync.

One incentive to work things out is the Public Sector Accounting Board’s (PSAB 3150) ever-nearing deadline (see page 36). But it’s unclear whether PSAB’s requirements will lead to more sustainable infrastructure management. Municipalities that use the conventional straight-line depreciation method because it’s easier and that fail to recognize the link between strategic asset management and financial accounting will just continue to argue over unfunded depreciation of our assets—the infrastructure deficit. Canadian cities like Hamilton and Edmonton are less likely to make significant material misstatements in their financial reporting because their managers recognize that asset management is a corporate, not just technical, responsibility. They’ve taken the necessary steps to integrate asset accounting with financial reporting. Those who don’t will end up like some Australian towns, where the absence of a strategic framework for valuing and measuring depreciation expenses has led to a huge deficit.

  —Silbert Barrett
 These are the author’s personal opinions and do not reflect those of his employer. Nor is the author making inferences about how infrastructure assets are managed. The author bases his opinions on his involvement in the pilot implementation of capital asset accounting as a project manager for the City of Hamilton and the Ontario Benchmarking Initiatives (OMBI).

PAVE PARADISE AND CALL IT PROGRESS: AN ENVIRONMENTAL DISASTER WAITING TO HAPPEN

Significant portions of Jamaica should be designated World Nature Reserve. Jamaica has one of the most extensive systems of underground rivers and caves in the world constituting perhaps some of the most delicate eco-systems with a bio-diversity yet be discovered.

The North-South Highway Link in Jamaica is a costly environmental disaster waiting to happen, as the highway link is built on a sea of underground rivers with extensive connections through the island.

In 2012 the government was warned about the risk but went ahead with the project in the cheapest and most aggressive assault on the delicate eco-system using Chinese “Open-Cut and Fill” road construction instead of tunneling through portions of the mountain to save vegetation and bridging sensitive sinkholes.

““The north-south link of Highway 2000 is going to traverse the island, crossing the floodplains of at least five major rivers, requiring significant removal of forests and large-scale engineering works on steep slopes,” JET Chief Executive Officer Diana McCaulay wrote to then Minister of Transport, Works, and Housing Dr Omar Davies in December 2012. “It presents a range of serious environmental and public safety hazards, described in some detail in the EIA, yet inexplicably all these risks are rated as ‘minor’ and ‘small’,” McCaulay added.

She told Davies that she took no comfort in a statement that the risks would be mitigated or managed by the Natural Resources Conservation Authority (NRCA) and the National Environment and Planning Agency (NEPA) because “environmental permits in Jamaica are too often poorly drafted and rarely enforced”. Despite the concerns, work on the US$730-million highway was completed in March this year. But JET, in a document compiled last month, pointed out that NEPA was lax in its monitoring of the project. http://m.jamaicaobserver.com/mobile/news/Highway-backlashGov---t-ignored-environmental-concerns-from-2012-------_69859

I wondered why the Jamaican government allowed the construction of a highway to literally sit on top of rivers not realizing the environmental implication and risk associated the project. It could well be that all those floodings in St. Mary is related to the blockage of portions of these underground rivers. The Highway cost US$730 million or US$18 million for 67 km of roadway making this the most expensive Greenfield highway project in the world.  

The land of wood and water is systemically plagued with drought and lack of an effective water distribution system in most communities. “In the abundance of water the fool is thirsty....”-Bob Marley

Despite the fact that the island literally floats on a sea of interconnected subterranean rivers, chronic water problem is persistent in most areas of Jamaica. The problems have more to do with the inability and political will to harness the potential of this unlimited resource through an effective Water Resources Management Plan. http://dsidi.blogspot.ca/2016/07/why-water-is-becoming-new-oil.html

Jamaica Risk Major Flooding And Destruction To Local Businesses From The Environmental Impacts Of More Tourism Development. Jamaica may have exceeded its development capacity to support further major tourism and hotel development on the North Coast. Shoreline dredging and deep pile foundations cause soil densification and inhibit natural drainage of subterranean rivers along the North Coast out into the sea. This also adds to the depletion of sea corals and fishing grounds. Adding to the problem of environmental degradation is the growth of unplanned communities along the North Coast as result of migration of unemployed Jamaicans from other areas to work in low wage construction and hotel jobs.

A moratorium on further hotel development in the North Coast should be considered as a sustainable strategy. The Government should work with the existing capacity to create more linkages to local products and farm produce. Demand fair wages for hotel workers and levy market-based property tax assessment to renew and upgrade existing infrastructure such as sewage capacity and build a regional hospital in St. Ann's Bay or Ocho Rios.

Rise in Weather Extremes Threatens Infrastructure

By: Matthew L. Wald reported from Washington, and John Schwartz from New York.

WASHINGTON — From highways in Texas to nuclear power plants in Illinois, the concrete, steel and sophisticated engineering that undergird the nation’s infrastructure are being taxed to worrisome degrees by heat, drought and vicious storms.Restoring power in Bethesda. Md., after a wave of powerful storms on June 29. On a single day this month here, a US Airways regional jet became stuck in asphalt that had softened in 100-degree temperatures, and a subway train derailed after the heat stretched the track so far that it kinked — inserting a sharp angle into a stretch that was supposed to be straight.

In East Texas, heat and drought have had a startling effect on the clay-rich soils under highways, which “just shrink like crazy,” leading to “horrendous cracking,” said Tom Scullion, a senior research engineer with the Texas Transportation Institute at Texas A&M University. In Northeastern and Midwestern states, he said, unusually high heat is causing highway sections to expand beyond their design limits, press against each other and “pop up,” creating jarring and even hazardous speed bumps. Excessive warmth and dryness are threatening other parts of the grid as well. In the Chicago area, a twin-unit nuclear plant had to get special permission to keep operating this month because the pond it uses for cooling water rose to 102 degrees; its license to operate allows it to go only to 100.

According to the Midwest Independent System Operator, the grid operator for the region, a different power plant had had to shut because the body of water from which it draws its cooling water had dropped so low that the intake pipe became high and dry; another had to cut back generation because cooling water was too warm. The frequency of extreme weather is up over the past few years, and people who deal with infrastructure expect that to continue. Leading climate models suggest that weather-sensitive parts of the infrastructure will be seeing many more extreme episodes, along with shifts in weather patterns and rising maximum (and minimum) temperatures. “We’ve got the ‘storm of the century’ every year now,” said Bill Gausman, a senior vice president and a 38-year veteran at the Potomac Electric Power Company, which took eight days to recover from the June 29 “derecho” storm that raced from the Midwest to the Eastern Seaboard and knocked out power for 4.3 million people in 10 states and the District of Columbia.

In general, nobody in charge of anything made of steel and concrete can plan based on past trends, said Vicki Arroyo, who heads the Georgetown Climate Center at Georgetown University Law Center in Washington, a clearinghouse on climate-change adaptation strategies. Highways, Mr. Scullion noted, are designed for the local climate, taking into account things like temperature and rainfall. “When you get outside of those things, man, all bets are off.” As weather patterns shift, he said, “we could have some very dramatic failures of highway systems.” Adaptation efforts are taking place nationwide. Some are as huge as the multibillion-dollar effort to increase the height of levees and flood walls in New Orleans because of projections of rising sea levels and stronger storms to come; others as mundane as resizing drainage culverts in Vermont, where Hurricane Irene damaged about 2,000 culverts. “They just got blown out,” said Sue Minter, the Irene recovery officer for the state.

In Washington, the subway system, which opened in 1976, has revised its operating procedures. Authorities will now watch the rail temperature and order trains to slow down if it gets too hot. When railroads install tracks in cold weather, they heat the metal to a “neutral” temperature so it reaches a moderate length, and will withstand the shrinkage and growth typical for that climate. But if the heat historically seen in the South becomes normal farther north, the rails will be too long for that weather, and will have an increased tendency to kink. So railroad officials say they will begin to undertake much more frequent inspection. Some utilities are re-examining long-held views on the economics of protecting against the weather. Pepco, the utility serving the area around Washington, has repeatedly studied the idea of burying more power lines, and the company and its regulators have always decided that the cost outweighed the benefit. But the company has had five storms in the last two and a half years for which recovery took at least five days, and after the derecho last month, the consensus has changed.

Both the District of Columbia and Montgomery County, Md., have held hearings to discuss the option — though in the District alone, the cost would be $1.1 billion to $5.8 billion, depending on how many of the power lines were put underground. Even without storms, heat waves are changing the pattern of electricity use, raising peak demand higher than ever. That implies the need for new investment in generating stations, transmission lines and local distribution lines that will be used at full capacity for only a few hundred hours a year. “We build the system for the 10 percent of the time we need it,” said Mark Gabriel, a senior vice president of Black & Veatch, an engineering firm. And that 10 percent is “getting more extreme.” Even as the effects of weather extremes become more evident, precisely how to react is still largely an open question, said David Behar, the climate program director for the San Francisco Public Utilities Commission. “We’re living in an era of assessment, not yet in an area of adaptation,” he said. He says that violent storms and forest fires can be expected to affect water quality and water use: runoff from major storms and falling ash could temporarily shut down reservoirs.

Deciding how to address such issues is the work of groups like the Water Utility Climate Alliance, of which he is a member. “In some ways, the science is still catching up with the need of water managers for high-quality projection,” he said. Some needs are already known. San Francisco will spend as much as $40 million to modify discharge pipes for treated wastewater to prevent bay water from flowing back into the system. Even when state and local officials know what they want to do, they say they do not always get the cooperation they would like from the federal government. Many agencies have officially expressed a commitment to plan for climate change, but sometimes the results on the ground can be frustrating, said Ms. Minter of Vermont. For instance, she said, Vermont officials want to replace the old culverts with bigger ones. “We think it’s an opportunity to build back in a more robust way,” she said. But the Federal Emergency Management Agency wants to reuse the old culverts that washed out, or replace them with similar ones, she said. Ms. Arroyo of Georgetown said the federal government must do more. “They are not acknowledging that the future will look different from the past,” she said, “and so we keep putting people and infrastructure in harm’s way.” Matthew L. Wald reported from Washington, and John Schwartz from New York.

Infrastructure Financial Sustainability Reporting

By Silbert Barrett, BAA

Affiliated Member of the American Society of Civil Engineers (ASCE)

http://brittenwoods.com/index.html

Public Sector Accounting Board (PSAB) is part of the Canadian Institute of Chartered Accountants which introduces and proposes new accounting rules and guidelines affecting how municipalities in Canada prepare their annual financial reports.  In 2009 the Public Sector Accounting Board (PSAB) under rules 3150, required all local government in Canada to report infrastructure assets in their annual financial statements. What should have been a deliberate exercise in adopting fundamental changes to how municipalities plan for and manage their capital assets turns out to be a slight adjusting in their statements to report depreciation unrelated to the economic consumption of major infrastructure assets and long-term financial management planning.

Nevertheless, it would be unfair to make any judgments about local government commitment to sustainable infrastructure management since; PSAB 3150 was implemented with little or no legislative framework and hardly any resources from the Federal and Provincial Governments. However, we can all agree that this was perhaps an initial first step in what can be characterized as the "long and winding" road to sustainable management of our major infrastructure assets.

The development of an asset management plan for key infrastructure assets is fundamental to municipalities having a comprehensive long-term and strategic view of the financial plans needed to support the planning and decision-making processes of council. The decision to removed the reference to "deferred maintenance" as supplementary notes to the financial statement in the first exposure draft of PSAB 3150 was unfortunate, but more importantly, that the decision was not subjected to a vote in council.

Capital asset accounting was adopted in almost all Canadian municipalities without local councils knowing that key aspects of PSAB 3150 accounting guidelines relating to the long-term financial management of the nation’s major infrastructure assets were deleted without a vote in council. The section would have required municipalities to report on the condition of major assets as supplementary information to the financial statement. On the other hand the implementation of GSAB 34 in the United States in 2001 saw a compromise in dealing with the same issue where governments were allowed to adopt the modified approach. This too was not implemented in the proper manner, as we can see that major bond rating firms are expressing their concerns.

Reporting of General Infrastructure Assets under GASB Statement No. 34

GASBS No. 34 represents a dramatic shift in the way state and local governments report and present general infrastructure assets. Using Comprehensive Annual Financial Reports for the 50 states, Puerto Rico, and the District of Columbia, we find that financial statement users are unable to determine the extent of retroactive capitalization of these assets due to the lack of detailed disclosures provided by these governments. Comparing the status of infrastructure assets among the governments is also extremely difficult because governments using depreciation accounting have significant variation in the maximum useful lives of these assets and governments choosing the modified approach use different measurement methods and baselines. Given the need for comparability across governments and Standard & Poor's concern about how governments identify capital assets and their depreciation assumptions and processes, we suggest the GASB explicitly require governments to disclose the extent that infrastructure assets are capitalized and consider whether it is feasible to provide a list of acceptable measurement scales and condition levels for the modified approach. We also suggest that government officials and auditors further examine whether governments are meeting the requirements of the modified approach and whether the useful lives adopted for depreciation accounting are consistent with the physical lives of these assets. By enhancing the reporting transparency for infrastructure assets, governments can significantly increase the usefulness of these disclosures.-by Thomas E. Vermeer, Terry K. Patton, and Alan K. Styles

This strategic approach to infrastructure planning and development would have allows council to understand the extent and nature of future financial commitments, and to develop policy framework to address issues such as service levels, debt financing and revenue capture. These are important elements of the budget process for which municipalities for most part have either ignored or allow the political process to shape the budget outcomes.

Therefore, the mandate to implement sustainability reporting of major local government infrastructure assets should be supported within the context of a national framework to ensure long-term planning. The key components would be the requirement to prepare strategic asset and financial management plans both at the official planning and community planning levels. What is at stake is the viability of local governments and need to lessen the burden on the property tax base and preventing the transfer of our current obligations for the up-keep of assets consumed to create wealth today onto future generations.

This planning should be integrated with the Development Charges Act in which asset depreciation or consumption in it economic terms serves to provide the basis for allocating development charges and would imply that municipalities are financially sustainable if they are able to maintain their financial capital and infrastructure capital over the long-term. These changes to support sustainability reporting would also allow local governments to development long-term financial forecasts with a clear picture of the long-term infrastructure funding needs and opportunities for revenue capture in order to match service levels to operational planning and asset renewals needs.

Prime Minister Kevin Rudd talks Asset Management‏

It is a big development when we now have the Prime Minister talking of the need for improving asset management and financial management.

"We must improve asset management and financial management. Councils that plan and manage their assets effectively are councils that can deliver value for money to their communities."

This extract from a recent address by Prime Minister Kevin Rudd, to the new Australian Council of Local Governments, highlights the critical importance of asset management in the provision of the nation's infrastructure – and the need to get your house in order immediately.

Some of the key points in the Prime Minister’s message included:

• Recognition that infrastructure is under strain
• Recognition that long term reform is needed in the management of infrastructure
• Implementation of asset management and financial management has been patchy to date
• The Government will consider making resources available for a long term reform fund to support councils as they improve their asset management and financial plans

It would be wise for local government to heed the Prime Minister’s message.-source:www.ipwea.org.au/namsplus


While PSAB 3150 was a necessary first step towards the financial sustainability reporting, it should by now allow for the confidence building at senior levels of government to undertake the policy choice of developing the framework in which there is a clear and consistent focus on asset management and long-term financial planning.

—Silbert Barrett
 These are the author’s personal opinions and do not reflect those of his employer. Nor is the author making inferences about how infrastructure assets are managed. The author bases his opinions on his involvement in the pilot implementation of capital asset accounting as a project manager for the City of Hamilton and the Ontario Benchmarking Initiatives (OMBI).

Condition Based Infrastructure Asset Valuation Policy Framework-Part I

ACCOUNTING FOR INFRASTRUCTURE ASSETS IN THE PUBLIC SECTOR

by Silbert Barrett, BAA

Affiliated Member of the American Society of Civil Engineers (ASCE)

http://brittenwoods.com/index.html

Background

In 2002 the Canadian Institute of Chartered Accountants (CICA) published a research report titled “Accounting for Infrastructure in the Public Sector”; a public sector accounting handbook. It outlines a detailed analysis of the significance and possible impact of infrastructure deficit on the ability of government to maintain infrastructure service levels to ensure public health and safety. This report provided the framework for the on-going debate in Canada regarding the need to report infrastructure assets in public sector financial statements and form the basis for developing current accounting standards as outlined the Public Sector Accounting Board’s (PSAB) associate and exposure drafts 3150; Tangible Capital Asset Accounting. The introduction of Tangible Capital Asset Accounting underscores Provincial policies and guidelines focusing on preservation and stewardship of infrastructure assets, and also marks the beginning of improved financial management of the City’s infrastructure to foster future growth and ensure continued economic prosperity.

Public Sector Accounting Board (PSAB) is part of the Canadian Institute of Chartered Accountants, which introduces and proposes new accounting rules and guidelines affecting how municipalities in Canada prepare their annual financial reports.

Policy Framework

Provincial Legislation and Policy Interests

Accounting of Infrastructure Assets under PSAB 3150 must be conducted within the framework of recent policy initiatives. Recent developments in Ontario’s municipal financing, initiated under the then Mike Harris government with the introduction the Capital Investment Plan Act (RSO 1993), started the “corporatization” of key provincial agencies responsible for the delivery of provincial infrastructure services. “The Government of Ontario has announced a capital investment plan for Ontario under which the Government, municipalities and other public bodies and the private sector will work together  to make significant investments in the province’s infrastructure.[1]”

Under Municipal Act, 2001 section 294 & section 231 of the City of Toronto Act, 2006, which require municipalities to prepare annual financial statements in accordance with generally accepted accounting principles for local governments as directed by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants.

Changes in PSAB guidelines therefore affect municipal financial accounting and reporting requirements.  

In 2004 the current Ontario Government announced a new Infrastructure, Financing and Procurement Framework, under the jurisdiction of the Minister of Public Infrastructure Renewal. A new crown corporation was created; Infrastructure Ontario to engage Private-Public Partnership in infrastructure financing and development through an innovative approach called Alternative Financing and Procurement (AFP) and is mandated to manage the implementation of AFP projects. The existing policy framework for the implementation of the AFP model included the “Building a Better Tomorrow” and the “The Places to Grow” legislation and growth plans for the “Greater Golden Horseshoe”.

Recognizing the growing infrastructure deficit and its implications, the Ontario Government has taken some important steps in infrastructure investment[2]:

• Established framework for planning, financing and procuring public Infrastructure.  

• Enacted the Places to Grow Act (Bill 136) for long-term growth planning and infrastructure renewal across      the province.  

• Released a five year infrastructure investment plan which set priority and targeted more than $30 billion for infrastructure investments by 2010. 

• Selected Alternative Finance and Procurement models to finance and implement many large infrastructure      projects. 

• Created a new provincial agency, Ontario Infrastructure Project Corporation (Infrastructure Ontario), to manage the implementation of AFP projects. 

• Committed a total of $5,318 million for infrastructure expenditures in the 2006 Budget.

Building a Better Tomorrow Framework; is an infrastructure planning, financing and procurement policy framework. This represents the first comprehensive framework in Ontario’s history to guide the province, municipalities, and broader public sector partners in choosing the best options for planning, financing and procuring public infrastructure assets and establishes clear guidelines to achieve its objectives based on these principles:

•  Protection of the public interest;
• Value for money;
• Appropriate public control/ownership structure;
• Accountability ; and
•  Transparency.

These guidelines will ensure that infrastructure investments are consistent with growth planning to accommodated additional four to five million people estimated to settle in Ontario over the next 25 years will do so in a planned environment to ensure desirable places to live, work and learn, and have convenient access to health care and educational facilities, public transit, and a clean and healthy environment.

To achieve these goals the government passed legislation in 2005, the Places to Grow Act (Bill 136), with the intent to provide a better way of planning for growth across the province. This meant that municipalities will be better able to curb urban sprawl, strengthen communities and protect the natural environment and at the same time enable the government to get maximum benefit from its infrastructure investments.

Also in 2005, the government released a five year strategic infrastructure investment plan, ReNew Ontario Initiative, aimed at coordinating contributions from all levels of government, the private sector and public sector agencies (Hospital and Universities) to invest more that 30 billion in public infrastructure by 2010. “After extensive consultations with stakeholders and communities across the province, the first growth plan, the Growth Plan for the Greater Golden Horseshoe, where most of the expected growth over the next 25 years will occur, was released in June 2006”.

In recent years, the Province of Ontario has enacted various pieces of legislation, such as the new Municipal Act and Bill 175 that require municipal service fees to be established based on the “cost” of delivering those services.

---

[1] Capital Investment Plan Act RSO (1993)

[2] RCCAO,  The Infrastructure Funding Deficit: Time to Act, June 2006

Thomas E. Vermeer, Terry K. Patton,Alan K. Styles (2011) Reporting of General Infrastructure Assets under GASB Statement No. 34. Accounting Horizons: June 2011, Vol. 25, No. 2, pp. 381-407. '.

—Silbert Barrett
These are the author’s personal opinions and do not reflect those of his employer. Nor is the author making inferences about how infrastructure assets are managed. The author bases his opinions on his involvement in the pilot implementation of capital asset accounting as a project manager for the City of Vancouver, City of Hamilton and the Ontario Benchmarking Initiatives (OMBI). Research Analyst II (Operational Planning), City of Toronto Transportation Services Division.

Condition Based Infrastructure Asset Valuation Implementation Framework-Part II

ACCOUNTING FOR INFRASTRUCTURE ASSETS IN THE PUBLIC SECTOR

By Silbert Barrett, BAA

Affiliated Member of the American Society of Civil Engineers (ASCE)

Public Sector Accounting Board (PSAB) Exposure Draft 3150 (s.43)http://brittenwoods.com/index.html 

Section 43 of the then PSAB exposure draft would have allowed for the reporting of asset condition while maintaining the fundamental premise of GAAP accounting principles; whereby historical cost is the basis of financial statement presentation. In my judgment, the inclusion of section 43 was a compromise similar to the modified approach that was adopted by the Government Accounting Standards Board (GASB) Statement 34, in the United States. However, section 43 of the original PSAB exposure draft 3150 was greatly misunderstood. The opposition had characterized it as current cost asset accounting to replace historical cost or imposing upon municipal governments the financial liability for their infrastructure deficits and so it was subsequently taken out of the exposure draft. 

The guidance for implementing capital asset accounting in Canada should have been drawn from the International Financial Reporting Standard (IFRS s.16) rules as adopted by Australia (s.116) and other governments around the world. It introduces the concept of depreciated replacement cost instead of discounted replacement cost as an estimate of historical cost in instances where historical cost for an asset was not available. Depreciated replacement cost or value in use is far more an accurate measure of asset valuation and consumption over time than discounted replacement cost, since it relies on the condition state of the asset as oppose to the average inflation rate over time to arrive at the opening balance or value in use.  

According to the original exposure draft, “Nothing precludes management form using estimated replacement costs for the purposes of rate setting and future revenue requirements for asset replacement planning”. With the introduction of Bill 175, the Provincial government at the time recognized the importance of depreciated replacement cost as a measure for setting service levels and cost recovery.

Section 43 stated that “Governments are encouraged to measure and disclosed the extent to which maintenance has been deferred on their material and complex network assets, such as highways. Government may want to consider providing this information in the financial statements because it can add to the picture given of the financial condition of a government. Deferred maintenance information, like information on contractual obligation and contingencies, is useful for understanding and assessing future revenue requirements and could be presented as supplementary information”.

In light of these challenges, PSAB had conducted a study to assess the implication of asset condition measures or standards for reporting capital asset and to provide guidance for disclosure about this type of reporting, although the draft had already stated that the disclosure could be presented as supplementary information in the form of management decision analysis.

It was hoped that PASB Exposure Draft 3150 would have been amended to allow municipalities to record and report on the state of infrastructure assets as supplementary financial information in the form of a Management Decision Analysis (MDA) to their annual financial reports. This policy option was vigorously advocated as having distinctive advantages for older municipalities such as the City of Hamilton with significant infrastructure deficits. This would have allowed for a better alignment of development charges and other cost recovery measures to the actual cost of infrastructure maintenance and development.

The premise of the original PSAB exposure draft 3150, was not to fundamentally change GAAP as it relates to capital asset accounting but rather to allow improve financial management of major infrastructure assets in terms of rate setting for cost recovery and long-term financial planning; an integrated approach to asset accounting from an economic and financial sustainability perspective.  

Ontario Municipal Benchmarking Initiatives (OMBI) Municipal Guide to Accounting for Capital Assets (excerpts):

The OMBI accounting guide is intended to apply the principles outlined in PASB 3150 in a practical setting as it relates to the implementation of capital assets accounting at the municipal level.

“This guide aims to give municipal financial officials and operational manager’s practical information and tools to set up and operate a capital asset accounting system. This guide does not, however, replace the need for the planning and discussions that will be required between a municipality’s professional finance staff and its operational management in implementing such a system”.

The OMBI guide requires the valuation of capital asset using the historical cost, however, in the absence of historical cost, estimated historical (discounted replacement and or depreciated replacement) cost is considered a reasonable alternative. Depreciated replacement cost would more accurately reflect asset condition and value in use pursuant to the International Financial Reporting Standards (IFRS) rules.

Government Accounting Standards Board ( GASB) Statement 34

The valuation of infrastructure assets has been the focus of municipal financial officers and engineers in the U.S. since GASB 34 was issued in 1999. It recommends two valuation methods; depreciation method and the modified approach. “GASBS 34 allows respondents to either depreciate the value of their infrastructure assets as they age or leave the value recorded in the balance sheet unchanged if they can demonstrate that the assets are being effectively preserved”.

The depreciation method estimates the value of capital assets using indexation to historical or replacements cost and then amortized it over the estimated useful life of the asset using the straight-line approach. How capital assets are amortized and depreciated appears to be the point of departure between accounting and engineering and have resulted in the adoption of the modified approach. The key to meeting GASB 34 requirements using the Modified Approach is having an Asset Management System with the following characteristics:

• an up-to-date inventory of assets;
• ability to perform condition assessments of assets and summarize these assessments using a measurement scale; and
• annual estimates of the amount needed to maintain and preserve the assets at the level established by the jurisdiction.

Australia Accounting Standards Board (AASB-116 Accounting for Property, Plant & Equipment)

The Australian Accounting Standards Board (AASB 116) has gone further than both the Canadian (PASB 3150) and the U.S. (GASB 34) in recognizing the role of infrastructure asset accounting as an integrated approach for effective asset management and financial reporting.

Unlike GASB 34 and PSAB 3150, straight-line depreciation is not mandated under AASB 116 capital assets accounting guidelines. Instead, it suggested that “the depreciation basis must reflect the pattern of consumption of economic benefits embodied in the asset (that is, what is actually happening to the asset as a result of the way that it is actually being managed)”. Not all assets lose their service potential in a uniform (straight-line) way. Many assets degrade or decay on a curve as shown below.

Pavement Life Cycle 

Source: Timely Preventive Maintenance for Municipal Roads — A Primer

            Issue No 1.1, A Best Practice By The National Guide To Sustainable Municipal Infrastructure   April 2003

This implies that the useful life of the assets must be assessed annually to determine the level of depreciation and make the necessary changes or adjustments to depreciation charges. Invariably, the useful life of the asset should be managed so as to ensure that the expected pattern of consumption of the economic benefits is consistent with the asset’s lifecycle. Asset management is, therefore, managing the useful life of the infrastructure assets based on condition and age to optimize the value of the asset over its life cycle in monetary terms rather than engineering terms. 

The importance of this analysis is to conduct infrastructure asset valuation based on life cycle costing to determine "value for money" and to demonstrate how opportunities for cost savings increase or decrease depending on changes in the condition state of the asset over time. The greater the risk of asset failure or impairment, the lower the opportunity for cost savings. Timely capital improvements will extend the life of the asset and will result in greater "value for money" or return on investments. Asset management based accounting, therefore, allows for meaningful management decision analysis and reporting.

—Silbert Barrett
These are the author’s personal opinions and do not reflect those of his employer. Nor is the author making inferences about how infrastructure assets are managed. The author bases his opinions on his involvement in the pilot implementation of capital asset accounting as a project manager for the City of Vancouver, City of Hamilton and the Ontario Benchmarking Initiatives (OMBI). Research Analyst II (Operational Planning), City of Toronto Transportation Services Division.