Asset Management Framework - North West...Asset Management Framework Version 3.3 April 04 - 7 - Framework of the information needed for asset management. Accounting conventions and

Asset Management Framework

Version 3.3 April 04 - 1 - Framework

ASSETMANAGEMENT FRAMEWORK



Table of Contents1 BACKGROUND 4

2 FINANCIAL MANAGEMENT CONCEPTS 5

3 ASSET MANAGEMENT 63.1 CURRENT SCENARIO IN GOVERNMENT 73.2 MEASUREMENT OF ASSETS 73.3 LEGISLATIVE BASE FOR ASSET MANAGEMENT IN THE PFMA 83.4 CLASSIFICATION OF ASSETS 93.5 TRANSITIONAL ARRANGEMENTS 9

4 ASSET MANAGEMENT DECISIONS AND POLICIESADOPTED 11

4.1 DECISIONS TAKEN 114.1.1 Capturing of Assets 114.1.2 Asset Register Software 12

4.2 POLICIES ADOPTED 124.2.1 Asset Threshold 124.2.2 Depreciation Method 12

5 ASSETS AND FINANCIAL STATEMENTS 135.1 PURPOSE OF FINANCIAL STATEMENTS 13

5.1.1 Components of Financial Statements 135.1.2 Responsibility for Financial Statements 14

6 ASSET LIFE-CYCLE MANAGEMENT 156.1 PLANNING PHASE 16

6.1.1 Introduction 166.1.2 Common Understanding of Assets 166.1.3 Definition of an Asset 166.1.4 Role of Assets 206.1.5 Characteristics of Assets 206.1.6 Recognition of Assets in Financial Statements 216.1.7 Evaluating Existing Assets 256.1.8 Evaluating Asset Performance 256.1.9 Developing the Asset Strategy 256.1.10 Current or Committed Projects 256.1.11 Own-Account Construction 266.1.12 Classification of Assets 306.1.13 Classification Standards 336.1.14 Asset Register 33

6.2 ACQUISITION PHASE 366.2.1 Measurement of the Elements of Financial Statements 376.2.2 Alternatives to Asset Ownership 386.2.3 Methods of Acquisition 396.2.4 Establishing Life-Cycle Costs 406.2.5 Asset Valuation 406.2.6 Asset Transfers between Departments and Entities 416.2.7 Exchanges of Assets 42

6.3 OPERATIONS & MAINTENANCE PHASE 42



6.3.1 Expenditure on Assets during its life 426.3.2 Obsolescence 466.3.3 Subsequent Valuation or Re-valuation of Assets 466.3.4 Depreciation 476.3.5 Useful Life 516.3.6 Impairment 53

6.4 DISPOSAL PHASE 53

7 DISCLOSURE 55

8 INVESTMENT PROPERTY 588.1 INITIAL MEASUREMENT 588.2 SUBSEQUENT EXPENDITURE 59

8.2.1 Fair Value Model 608.2.2 Cost Model 61

8.3 TRANSFERS 618.4 DISPOSALS 62



PurposeThe purpose of this document is to introduce the concept of assetmanagement. It is designed to highlight the principles of, and need for,asset management and give broad guidelines in this regard. Thepractical aspects of asset management will be dealt with in ‘PracticalGuides’.

The Department of Public Works will issue an Immovable AssetManagement Guide that will cover immovable assets that are subject tothe Public Works mandate in respect of the provision and managementof accommodation, housing, land and infrastructure needs of nationaldepartments. A Practical Guide will be issued by National Treasurydealing with tangible assets (both movable and immovable) with thespecific exclusion of immovable assets dealt with in the ImmovableAsset Management Guide issued by the Department of Public Works

1 Background

In the pursuit towards the attainment of a goal or a set of goals,resources are required, which will enable the entity to achieve the goalas set. Some obvious examples of resources are assets (inventory,immovable property, transport assets, cash) and human (a number ofpeople with different kinds of expertise). When these combinedresources are used to the best possible advantage the goal will beachieved quicker and easier. The decision making process to decidewhat to use, where to use it and how to use it, is generally referred toas “management”.

The management process weighs up the advantages anddisadvantages (cost versus benefit) of utilising resources in a specificway against the risk of not doing so and not achieving the set goal inthe shortest period and most effective way possible.

By managing all resources at our disposal we can ensure that weremain goal orientated and that resources not utilised properly can bebetter applied or alternatively even changed for resources that will bemore effective in the process towards the attainment of the goal.

The above principles (although very simplistically stated) are applied ineveryday life whether in a family or a business situation. Applyingthese principles in business and keeping record of the cost of a projectand weighing it up against the benefits gained is generally referred toas “financial management”. The basic principles remain constant in thepursuit of financial gain and that of service provision. Neither financialgain nor service provision can be achieved for an indefinite period ifthese principles are not adhered to. Inefficiency will lead to inhibitivecost, which will eventually make it impossible to move forward.



Historically the Public Sector did not place much emphasis on theprinciple of cost versus benefit, largely due to the system for recordingincome and expenditure, which accounted only for the movement ofcash, which in turn lead to the misconception that the use of assetsonce paid for was “free”, or without cost.

In reality it made evaluating the decisions of management incomparison to the benefits derived and any comparison with alternativecourses of action meaningless if not impossible.

In recent years the trend in Public Sector accounting has been to movetowards greater transparency and accountability towards the public atlarge in the utilisation of public funds. This has placed responsibility formanaging the financial affairs of the State under the spotlight and hasraised questions regarding the effectiveness and appropriateness ofsystems and procedures used to manage state assets. In the PrivateSector stringent rules apply for the accounting of funds and thedisclosure of financial information in annual financial statements.

The comparison between public sector and private sector accountingand the benefits that can be derived have resulted in a global change inmethods used historically in the Public Sector to account and report onthe utilisation of public funds.

Great emphasis are being placed on better accounting practices andprocedures to ensure that state assets are managed and utilised in themost effective way to achieve the required results as defined for eachentity within the Public Sector.

2 Financial Management Concepts

The underlying concept is gathering and providing information, bothfinancial and non-financial, to users to make informed decisions.

The users of the information can be internal to the organisation orexternal. Internal users would include managers that need to decide onthe best course of action in order that the specified goals as set by allstakeholders can be achieved in the most effective and efficientmanner. External users would include potential investors, citizens, aidagencies, banks and providers of capital.

In the Public Sector the internal users would be the relevant decision –makers within an entity as well as parliament for reporting purposes tothe public regarding the utilisation of funds and the related serviceachievement. The external users of the information would be economicanalysts, foreign governments with a view to investment andorganisations like The World Bank and International Monetary Fund asbase for providing loan capital.



Management broadly involves decision-making, planning and controlprocesses. The decision-making and planning stages involve thesearch for alternative courses of action, the gathering of data about thealternatives, the selection of the most appropriate alternative and theimplementation of the final decision. The control process is the processof measuring actual performance to ensure that the alternatives thatare chosen and the plans for implementing them are carried out andcorrective action is taken where appropriate and in good time. Theprocess involves comparing actual to planned outcomes andresponding to divergences from plan by alerting management to searchfor alternative courses of action to achieve the planned outcome.

3 Asset Management

In keeping with the global move towards the improvement in publicsector accounting the Public Finance Management Act, 1999 (PFMA)was introduced. The Municipal Finance Management Act, Act 56 of2003 (MFMA), has also been introduced to extend the improvement tolocal government level. The MFMA will be implemented in stages.Sections of the Act relevant to asset management will become effectiveon 1 July 2004.

Good asset management is critical in any business environment andmore so in the public sector, particularly as some of the significantassets are infrastructure assets with long life spans and enormouscapital outlay that are vital to providing a foundation for economicactivity.There are two main systems of recording income and expenditurebeing used in the public sector in the world today. One system is thecash based system that has historically been used by mostgovernments for accounting in the past, and the accrual based system.There has been a steady move towards the use of an accrual system inrecent years in the public sector at large.Under the cash based system there is a tendency to focus on whetheror not to spend on new assets rather than measuring the full and mosteffective and efficient use of assets available. In addition maintenanceof assets on hand is frequently ignored or postponed in favour of otherpressing needs.On the other hand, under an accrual based system, the focus canextend further on whether to retain and upgrade existing assets asopposed to only the purchase of new assets by providing informationfor continued measurement of actual cost against benefits derived.Decision-makers are thus able to focus on the broader range ofoptions available in managing assets.

Financial management and accounting conventions provide adisciplined and consistent framework for recording and reporting much



of the information needed for asset management. Accountingconventions and reporting obligations influence all phases of the AssetLife Cycle.It must be noted that the decision to implement asset managementguidelines is not dependant on or in contradiction of an accountingsystem in use, but rather based on the need for decision-makinginformation due to the current lack of such available information andtowards assisting with the improvement of asset management in thePublic Sector at large, as required by the PFMA.

Take Note:For ease of reference, the term ‘entity’ has been used throughoutthe Guideline to refer to all Government entities (nationalprovincial and local) that are wholly or partly funded through theRevenue Funds and that, under the provisions of the PFMA orMFMA, are required to report to Parliament / Legislature. Theentities include all National and Provincial Departments as well asSchedule 1 and Schedule 3 entities.

3.1 Current scenario in Government

Government currently uses a cash basis of accounting whereassets are expensed when payment is made. Under cash basedaccounting, assets purchased with capital funds, once approved,are treated effectively as 'free' goods in subsequent years sothat there is little ongoing incentive to ensure that the servicepotential of these assets are optimised.Budgeting and appropriation of funds on an annual basis ignoresthe associated nature of capital and operating costs. It alsoprovides the opportunity to defer necessary maintenanceexpenditure, as the impact of such a decision is not realised untillater in the asset's life. The medium term expenditure frameworkintroduced for budgeting purposes, results in the same difficultydue to no maintenance plan for assets being formalised and thelack of information on the maintenance history.The true cost of owning and operating assets can be readilydetermined but only through the maintenance of complete andaccurate asset records.

3.2 Measurement of assetsFinancial accounting is not an end in itself, and the managers ofassets will require other information to measure some aspects ofasset performance such as functionality and utilisation. There isa close correlation between financial management and othermeasures associated with asset performance and managersneed to have a good understanding of the fundamental financialmanagement and accounting concepts that apply.



3.3 Legislative base for asset management in the PFMA and MFMA

Section 38 places the responsibility on the accounting officer forfinancial and risk management of the entity as well as theeffective and efficient use of the resources thereof. The sectionfurther specifically tasks the accounting officer with themanagement, including the safeguarding and maintenance, ofassets, and the management of liabilities. Similar use ofresources and safeguarding and maintenance requirements areset in Section 62 (1) (a) and 63 (1) (a) of the MFMA effective 1July 2004.Section 40 of the Act requires that the accounting officer keepfull and proper records of the financial affairs of the entity andplaces the responsibility for producing annual financialstatements, that will fairly reflect the financial position of theentity as well as its financial performance, on the accountingofficer. Section 65 (1) and (2) (a) to (i) of the MFMA set similarstandards for accounting effective 1 July 2004 while theproduction of full financial statements will be phased in overfuture periods.Section 27 requires further that the annual budget must reflectthe estimates of current and capital expenditure per vote and permain division, and in relation to capital expenditure reflect theimpact thereof on future financial years. Similar standards areset for local government in the MFMA to be implemented in thenext four financial years. An annual budget and spending perbudget is effective from the 2004/05 financial year. Sections15(a), read with 16 (1) and (3) and 28 (1),(2),(5) and (6) and69(1) and (2) of the MFMA.Treasury Regulation 10.1 (issued in terms of Section 76)requires of the accounting officer to ensure that processes,manual or electronic, and procedures are in place for theeffective, efficient, economical and transparent use of the entity’sassets. It further places the full responsibility on the accountingofficer for ensuring that control systems are in place to ensurethe prevention of theft, losses, wastage and misuse of assetsand the keeping of stock levels at an optimum and economicallevel.From the above it is clear that the proper management of andaccounting for assets have been set as an importantresponsibility of the accounting officer. To give affect to this it isnecessary to firstly identify all assets under the control of anentity through reference to original documentation and physicalcounts and secondly to create a system that will ensurecontinued monitoring of these assets as well as accounting foradditional assets procured on an ongoing basis.



It is very important to note therefore, that the need to haveeffective Asset Management and to compile a complete AssetRegister is not as a result of a change to “Accrual Accounting”but as a result of legislation enacted as far back as 1999, andbased on good financial management practices. It must beunderstood that there is no interdependence between the needfor keeping asset registers and good asset managementpractices and the change in accounting basis if and whendecided.

3.4 Classification of AssetsSection 38 of the PFMA (and Section 63 (1) (a) of the MFMA) isall embracing in its reference to “assets” and so is TreasuryRegulation 10.Part 1 of this guideline will specifically and exclusively deal withthe management of tangible non-current assets (immovable aswell as movable) as classified in FIGURE 2 ON PAGE 30.

3.5 Transitional Arrangements

As a first step towards the management of non-current assetscertain disclosures related to these assets were already requiredin the financial statements of departments and constitutionalinstitutions for the years ended 31 March 2002, 31 March 2003and 31 March 2004.This Guideline and the disclosure requirements have beendrawn up with reference to International Standards on therecognition of non-current assets.It is expected that Schedule 1 and Schedule 3 entities will fullycomply with all aspects of this Guideline since these entities inmany cases are already operating under Generally AcceptedAccounting Practice (GAAP). GAAP has in turn been alignedwith current International Accounting Practice.



PART 1

THE MANAGEMENT OF TANGIBLE NON-CURRENT

ASSETS IN THE PUBLIC SECTOR IN SOUTH AFRICA



4 Asset Management Decisions and Policies adopted

Since the promulgation of the PFMA and as part of the move towardsproper management and recording of assets a strategy was adopted togradually enable entities to comply therewith.The strategy involves the compilation of asset registers, validation ofthe completeness thereof through physical identification and countingof assets, and introducing values to the register through the referenceto original documentation of purchase. During this process guidelineson procedures and policies will be developed.Government has taken the following decisions with regards to AssetManagement:

4.1 Decisions Taken

4.1.1 Capturing of AssetsAsset Capturing TimelinesThe following table represents the timeline that has beenadopted for the capturing of assets at the start of the financialperiod 2001 / 2002.

ACQUISITION DATE CAPTURE DATECurrent year As acquired2003/04 As acquired2002/03 As acquired and by March

20032001/02 By March 20032000/01 By March 20031999/00 By September 2003Prior to 1999/00 By March 2004

As much detail as possible, needs to be recorded whencapturing assets, REFER FIGURE 3 ON PAGE 35. Whereinformation on the cost price of assets is available, this shouldbe utilised. Where cost information is not available a value ofR1,00 should be applied for the initial recognition. This willensure that the asset is captured on the register, which will thenrepresent a complete list of assets on hand, for managementpurposes.

National Treasury, in conjunction with other stakeholders, will inthe future develop a policy on standard values which would thenbe applied to these older assets listed at R1,00.



4.1.2 Asset Register Software

A variety of software systems are available in the market placeto assist in the effective management of assets.

1. The Asset Register Year-end reports should be usedto support the asset amounts reflected in the AnnualFinancial Statements for disclosure purposes.

2. A National or Provincial Department can use anysoftware system for capturing their assets provided itwill give the information required for disclosurepurposes and has been approved by the NationalTreasury.

4.2 Policies adopted

4.2.1 Asset Threshold

All assets costing less than R5 000 will be classified as ‘minorassets’. These assets must be recorded in the asset register, butwill be fully depreciated / written-off in the year of acquisition andnot over its useful life, as is the case with assets costing R5 000and more.It is required that all assets are classified and recorded, bothminor and major assets. The assets costing less than R5 000will be included under “Current Expenditure” on the IncomeStatement and Appropriation Statement. These assets shouldstill be managed and controlled, since certain of these assetscould be classified as ‘highly desirable’ items, e.g. cell phones.The recording threshold has been based on cost-benefitconsiderations in terms of accountability and the management ofassets. The inputs of National and Provincial Departments havealso been taken into consideration. It may become necessary infuture years to revise this amount or to have different thresholdsfor each of the sectors within government.

4.2.2 Depreciation Method

The straight-line method of depreciation is the methodselected and approved for use in all National Departments andProvinces. This method is advantageous as:

1. It is simple to calculate.2. It is the most commonly used.3. Adopting this method throughout facilitates uniformity

across all National Departments and Provinces.



5 Assets and Financial Statements

Public sector entities control assets of various classes and all suchentities have a duty of stewardship over assets under their control,irrespective of how such assets may be reported in their financialstatements.

5.1 Purpose of Financial Statements

Financial statements are a structured representation of thefinancial position and the changes therein and of thetransactions undertaken (financial performance) by an entity.The objectives of general purpose financial reporting in thepublic sector should be to provide information useful foreconomic decision-making and to demonstrate the accountabilityof the entity for the resources entrusted to it by:a) Providing information about the sources, allocation and

uses of financial resources;b) Providing information about how the entity finances its

activities and meets its cash requirements;c) Providing information that is useful in evaluating the entity’s

ability to finance its activities and to meet its liabilities andcommitments;

d) Providing information about the financial condition of theentity and changes in it; and

e) Providing aggregate information useful in evaluating theentity’s performance in terms of service costs, efficiencyand accomplishments.

General-purpose financial statements can also have a predictiveor prospective role, providing information useful in predicting thelevel of resources required for continued operations, theresources that may be generated by continued operations, andthe associated risks and uncertainties.

Financial reporting may also provide users with informationindicating whether resources were obtained and used inaccordance with legal and contractual requirements, includingfinancial limits established by appropriate legislative authorities.

5.1.1 Components of Financial Statements

The information requirements are, respectively, fulfilled by thepreparation and presentation of:

a) A Statement of Financial Position (balance sheet);



b) A Statement of Financial Performance (incomestatement);

c) A Statement of Changes in Net Assets/Equity(statement on changes in Equity);

d) A cash flow statement;

and appropriate supplementary notes thereto.

The principal elements of financial statements are:

a) Revenue;

b) Expenditure;

c) Assets;

d) Liabilities, and

e) Net assets/equity.

Whilst the information contained in financial statements can berelevant for the purpose of meeting the objectives, it is unlikelythat all the objectives will be met.This is likely to be particularly so in respect of entities whoseprimary objective may not be to make a profit, such as in thecase of government, as public sector managers are likely to beaccountable for the achievement of service delivery as well asfinancial objectives.Therefore, supplementary information including reporting onperformance against pre-determined objectives and anAppropriation Statement (to provide information indicatingwhether assets were obtained and used in accordance with theapproved budget) would be included in addition to the financialstatements in order to provide a more comprehensive picture ofthe entity’s activities during the reporting period.

5.1.2 Responsibility for Financial Statements

The responsibility for the preparation and presentation offinancial statements varies within and across jurisdictions ingovernment and is set out in the PFMA (Section 40(1)(b) readwith Section 36(2), Section 55(1)(b) read with Section 49(2),Section 8(1) and Section 19(1)).In addition, a jurisdiction may draw a distinction between who isresponsible for preparing the financial statements and who isresponsible for approving or presenting the financial statements.



Examples of people or positions that may be responsible for thepreparation of the financial statements of individual entities(such as government departments or their equivalent) includethe individual who heads the entity (the Accounting Officer orChief Executive) and the Chief Financial Officer.The responsibility for the preparation of the consolidatedfinancial statements of the Government as a whole rests with theNational and Provincial Treasuries.

6 Asset Life-Cycle Management

P la n n in g

A cq u is itio nD isp o sa l

O p e ra tio n &M a in te n a n ce

P la n n in g



P la n n in g



P lan n in g


O p era tio n &M ain ten an ce

Figure 1: Asset Life Cycle

The life cycle of an asset can be defined as that period that an entitycan foresee itself utilising an asset on an economically effective andefficient basis for the furtherance of the entity’s trade or servicedeliverance.The period covers all the phases in the life of an asset namely theprocurement, the use and maintenance and eventual disposal thereof.This period is described as the useful life of the asset to the entity andmay be different from the physical life of the asset.The Life-Cycle approach to Asset Management will be dealt with indetail in the Practical Guide. This Part of the Guideline focuses on theimpact and accounting for asset management through the adoption ofthe life-cycle approach. The following aspects are covered:

a) In the planning phase we deal with the definition ofassets;

b) In the acquisition phase we deal with the recognition ofassets including the measurement and valuation of assets;

c) In the operation and maintenance phase we deal withmaintenance, refurbishment, enhancement anddepreciation; and

d) Lastly, we deal with asset disposals in the disposal phase.



6.1 Planning Phase

6.1.1 Introduction

Assets are recorded and reflected in monetary terms to allowperformance to be measured both internally for managementpurposes and externally for accountability. Consistent definitionsfor internal and external reporting are essential for goodmanagement and reporting. This phase focuses on the overallunderstanding of an asset.Take note:Although the section on definition of assets andclassification of assets deals with assets in general, theGuideline focuses on the management of non-currentassets that is tangible (physical) in nature and has anexpectation of use during more than one reporting period.In accounting terms, “fixed” assets are described as non-current tangible (physical) items of significant value.

6.1.2 Common Understanding of Assets

The common understanding of an asset is that it is something ofenduring value, something that is worth having. A soundappreciation of the two elements of this definition – ‘useful life’and 'value’ – is fundamental if entities are to identify and recordall assets. ’Useful life’ is the period of time in which an asset, isexpected to be used by the entity. The 'value' of an asset ismeasured in monetary terms in order for it to be recognised infinancial statements.

6.1.3 Definition of an Asset

An asset is a resource controlled by an entity as a result ofpast events and from which future economic benefits orservice potential is expected to flow to the entity.The definition has three components, which must all be satisfiedin order to be classified as ‘an asset' in an accounting sense.They are relevant to all forms of assets:

a) The entity has the capacity to control the servicepotential or future economic benefits of the asset;

b) The service potential or future economic benefitsarose from past transactions or events (that is futureassets cannot be recognised in the financialstatements); and

c) The asset has future service potential or economicbenefit for the entity.



Many assets, for example, property, plant and equipment, havea physical form. However, physical form is not essential to theexistence of an asset; hence intangible assets such as patentsand copyrights, for example, are assets if future economicbenefits are expected to flow from them to the entity and if theyare controlled by the entity.Each of the above characteristics is further discussed below.

6.1.3.1 An Entity’s Control over Assets

How can you control an asset without owning it?The key point to understand is that it is control of theeconomic benefits or service potential of the assetrather than 'physical' control which is important.Do you enjoy the benefits of the asset and can youprevent others from sharing those benefits?Legal title and physical possession are goodindicators of control but they are not infallible. Manyassets, for example, receivables and property, areassociated with legal rights, including the right ofownership. In determining the existence of an asset,the right of ownership is not essential; thus, forexample, a vehicle held under finance lease is anasset if the entity controls the benefits, which areexpected to flow from the vehicle. (In terms ofTreasury Regulation 13.2 accounting officers may onlynegotiate operating leases and under nocircumstances enter into finance leases; thus the pointabove is noted only by way of illustration.)Although the capacity of an entity to control benefits isusually the result of legal rights, an item maynonetheless satisfy the definition of an asset evenwhen there is no legal control. For example, know-how obtained from a development activity may meetthe definition of an asset when, by keeping that know-how secret, an entity controls the benefits that areexpected to flow from it.

6.1.3.2 Past Transactions or Events

Transactions or events expected to occur in the futuredo not in themselves give rise to assets. Hence, forexample, an intention to purchase inventory does not,of itself, meet the definition of an asset. Assets arerecognised from the point when some event ortransaction transferred control to an entity. Good



indicators are when an entity pays for the asset, whenthey take possession of the asset or when they createthe asset. In some instances, an entity may be certainit is going to gain control of an asset – this is notenough in itself.There may be a number of events associated with anitem becoming an asset. It is essential that the event-giving rise to control be identified. This is not alwaysan easy exercise. There is a close associationbetween incurring expenditure and generating assetsbut the two do not necessarily coincide. Hence, whenan entity incurs expenditure, this may provideevidence that future economic benefits were sought,but are not conclusive proof that an item satisfying thedefinition of an asset has been obtained. Similarly theabsence of a related expenditure does not precludean item from satisfying the definition of an asset andthus becoming a candidate for recognition in thestatement of financial position; for example, items thathave been donated to the entity may satisfy thedefinition of an asset.

6.1.3.3 Future Economic Benefit or Service Potential

In applying the asset definition to the public sectorenvironment, the focus may mostly be on servicepotential rather than future economic benefits. Theconcept of ‘profitability’ is not always applicable in thepublic sector, as the government provides publicservices and redistributes wealth for a variety of socialand economic purposes (excluding governmentbusiness enterprises).The future economic benefit embodied in an asset isthe potential to contribute, directly or indirectly, to theflow of cash and cash equivalents to the entity. Thepotential may be a productive one that is part of theoperating activities of the entity. It may also take theform of convertibility into cash or cash equivalents ora capability to reduce cash outflows, such as when analternative process lowers the costs of providing aservice.Assets that are used to deliver goods and services inaccordance with an entity’s objectives but do notdirectly generate net cash inflows are often describedas embodying ‘service potential’. Service potential isthus the capacity of an asset, singularly or incombination with other assets, to contribute directly or



indirectly to the achievement of an objective of apublic sector entity.Objectives may include provision of services. Typical‘services’ include for example the provision of filteredwater, accommodation for administrative workers, thetreatment of patients in community clinics or theprocessing and transfer of information. Services canalso include services to the public for which the entityreceives no economic return.International Federation of Accountants (IFAC);Public Sector Committee (PSC) in InternationalPublic Sector Accounting Standard (IPSAS) IPSAS17 states:“Assets provide a means for entities to achieve theirobjectives. Assets that are used to deliver goods andservices in accordance with an entity’s objectives, butwhich do not directly generate net cash inflows areoften described as embodying ‘service potential’.Assets that are used to generate net cash inflows areoften described as embodying ‘future economicbenefit’. To encompass all the purposes to whichassets may be put, the term ‘future economic benefitsor service potential’ to describe the essentialcharacteristics of assets (is used)”.The future economic benefits or service potentialembodied in an asset may flow to the entity in anumber of ways. For example, an asset may be:a) Used singularly or in combination with other

assets in the production of goods or services;

b) Exchanged for other assets;

c) Used to settle a liability; and

d) Distributed to the owners of the entity.

Entities should consider the following in assessingservice potential:a) Will the ‘asset’ provide any benefit to the entity

that controls it?b) Does it have potential to support programme

delivery?c) Does it have a resale value?d) Can it be exchanged for something else that is

useful to the entity?



e) Will it save the entity money in the future?

Decline in the service potential of an asset typicallyoccurs over time through:a) Physical wear and tear (depreciation); and/orb) Technical or functional obsolescence; and/orc) Commercial obsolescence.Financial recognition of the decline in service potentialover the life of an asset is through the use ofdepreciation.

A decline in service potential can be constrained orreversed by enhancing or refurbishing the assetduring its useful life.

6.1.4 Role of Assets

The role of assets is to support the delivery of a governmentservice to the public. Assets should only exist to supportprogramme delivery.

The key starting point is to establish a link between programmedelivery and assets. Corporate objectives are translated intoprogramme objectives, delivery strategies, outputs andoutcomes. Assets within a programme are one of the inputsutilised to enable programme outputs.

If an asset does not contribute effectively to such a governmentservice it should not be held or used and must be disposed off.

6.1.5 Characteristics of Assets

For the purpose of these guidelines, an asset is an itempossessing the following characteristics:

a) It is a physical item of value;b) It possesses service potential or future economic

benefit that will flow to the entity;c) The service potential or future economic benefit is

controlled by an entity;d) The service potential or future economic benefit arose

from past transactions or events (that is, ‘future’assets cannot be recognised in the financialstatements);

e) It is probable that the service potential will be used;



f) The asset has a cost or value that can be reliablymeasured.

Any discussion of asset management pre-supposes thatparticipants understand what an asset is – not just in anaccounting sense – but what it represents to an entity and how itcontributes to programme delivery.

6.1.6 Recognition of Assets in Financial Statements

Recognition is the process of incorporating in the statement offinancial position or statement of financial performance, an itemthat meets the definition and satisfies the criteria for recognition.Assets are classified into categories as set out in the practicalguide, section 6.2, and the information for each categorysummarised in a table format as a note to the financialstatements. The net value (carrying value at year-end), for allcategories is added together and reflected as a single line itemin the statement of financial position.The failure to recognise such items is not rectified by disclosureof the accounting policies used, or by notes or explanatorymaterial.To be able to assess the utilisation of assets all assets shouldbe listed once the recognition criteria are met.An Asset item should be recognised in the financial statements ifit meets the:

a) Probability criteria (it is probable that any futureeconomic benefits or service potential associated withthe asset will flow to the entity); and

b) Measurement criteria (the asset has a cost or valuethat can be measured with reliability).

In assessing whether an item meets these criteria and thereforequalifies for recognition in the financial statements, considerationalso needs to be given to the materiality considerations. Theinterrelationship between the elements (principal elements R EA L see section 5.1.1) means that an item that meets thedefinition and recognition criteria for a particular element,automatically requires the recognition of another element, forexample income, expenditure or a liability, i.e. a contra entry.In assessing whether an item meets the definition of an asset,attention needs to be given to its underlying substance andeconomic reality and not merely its legal form.The Treasury Regulations currently prohibits the use of financeleases, but by way of illustration of the above the motivation for



the difference in treatment of finance and operating leases willbe highlighted.In the case of finance leases, the substance and economicreality are that the lessee acquires the economic benefits of theuse of the leased asset for the major part of its useful life, inreturn for entering into an obligation to pay for that right, anamount approximating to the fair value of the asset and therelated finance charge. At the end of the term the lessee has fullcontrol over the asset to deal with the asset in any wayconsidered appropriate.Hence, the finance lease gives rise to items that satisfy thedefinition of an asset and is recognised as such in the lessee’sstatement of financial position.In the case of an operating lease, the lessee acquires the rightto use the asset for an agreed period of time in return for aseries of payments. The payments will be based on economicfactors such as availability of the type of asset, the demand forthe asset and the length of the lease period, but will notapproximate the fair value of the asset. At the end of the leaseperiod the lessee does not acquire any title to the asset and theownership remains with the lessor. Thus the lessee cannotdecide how the asset should be dealt with.In assessing the management of an entity the effective andefficient use of assets are considered. When assets are acquiredit is done through a cash payment or repayment in instalmentsinclusive of interest (for the financial assistance in acquiring theasset). The statement of financial performance will reflect the fullimpact of the cost of ownership of the asset. In the first instancethe cash on hand would have reduced in return for an asset andin the second a liability will be reflected to balance the assetacquired.A finance lease is another means of financing the acquisition ofan asset. If this transaction is not reflected as such on thestatement of financial position the assets utilised by the entitywill be understated and it will thus appear as if the entity isachieving better utilisation of its assets than it is actuallyachieving.In accounting terms this is called off-balance sheet financing.Analysts will come to the conclusion that the entity is moreeffectively managed than it actually is. The reason being that thecost of the off-balance sheet assets are not reflected but theutilisation benefit is. Once the cost of usage of all the assets inuse is reflected, the actual utilisation will be seen to be lower.



With an operating lease the asset leased is not part of the capitalbase of the entity and the cost of usage reflected in thestatement of financial performance will be the full cost thereof.This guide does not deal with the accounting and treatmentof Finance and Operating leases. The references to leasesare therefore illustrative only.

6.1.6.1 The Probability Criteria

The concept of probability is used in the recognitioncriteria to refer to the degree of uncertainty that thefuture economic benefits or service potentialassociated with the item will flow to or from the entity.The concept is in keeping with the uncertainty thatcharacterises the environment in which an entityoperates. Assessments of the degree of uncertaintyattaching to the flow of future economic benefits aremade on the basis of the evidence available when thefinancial statements are prepared.

6.1.6.2 Measurement Criteria

The second criterion for the recognition of an item isthat it possesses a cost or value that can bemeasured with reliability.In many cases, cost or value must be estimated; theuse of reasonable estimates is an essential part of thepreparation of financial statements and does notundermine their reliability. When, however, areasonable estimate cannot be made, the item is notrecognised in the statement of financial position orstatement of financial performance.An item that, at a particular point in time, fails to meetthe recognition criteria may qualify for recognition at alater date as a result of subsequent circumstances orevents. An item that possesses the essentialcharacteristics of an asset but fails to meet the criteriafor recognition may nonetheless warrant disclosure inthe notes, explanatory material or in supplementaryschedules. This is appropriate when knowledge of theitem is considered to be relevant to the evaluation ofthe financial position, performance and changes infinancial position of an entity by the users of financialstatements.No asset is recognised in the statement of financialposition for expenditure incurred where it is



improbable that economic benefit or service potentialwill flow to the entity beyond the current financial year.Where the probability is low such a transaction resultsin the recognition of an expense in the statement offinancial performance. This treatment does not implyeither that the intention of management in incurringexpenditure was other than to generate futureeconomic benefits for the entity or that managementwas misguided. The only implication is that thedegree of certainty that economic benefits will flow tothe entity beyond the current accounting period isinsufficient to warrant the recognition of an asset.Where the expenditure has been incurred inconnection with an asset already recognised,consideration should be given to the probability thatthe expense will result in an extension of the asset’sestimated useful life. If the probability is high theexpense will be added to the value of the asset in thestatement of financial position and written off by wayof depreciation over the remaining life of the asset.Expenditure incurred on an existing asset that willnot extend the useful life or the functionality of theasset, will be reflected in the statement of financialperformance as an expense (maintenance).Assets may be acquired for safety or environmentalreasons. The acquisition of such assets, while notdirectly increasing the future economic benefits orservice potential of any particular existing asset, maybe necessary in order for the entity to obtain thefuture economic benefits or service potential from itsother assets. When this is the case, such acquisitionsof assets qualify for recognition as assets, in that theyenable future economic benefits or service potentialfrom related assets to be derived by the entity inexcess of what it could derive if they had not beenacquired. However, such assets are only recognisedto the extent that the resulting carrying amount ofsuch an asset and related assets does not exceed thetotal economic benefits or service potential that theentity expects to recover from their continued use andultimate disposal.For example, fire safety regulations may require ahospital to fit sprinkler systems. These enhancementsare recognised as an asset because, without them,the entity is unable to operate the hospital inaccordance with the regulations.



6.1.7 Evaluating Existing Assets

The evaluation of existing assets determines whether theirperformance is adequate to support the selected service deliverystrategy.For further details, consult the Practical Guide, Section 4.1.2discussion of figure 7.

6.1.8 Evaluating Asset Performance

All assets currently being used to deliver the service underconsideration need to be identified and registered.For further details, consult the Practical Guide, Section 4.1.2discussion of figure 8.

6.1.9 Developing the Asset Strategy

Entities are to establish systems and processes to support thepreparation of three-year forward asset strategies coveringacquisition, safeguarding, maintenance, refurbishment,redeployment and disposal, together with the capital andoperating costs.For further details, consult the Practical guide, Section 4.1.3discussion of figures 9 and 10.

Elements of an Asset Strategy

Asset management decisions should be integrated intostrategic planning processes. The asset strategy is oneelement of the Strategic Plan of an entity, whichcomplements the Human Resource, InformationTechnology and Financial Strategies.For further details, consult the Practical Guide, Section4.1.3 discussion of figure 11.

6.1.10 Current or Committed Projects

The management of existing assets must include those assets inthe process of being acquired or that are committed (such asfacilities under construction, or those incorporated in anauthorised capital works program). The result of evaluatingexisting and anticipated new assets is a statement of the assetsavailable, or expected to be available, to support the selecteddelivery strategy.For financial reporting purposes, the capital commitment isgenerally disclosed in the notes to the financial statements untilthe asset is purchased.



6.1.11 Own-Account Construction

Own-account construction is dealt with differently from afinancial reporting perspective to that of GFS.

6.1.11.1 Government Finance Statistics (GFS)

Government may supply the labour, services andmaterial to be used as input in the construction of acapital asset, for example a road, called own-accountconstruction.The Government Finance Statistics (GFS)recommends that all spending on current goods,services and labour that is associated with own-account construction, should be classified as capitalspending of government. Thus, capital spending inthe form of own-account production is the total valueof the sum of compensation of employees, use ofgoods and services and consumption of capitalassets. These expenses are referred to as capitalisedexpenditure on a project.In practice, government engages in own-accountconstruction of tangible non-current assets, mainlybuildings, roads and other structures.The production of some types of non-current assets,especially structures, transport equipment, andcultivated assets, extends over more than onereporting period. When the production of non-currentassets is carried out on own account, the cost of theentire production process that has taken place, duringthe current accounting period, is recorded as grossfixed capital formation, which will be reflected as theacquisition of an asset. Each transaction directlyrelated to the project that otherwise would berecorded as compensation of employees, use ofgoods and services and consumption of capital assetsshould be recorded as part of the capitalisedexpenditure, when they relate to own-account capitalformation.When production of a structure for own account orproduction through a contractor, under a contractagreed in advance, is incomplete at the end of anaccounting period, then the amount that has beencompleted is considered gross fixed capital formation,which is in effect an acquisition of a capital asset.



When there is a contract with another producer, stageor progress payments are usually required and theamounts paid may approximate the value of theproduction, accomplished at each stage. If thepayments are made in advance or in arrears ofcompletion of the relevant work, then short-termcredits have implicitly been extended by thepurchaser to the construction enterprise or vice versaand the stage payments should be adjusted by theamount of these credits.The amounts spent on capitalised expenditure or theprogress payments made to contractors on theconstruction of capital assets will be transferred togross fixed capital formation classified to the relevantasset category annually until the completion of theproject.

6.1.11.2 Accounting Standards

International Public Sector Accounting Standards,IPSAS 17 Property, Plant and Equipment and IPSAS11 on Construction contracts are relevant. UnderIPSAS 17 Property, Plant and Equipment, costincurred on the self-constructed assets may undercertain circumstances be regarded as capitalexpenditure.Under IPSAS 11 Construction Contracts, costincurred on construction of assets would not beregarded as capital expenditure. The motivation forthis is that contractors usually carry out constructionas their main business on behalf of other parties, thusthe contracts represent revenue for the contractor andthe expenditure incurred will be in the production ofincome. Where a contractor construct an asset forown use however, the costs incurred directly relatedto that project will fall within the ambit of IPSAS 17.In terms of IPSAS 17 Property, Plant and Equipment,the costs of a self-constructed asset may berecognised as an asset when:a) It is probable that future economic benefits or

service potential associated with the asset willflow to the entity; and

b) The cost or fair value of the asset to the entitycan be measured reliably.



In the case of self-constructed assets, a relevant andreliable measurement of the cost can be made fromthe transactions with parties external to the entity forthe acquisition of the materials, labour and otherinputs used during the construction process.IPSAS 17 furthermore states that the cost of a self-constructed asset is determined using the sameprinciples as for an acquired asset. The cost ofabnormal amounts of wasted material, labour or otherresources incurred in the production of a self-constructed asset is not included in the cost of theasset.IPSAS 11 on Construction Contracts only applies tocontractors, defined as “an entity that performsconstruction work pursuant to a constructioncontract”. This standard does not apply where theentity is not a contractor, but the construction of anasset is incidental to its core activities. The primaryissue in this standard is the allocation of contractrevenue and contract costs to the accounting periodsin which construction work is performed.It is envisaged that the Department of Public Works,may undertake construction type activities as a coreactivity. However, the objective is not to generateprofit, and consequently no ‘revenue’ is earned foreach contract. Nevertheless, it may still be possiblethat IPSAS 11 may be applicable. It could be arguedthat the money transferred from central governmentor special grants given for the specific constructioncontract, be viewed as the contract ‘revenue’. In suchinstances it will thus be unusual to generate a profit;however, the application of the principles in IPSAS 11may fairly reflect the contract activity during theperiod. This will thus ensure that the total contractcost is monitored against the ‘contract revenue’ oramount appropriated for the specific contract.It should be noted that this statement will thus beapplied in the financial statements of the Departmentof Public Works and that when performing theconsolidation of the Department of Public Works inthe Central Government’s financial statements,“contract revenue” will be reversed and the asset willbe recognised in the consolidated financialstatements.



On the other hand, government business enterprisesmay be a contractor and enter in constructionactivities with the motive to generate profit.In such instances the statement will be fully

applicable to the government business enterprises.



6.1.12 Classification of Assets

The following diagram, Figure 2, depicts a high level overview of the classification of assets in terms of this document.

Figure 2: Classification of Assets Hierarchy

ASSETS

NON - CURRENT CURRENT

TANGIBLE INTANGIBLE INVENTORY

Stationery

MOVABLE IMMOVABLE Consumables

EQUIPMENT INVESTMENT PROPERTY COMPUTER SOFTWARE Maintenance material

MACHINERY LAND TRADEMARKS Spare parts

FURNITURE BUILDINGS LICENCES & PATENTS Strategic stock

COMPUTER HARDWARE DWELLINGS CAPITALISED DEVELOPMENT (limited to the

TRANSPORT ASSETS NON RESIDENTIAL COSTS examples used

SPECIALISED MILITARY INFRASTRUCTURE not exhaustive list)ASSETS HERITAGE ASSETS

MINERAL & OTHER RESOURCES



In general Assets can be classified as follows:a) Non-current assets (commonly referred to as fixed) and

current assets1;

b) Tangible and intangible assets;

6.1.12.1c) Movable and immovable assets.

Assets take a number of forms and maybe financial (e.g.cash) and non-financial (e.g. land and buildings).

6.1.12.1 Assets may be current or non-current

Current Assets have an expected short life due either toan inherent feature (perishable goods for example) orbecause they will be converted into cash or anotherasset or consumed within the entity within a shorttimeframe (deposits, investments, raw materials orinventory and debtors are examples). These assets aregenerally referred to as ‘current’ in accounting terms, asthey can be consumed or converted into something elsewithin the next twelve months after the reporting date.In contrast, Non-Current (Fixed) Assets have anextended useful life greater than one year and it isusually expected that these assets would be used duringmore that one reporting period. This may reflect theirphysical life (e.g. motor vehicle) in the case of tangibleassets or their legal life (e.g. patent) in the case ofintangible assets.

6.1.12.2 Tangible (physical) or Intangible

Tangible assets are physical in nature. These areassets that one can touch and feel and can be eithercurrent of non-current.Examples of non-current tangible assets are includedin section 6.2.1 – Asset Groupings in the PracticalGuide.All tangible assets are either movable or immovable.

1

The Guideline does not deal with current assets but is centered on the management of non-current (fixed)assets.



Intangible assets are trademarks, licenses (e.g. fishinglicenses) and/or the legally enforceable rights associatedwith copyright and patents.Assets belonging to the category ‘intangible’ do nothave a physical form.Examples of intangible assets are:a) Mineral exploration rights;b) Computer software;c) Entertainment, literary or artistic originals; andd) Other assets (e.g. new information, specialised

knowledge) that have not been classifiedelsewhere, whose use in production is restricted tothe units that have established ownership rightsover them or to other units licensed by the latter.

6.1.12.3 Movable and Immovable assets

All tangible assets can also be divided into two types:a) Movable assets; andb) Immovable assets.

Movable assets are assets that can be moved (e.g.machinery, equipment, vehicles, aircraft, engines andmotors). All inventories and valuables and most non-current assets belong to this category.

Immovable assets consist of:a) Tangible assets, namely land, subsoil assets, and

water resources; andb) Fixed structures, namely bridges, houses, office

buildings, roads, etc.

6.1.12.4 Primary and Secondary Assets

Assets that fall into this classification will havecomponents, each of which can be considered as aunique asset in its own right, but related to others. Anexample would be a desktop personal computer: themonitor and CPU (perhaps the keyboard as well) might



be valuable enough to require their separate registrationin the Assets system.The “primary asset” will be the CPU with the otherperipherals registered as linked “secondary assets”. Inthis way all components can be tracked during theirlifetime.Secondary assets can have a different depreciationmethod, useful life and depreciation rate from the primaryassets.

6.1.13 Classification Standards

Assets vary considerably in their size and nature, and it is useful toclassify them into logical groupings for management control andfinancial treatment. Classifications may also be imposed by externalreporting requirements. Typical of these standards, are standardsset by IFAC for financial reporting (local equivalents will be set bythe Accounting Standards Board (ASB)) and the reportingstandards set by the Government Finance Statistics (GFS) of theInternational Monetary Fund (IMF).Refer to Practical Guide 6.2.1 for the Classification of Assets.

6.1.14 Asset Register

Classification of assets as depicted in the Financial Statements isderived from the Asset Register.The compilation of information within an asset register enables theidentification of the ongoing costs, such as depreciation andmaintenance, of owning and operating assets. Information on thesecosts is needed to measure the total cost of goods and servicesproduced, which in turn is used to determine which goods andservices to provide and the most efficient way of providing thosegoods and services. This process becomes easier to manage themore detailed the accounting system in use.Both summarised and detailed information is useful. Total assetfigures show how much government funding is tied up in assetholdings. This allows Government to make informed decisionswhen considering capital investment, acquisitions or disposals.The asset register is the asset database that provides the basis forthe figures in the financial statements. It includes information onasset purchase prices, asset condition and expected life. It mayalso include information on current replacement cost. All assetsshould be recorded in the asset register, regardless of the funding



source. The asset register should contain non-financial data onacquisition, identity, accountability, performance and disposal, inaddition to the financial data necessary to discharge statutoryreporting obligations. Indicators can be included to reflect asperformance measurement indicators in a report.The size and complexity of an asset register will depend on thenumber and type of assets held by an entity. The volume ofpurchases, transfers and disposals in a year is also an indicator ofthe degree of sophistication required for asset recording andreporting.With this in mind, the features of a good asset register include:

a) Integration to the extent practicable with purchasing andpayments systems and the general ledger;

b) Structuring to allow the different classifications of assetsto be distinguished;

c) Financial data on assets that is maintained down to alevel, which is important to decision-makers;

d) A clear identification of the individual, or entity unit,responsible for the asset; and

asset data that is:

updated as transactions and events occur;

regularly reconciled with acquisition, disposaland transfer data and the general ledger; and

readily available to asset managers, preferably‘on-line’. Figure 3: Composition of an AssetRegister summarises the minimum data thatshould be maintained on assets (it is importantthat assets of cultural or heritage significance are'flagged' as such and their special maintenanceneeds and disposal considerations are madeknown to asset managers).



• Date• Supplier• Reference• Amount

• Description• Model• Manufacturer• Serial

Number• Unique Asset

Number

• Location• Programme• Custodian• Convertants

or restrictions• Heritage or

cultural“identifier”

• Capacity• Condition• Useful Life• Residual

Value


Value• Warranties or

Guarantees• Measures

• Historic Cost• Replacement

Value• Depreciation

Rate• Accumulated

Depreciation

Acquisition

Identify

Accountability

Performance

Disposal

Accounting




Number





Value






Rate• Accumulated

Depreciation




Number





Value






Rate• Accumulated

Depreciation

Acquisition

Identify

Accountability

Performance

Disposal

Accounting

Figure 3: Composition of an Asset Register

The details as per the asset register should enable the personpreparing the financial statements to provide the disclosure requiredby GRAP.The disclosure requirements, as set out in this guideline has beenbased on the IPSAS standards which is the approach adopted byThe Accounting Standards Board (ASB) for setting standards ofGRAP.

The financial statements should disclose for each class of assetsrecognised in the financial statements:

a) Whether it is Owned or subject to Finance Lease(Finance leases are currently not allowed in terms ofTreasury Regulations);

b) Measurement bases used for determining the grosscarrying amount;

c) Depreciation method used;d) The useful lives or the depreciation rates used;e) The gross carrying amount and the accumulated

depreciation at the beginning and end of the period;



f) The existence and amounts of restrictions on title forassets pledged as securities for liabilities;

g) The accounting policy for the estimated costs of restoringareas/sites used;

h) The amount of disbursements on account of assets inthe course of construction; and

i) The amount of commitments for the acquisition ofproperty, plant and equipment.

Information that would enable a reconciliation of the carryingamount at the beginning and end of the period includes:

a) Additions;b) Disposals;c) Acquisitions through business combinations;d) Increases or decreases during the period resulting from

revaluations and from impairment losses (if any)recognised or reversed;

e) Impairment losses (if any);f) Impairment losses reversed (if any);g) Depreciation;h) The net exchange differences arising on the translation

of the financial statements of a foreign entity; andi) Other movements.

The Asset Classification and parameters for Useful Lives in tableformat can be found in section 6.2.1 of the Practical Guide. Entitiescan allocate useful lives within the stated parameters best suited totheir individual experience.

6.2 Acquisition Phase

To review the conclusions drawn in the planning phase, an assetshould be recognised using historical cost in the financialstatements of an entity if it meets all of the following criteria:

a) The asset has service potential for the entity;

b) The entity has the capacity to control the servicepotential of the asset (i.e. ownership or possession ofright);



c) An event giving the entity control over the servicepotential has occurred (i.e. past event);

d) It is probable that the service potential will be used;

e) The asset has a cost or value that can be reliablymeasured; and

f) The estimated value of the asset is above the entity'srecognition threshold.

6.2.1 Measurement of the Elements of Financial Statements

As noted earlier, a criterion for the recognition of an item is that itpossesses a cost or value that can be measured with reliability.Measurement is the process of determining the monetary amountsat which the elements of the financial statements are to berecognised and carried in the statement of financial position andstatement of financial performance. This involves the selection ofthe particular basis of measurement. A number of differentmeasurement bases are employed to different degrees and invarying combinations in financial statements. They include thefollowing:

a) Historical costAssets are recorded at the amount of cash or cashequivalents paid or the fair value of the considerationgiven to acquire them at the time of their acquisition.

b) Current cost (Replacement cost)Assets are carried at the amount of cash or cashequivalents that would have to be paid if the same oran equivalent asset was acquired currently.

c) Realisable (settlement) valueAssets are carried at the amount of cash or cashequivalents that could currently be obtained by sellingthe asset in an orderly disposal.

d) Present valueAssets are carried at the present discounted value ofthe future net cash inflows that the item is expected togenerate in the normal course of business.



6.2.2 Alternatives to Asset Ownership

Successful 'non-asset' solutions can reduce or defer therequirement for new assets with advantages in terms of reducedmanagement effort and the release of capital funds.

The consideration of non-asset solutions is becomingincreasingly important as:a) The current stock of Government assets is growing and

steadily ageing;b) Changing expectations and technologies can prompt

proposals for new assets where existing assets couldcontinue in service unchanged;

c) Asset requirements change over time with changingprogramme requirements; and

d) Expenditure on fixed assets constrains expenditure inother areas.

These trends have encouraged a number of public and privatesector entities to divest themselves of assets, moving to less assetintensive styles of operation. This approach provides greaterflexibility in the face of change.

Considerations in the search for non-asset solutionsinclude:a) Contracting-out the function to a service provider whom

will provide the assets;b) Redesign the service to reduce demand on assets - for

example, use of telephone-based services;c) Reduce demand for the service itself - for example, by

implementing user-charging regimes; andd) Increase the utilisation of existing assets - for example,

sharing facilities between programmes and entities.

An entity must have a clear understanding of the strategicsignificance of its assets, for its service delivery obligations,prior to considering 'non-asset' solutions.Treasury Regulation 16 deals with private public partnerships(PPP)(see a) above) in detail, and should be adhered to. Notably, itrequires that only the Accounting Officer can enter into a PPP onbehalf of the institution, and only after written approval of theappropriate treasury. The relevant treasury may give such approvalonly if it is satisfied that the proposed PPP agreement will:



a) Provide value for money;b) Be affordable for the institution; andc) Transfer appropriate technical, operational and financial

risk to the private party.

Furthermore, the Accounting Officer must undertake afeasibility study, the content should include broadly:

a) The strategic and operational benefits of the PPPagreement for the institution in terms of the institution’sstrategic objectives and government policy;

b) Describes in specific terms the extent to which thefunction, both legally and by nature, can be performed bya private party in terms of a PPP agreement; and whatother forms of PPP agreement were considered;

c) Provide information to assist the relevant treasury toassess whether the agreement will provide value formoney; be affordable for the institution; and transferappropriate technical, operational and financial risk to theprivate party; and

d) Explains the capacity of the institution to effectively enforcethe agreement, including monitoring and regulatingimplementation of and performance in terms of theagreement.

Take note:PPP agreements are used to facilitate the performance ofan institutional function, as defined in TreasuryRegulation 16, and or the use of state property by aprivate party. In both instances the private party mustassume substantial financial, technical and operationalrisk and benefit for the rendering of the institutionalfunction or use of property through payments derivedfrom a revenue fund or fees collected from users orcustomers or a combination thereof.

6.2.3 Methods of Acquisition

Once it has been determined that an asset is required, the threebasic options are to buy, build or lease.



For further details, consult the Practical Guide, Section 4.2.3.

6.2.4 Establishing Life-Cycle Costs

Life-cycle costing is a logical, systematic process for establishingthe total cost of an asset from its conception to its disposal.For further details, consult the Practical Guide, Section 4.2.4

6.2.5 Asset Valuation

6.2.5.1 Asset Value

Asset values are generally recorded at the originalpurchase price (historic cost) of the asset. They may laterbe re-valued on some other basis. Set out below aresome general observations based on international andlocal best practice accounting standards.An asset may not have a determinable cost because ofinadequate or non-existent records. For example, ahistoric building of national significance may have beenacquired several years ago and no record of itsacquisition cost may be available. Similarly, an entity mayhave only recently decided to improve management ofand control over assets, prior to which it did not maintainany records of assets. Where an asset does not have adeterminable cost, its fair value should be established asat the first reporting date that it is recognised in thefinancial statements as an asset. The initial recognition ofan asset at its fair value, in the absence of adeterminable or reliable cost, does not constitute arevaluation in terms of IPSAS.Accounting standards generally (both internationally andnationally) require the initial recording of an asset to be athistorical cost. ‘Cost’ includes necessary, additionalexpenditure such as transport of the asset to the site. Foritems where there is no cost to the entity (e.g. gifts ortransfers without cost) the standard requires that they berecorded at their fair value (i.e. the amount that a willingbuyer and willing seller would agree on). For more detailsrefer to the Practical Guide 6.3.



6.2.5.2 Asset Thresholds – Dealing with minor assets

Certain entities set a 'recording' threshold i.e. assetswhere the historical cost or fair value is under a certainamount, are recorded in the registers of the entity butdepreciated in full in the year of acquisition. Therecording in the asset register is necessary in order thatcontrol can be exercised over the asset.The recording threshold is based on cost-benefitconsiderations in terms of accountability, probity andmanagement of assets. The common example of itemsthat are recorded is 'portable and attractive' items, whichare generally below the 'reporting' threshold. Refer toPractical Guide 6.2.2 for a discussion of “Major vs. Minor”assets.

6.2.5.3 Loose tools

Loose tools, such as saws, spades, knives, axes,hammers, screwdrivers and spanners or wrenches, arenormally not considered ‘fixed’ assets, even though theyare often used repeatedly, or continuously, in productionover many years. This is because such tools are small,inexpensive and used to perform relatively simpleoperations. If expenditure on such tools takes place at afairly steady rate and if their value is small compared withexpenditure on more complex machinery and equipment,it may be appropriate to treat expenditure on these toolsas current. Some flexibility is needed however,depending on the relative importance of such tools, theymay be treated as ‘fixed’ assets and their acquisition anddisposal recorded as such. Refer to Practical Guide6.2.2.

6.2.6 Asset Transfers between Departments and Entities

For transfers between departments, assets would initially berecorded at the carrying value in the books of the receivingdepartment and taken out of its books at the carrying value by thetransferring department; however, the receiving department shouldalso record both the gross book value and accumulateddepreciation. (i.e. not just the net figure) and both the above valuesshould be reversed out by the transferring department. Where theasset was transferred at ‘no value’ or ‘donated’ to the receivingdepartment, this treatment does not differ.



The carrying amount is the amount at which an asset is recognisedin the statement of financial position (balance sheet) after deductingany accumulated depreciation and accumulated impairment lossesthereon. Refer to the Practical Guide 6.4.1.For transfers from departments to Public Entities, assets would berecorded at the carrying value but would need to be re-valued onreceipt and share capital of an equivalent value will have to beissued to the State by the Public Entity. The reverse would apply fortransfers made from public entities to departments.

6.2.7 Exchanges of Assets

An asset may be acquired in exchange or part exchange for adissimilar item of property, plant and equipment or other asset. Thecost of such an item is measured at the fair value of the assetreceived, which is equivalent to the fair value of the asset given up,adjusted by the amount of any cash or cash equivalents transferred.The asset may be acquired in exchange for a similar asset that hasa similar use in the same line of business and which has a similarfair value. The asset may also be sold in exchange for an equityinterest in a similar asset. In both cases, no gain or loss isrecognised on the transaction. Instead, the cost of the new asset isthe carrying amount of the asset given up.

However, the fair value of the asset received may provide evidenceof impairment in the asset given up. Under these circumstances theasset given up is written down and this written-down value assignedto the new asset. Examples of exchanges of similar assets includethe exchange of buildings and other real estate, machinery,specialised equipment, and aircraft. If other assets such as cashare included as parts of the exchange transaction this may indicatethat the items exchanged do not have a similar value.

6.3 Operations & Maintenance Phase

6.3.1 Expenditure on Assets during its life

Assets are often modified during their life. There are two main typesof modification:

(a) Enhancements/ Rehabilitation – capital expenditure(b) Refurbishment – current expenditure

(a) Enhancements / Rehabilitation:



This is where work is carried out on the asset thatincreases its service potential. Enhancementsnormally increase the service potential of the asset,and or may extend an asset's useful life and result inan increase in value.These expenses are not part of the life cycle of theasset. These costs normally become necessary duringthe life of an asset due to a change in use of the assetor technological advances. This follows that theseexpenses cannot be planned for at the stage when theinitial decision to acquire the asset was taken.Disbursements of this nature relating to an asset,which has already been recognised in the financialstatements, should be added to the carrying amount ofthat asset. The value of the asset is thus increasedwhen it is probable that future economic benefits orservice potential will flow to the entity over theremaining life of the asset, which will be in excess ofthe most recently assessed standard of performanceof the existing asset before such disbursements. Thisprocess is called capitalisation.

To be classified as capital spending, the expendituremust lead to at least one of the following economiceffects:a) Modification of an item or plant to extend its

useful life, including an increase in its capacity;b) Upgrading machine parts to achieve a

substantial improvement in the quality of output;c) Adoption of new production processes enabling a

substantial reduction in previously assessedoperating costs;

d) Extensions or modifications to improvefunctionality such as installing computer cablingor increasing the speed of a lift;

e) Improve the performance of the asset;f) Increase the capacity of the asset;g) Prolong the expected working life of the asset;h) Increase the size of the asset; ori) Change the shape of the asset.



The decision to renovate, reconstruct or enlarge anasset is a deliberate new investment decision that maybe taken any time, even when the asset in question isin good working order and not in need of repair.However, a major renovation to an asset that is not ingood working order could also be classified as capitalexpenditure provided that at least one of the economiceffects listed above is present and the decision istaken at infrequent intervals.

(b) Maintenance / Refurbishment:

Expenditure related to repairs or maintenance ofproperty, plant and equipment are made to restore ormaintain the future economic benefits or servicepotential that an entity can expect from the asset.Refurbishment works do not extend functionality or thelife of the asset, but are necessary for the planned lifeto be achieved. In such cases, the value of the assetis not affected, and the costs of the refurbishment areregarded as current expense in the statement offinancial performance. This follows that these costsare inherent to the nature of the asset and it can beforeseen at the acquisition stage that the expense willbe necessary to achieve the estimated useful life ofthe asset.For example, the cost of servicing or overhauling plantand equipment is usually an expense since it restores,rather than increases, the most recently assessedstandard of performance. In the case of re-painting aschool this is also an expense. It restores the assetrather than extends functionality of life of the asset.Using paint of a better quality that will slow down themaintenance cycle will not significantly extend the lifeof the school beyond the original estimate but willhave the effect of saving on maintenance costs thatare inherent to the asset. Repainting a school atregular intervals is inherent to the type of asset andthis expense should form part of the maintenance plandeveloped at the time the building is acquired.If maintenance is not done an asset will not be fit touse over its estimated useful life and therefore theoptimum use will not be made of the resource.



It is difficult to provide simple objective criteria thatenable improvements to be distinguished from repairsbecause any repair may be said to improve theperformance or extend the working life of an asset.The issue is however that the improved performanceor extended life should be beyond what has originallybeen estimated for the asset and not only to bringperformance back to the level that is normallyexpected for the asset.For example, machines may cease to functionbecause of the failure of one small part, especiallyequipment with electric circuits. The replacement ofsuch a part does not, however, constitute capitalexpenditure as replacement of such parts can be seento be inherent to the maintenance of such assets.Should the part not be replaced when needed, theasset will not function for the purpose and intentionthat it was acquired.Thus, improvements have to be identified either bythe magnitude of the changes in thecharacteristics of the assets or by the fact thatimprovements are not the kind of changes that areobserved to take place routinely in other assets ofthe same kind, as part of ordinary maintenanceand repair programmes.Thus, to be considered current expenditure thefollowing conditions must be satisfied:a) The spending is of a kind that must be

undertaken regularly in order to maintain anasset in working order over its expected servicelife;

b) The owner or user of the asset has no choiceabout whether or not to undertake ordinarymaintenance and repairs if the asset in questionis to continue to be used in production; and

c) The economic effect of this spending is such thatthere is no change in the asset's performance,capacity, expected service life, size or shape.The asset is simply maintained in good workingorder; perhaps because defective parts havebeen replaced, by new parts of the same kind, or



of a better quality and so would last a bit longerbetween maintenance cycles.

6.3.2 Obsolescence

Assets become obsolete as they age and are replaced in themarket place by more technologically advanced items. This doesnot mean that the asset held by a department is unusable: it may becontinuing to provide economic service to its user(s) but at a lesseffective or economical rate than a newer model.If an asset is considered to be beyond economic repair, it will haveceased to operate or provide the service for which it was acquiredand the cost of its repair is more than the economic value of itscontribution to the delivery of services. In circumstances such asthis, and if the need still exists for continuation of those services, adecision must be taken to either replace the asset, funds permitting,or to curtail delivery of services until funds for replacement areavailable.Even though it may not be cost-effective, in the absence ofavailable funds, it may be necessary to repair the asset in order tocontinue providing services, and planning its replacement in a futurefinancial year. The cost of repairs and maintenance should betreated as an expense and not an upgrade to the asset, if it doesnot meet the criteria for capital expenditure as described above.

6.3.3 Subsequent Valuation or Re-valuation of Assets

The accounting standards to be issued by the AccountingStandards Board will contain guidance on the appropriateness andaccounting treatment of revaluations for financial reportingpurposes.It should be noted that initial valuation (recognition) of assets on anhistoric cost basis would become increasingly irrelevant over timefor management decision-making purposes. More regularvaluations will provide a measure of the real costs consumed by,and current value of the investments in, programmes.Better practice in asset management suggests, for planningpurposes, management should have an indication of the futuredemand on resources for replacement of existing assets.While it is not compulsory for a re-valuation to be taken up in thefinancial statements, omission of this step is generally counterproductive in terms of obtaining a measure of the real costsconsumed by and current value of the investments in, programmes.



It may be possible to update the value of almost all assets.However, the cost of re-valuation can be a major expense. Thiscost is curbed to a large extent when the entity has established anadequate asset register and has maintained it by ensuring that allasset movements (acquisitions, disposals and transfers) arerecorded in a timely manner.In the absence of accounting standards that will direct theappropriateness and accounting treatment for re-valuations forexternal reporting, it is however worthwhile to note that theInternational Accounting Standards IPSAS 17 – requires that:“when an item of property, plant and equipment is re-valued, theentire class of property, plant and equipment to which that assetbelongs should be re-valued. The items within the class ofproperty, plant and equipment are re-valued simultaneously in orderto avoid selective revaluation of assets and the reporting ofamounts in the financial statements, which are a mixture of costsand values as at different dates. However, a class of assets may bere-valued on a rolling basis provided that the re-valuation of theclass of assets is completed within a short period of time andprovided that the re-valuations are kept up to date.”Initial re-valuations for management purposes should take note ofthis requirement for financial reporting purposes, as it may be likelythat a similar requirement may be included in standards of GRAP,once issued. The re-valuation of assets is normally an exercise bestleft to experts whether they are from internal officers with thenecessary qualifications and experience or an independent entity.

6.3.4 Depreciation

Depreciation is the systematic reduction in value of an assetrepresenting the consumption of the economic benefits embodied inthe asset. The current system of cash accounting, shows assetpurchases as expenditure in the year in which payment is made.This overstates programme costs in that year as it fails to reflectthat the asset is used over a number of years.The process of depreciation, spreads the cost of the asset over theperiod of use and allows for the actual cost of programmes to beseen, as and when an asset's service potential is consumed. Thedepreciation charge for a period is recognised as an expensereflecting the cost of the usage of the asset to the programme.Depreciation recognises the cost of consuming the service potentialof an asset over time, and provides a means of accounting for the



cost of an asset over its useful life. It is necessary to remember thatthis useful life is estimated in the context of ‘normal’ maintenancebeing undertaken on the asset, as and when required, over theperiod that it is in use.

Please note that:a) Depreciation is not a method of financing the

replacement of assets; andb) Depreciation is necessary even where assets are re-

valued every year.The amount of acquisition cost to be depreciated or allocated overthe total useful life of the asset is called the depreciable amount. Itis the difference between the total acquisition cost and the potentialresidual value.The residual value is also known as the terminal value, disposalvalue, salvage value or scrap value. This is the amount expectedon the sale or disposal of the asset at the end of its useful life. Thisamount is predicted based on current knowledge of the type ofasset.The useful (or economic) life of an asset is determined as theshorter of the physical life of an asset before it wears out or theeconomic life of the asset before it is obsolete. Refer to Section onUseful Life for more detail.The depreciable amount of an asset is determined after deductingthe residual value of the asset. In practice, the residual value of anasset is often insignificant and immaterial in the calculation of thedepreciable amount. When assets are recorded at cost and theresidual value is likely to be significant, the residual value isestimated at the date of acquisition and is not subsequentlyincreased for changes in prices.When assets are re-valued, it is however appropriate to make anew estimate of the residual value at the date of every subsequentrevaluation of the asset. The estimate is based on the residualvalue prevailing at that date for similar assets which have reachedthe end of their useful lives and which have operated underconditions similar to those in which the asset will be used.It must be emphasised that accounting for 'depreciation' is notsaving up for new assets and is only partly a reflection of the‘wearing out’ of assets. Other factors, such as technicalobsolescence and any residual value of the asset, must also beconsidered. The recognition of depreciation charges is necessary



for the valuation of assets and costing of services, and is also usedfor resource allocation and asset performance assessment.Land and buildings are separable assets and are dealt withseparately for accounting purposes, even when they are acquiredtogether.

Land normally has an unlimited life and, therefore, is notdepreciated. Buildings on the other hand have a limited life and,therefore, are depreciable assets. An increase in the value of theland on which a building stands does not affect or alter the usefullife of the building itself.

The useful life of a building should be determined and depreciationwritten off to ensure that the cost of consumption of the asset isrecognised. Where the building is nearing the end of its useful life ademand will be placed on cash resources to replace or improve thebuilding for continued use. The increase in value of the land canonly be accounted for when realised on disposal of the land andbuildings.

It is not reasonable to offset the increase on the one hand againstthe decrease in value on the other. The cost of replacement orimprovement of the building will not be reduced by the increase invalue of the land. It is however obvious that any increase in thevalue of the land will be reduced on disposal by the decrease invalue of the building due to its limited useful life to the new owner.

6.3.4.1 Depreciation Methods

The manner used to allocate the depreciable amount ofan asset on a systematic basis over its useful life is thedepreciation method. The method is normally chosen tomatch the consumption of the asset to the expectedpattern of economic benefits.Refer to the Practical Guide 7.1 for the discussion ofdifferent depreciation methods that are generallyconsidered acceptable practice. A method is selectedbased on the circumstances of the entity and that willmost accurately reflect the use of the asset over time.Depreciation is not normally funded and does not providecash for the replacement of an asset. Some methods arearithmetical, such as the straight-line or reducing-balancetechniques. Others are designed to reflect the actual



condition or capacity of the asset as realised over time(such as the sum-of-the-units method.).

6.3.4.2 Choosing Depreciation Methods

The method chosen should match the pattern of servicepotential yielded by the asset as closely as possible andthe depreciation charge will then be a realistic reflectionof the cost of providing the services by using the asset.The method used for an asset should be consistentlyapplied from period to period unless there is a change inthe expected pattern of economic benefits or servicepotential from that asset.The depreciation method applied to an asset should bereviewed periodically and, if there has been a significantchange in the expected pattern of economic benefits orservice potential from those assets, the method shouldbe changed to reflect the changed pattern. When such achange in depreciation method is necessary the changeshould be accounted for as a change in accountingpolicy. Refer to the Practical Guide 7.2.

The straight-line method has been adopted for useacross government for its ease of application.

6.3.4.3 Depreciation Rates

Depreciation rates must be reviewed annually and, ifnecessary, adjusted to reflect the most recentassessments of the asset's useful life (see discussionunder Useful Life). It must be noted that such a reviewwould affect the future usage of the asset and not alterthe history.Although the useful life (and therefore the depreciationrate) is reviewed regularly, the depreciation method usedfor an asset is selected based on the expected pattern ofeconomic benefits or service potential and is consistentlyapplied from period to period unless there is a significantchange in the expected pattern of economic benefits orservice potential from that asset. Refer to the PracticalGuide 6.2.1 for the range of Useful Lives.



6.3.4.4 Depreciation on assets acquired/disposed during a fiscal year

An asset is depreciated over its estimated useful life fromacquisition until it is scrapped or disposed of. Refer to thePractical Guide 7.4 for the discussion on the suggestedbasis to use.

6.3.4.5 Depreciation and Cash Flow

There is a common misconception that depreciationgenerates cash. It does not. Depreciation simplyallocates the original cost of an asset to the periods inwhich the asset is used- “nothing more nothing less”.Furthermore, accumulated depreciation is merely theportion of an asset’s original cost that has already beenwritten off to expense in prior periods –not a pile of cashwaiting to be used. It is an indication of the imminentfuture need for replacement of assets due to aging if thecurrent service level is to be maintained.It must be noted that the final approval for the appropriatewrite-off period per each asset ultimately lies with theAccountant-General if it falls outside the prescribed ratesas set out in the Depreciation Table included in thePractical Guide.The criteria used, for write-off needs to be establishedper department based on individual experience. Forexample, the prescribed write-off period for motorvehicles is 3-5 years. However, one needs to distinguishbetween vehicles used more extensively during itslifetime i.e. the distance travelled, e.g. police vehicles,and the terrain travelled by the vehicle e.g. a vehiclethat operated on rougher terrain would incur greater wearand tear, as opposed to the vehicle used for normal citytravelling to and from work.Thus the circumstances of use, distance travelled and theterrain travelled, will determine the appropriate write offperiod.

6.3.5 Useful Life

The useful life of an item of property, plant and equipmentshould be reviewed periodically and if expectations aresignificantly different from previous estimates, thedepreciation charge for the future periods should be adjusted.



Useful life is the period of time over which an asset is expected tobe used by the entity.During the life of an asset it may become apparent that the estimateof the useful life is inappropriate. For example, the useful life maybe extended by subsequent disbursements on the asset, whichimprove the condition of the asset beyond its most recentlyassessed standard of performance. Alternatively, technologicalchanges or changes in the market for the products may reduce theuseful life of the asset. In such cases, the useful life, and thereforethe depreciation rate, is adjusted for the current and future periods.The repair and maintenance policy of the entity will affect the usefullife of an asset. The policy may result in an extension of the usefullife of the asset or an increase in its residual value. However, theadoption of such a policy does not negate the need to chargedepreciation.Conversely, some assets may be poorly maintained or maintenancemay be deferred indefinitely because of budgetary constraints.Where asset management policies exacerbate the wear and tear ofan asset, its useful life should be reassessed and adjustedaccordingly.It should be noted that deferring maintenance on an asset is not ahealthy ‘policy’ as it has the effect that the asset will not reach itsestimated useful life as envisaged on acquisition and will thereforeinfluence the level of service delivery directly. In the long run thecost to the entity in terms of lost economic benefits or backlog inservice delivery will exceed the perceived ‘saving’ in maintenancecost.Thus, the assumption of a particular level of planned maintenanceis integral to the calculation of useful life. Maintenance that is part ofthis assumed level and which is insignificant to the total asset valueis generally recognised as an expense in the year that it occurs.The asset management policy of an entity may involve the disposalof assets after a specified time or after consumption of a certainproportion of the economic benefits or service potential embodied inthe asset. This can result in the useful life of an asset being shorterthan its economic life. The estimation of the useful life is a matter ofjudgement based on the experience of the entity with similar assets.Useful life must be realistically assessed. Entities should considerthe following:

a) Over what period does the entity expect to gain servicepotential from the asset?



b) Has the asset been acquired for a specific project, or canit be re-deployed within the entity over time?

c) What has been the past experience of such assets inuse?

d) Is the past experience an appropriate benchmark, giventhe technology embodied in the asset?

e) Has an independent adviser assessed the condition ofthe asset or its life expectancy?

f) What is the opinion of the user or relevant expert aboutthe asset’s useful life?

g) What is the net amount expected to be recovered on theasset’s disposal?

Consideration of these factors will enable the expected life of anasset to be assessed realistically. Refer to the Practical Guide 6.2.1for the range of Useful Lives.

6.3.6 Impairment

Necessary maintenance to keep the asset in good workingcondition, which is significant (or 'major') and which is not carriedout when required, may reduce the useful life of the asset, lower itsdisposal value at the end of its life, and or impair its functionalityand reduce its output on a long term or permanent basis.Under these circumstances, on review of such assets where theindication is that the carrying amount is permanently affected, animpairment loss needs to be recognised.An impairment loss is the amount by which the carryingamount of an asset exceeds the total economic benefits orservice potential that the entity expects to recover from thecontinued use and ultimate disposal of the asset.

6.4 Disposal Phase

An item of property, plant and equipment should be eliminatedfrom the statement of financial position on disposal or whenthe asset is permanently withdrawn from use and no futureeconomic benefits or service potential is expected from it.Not all assets are retained throughout their life and when they aresold or disposed of, gains or losses are inevitable. Gains or lossesarising from the retirement or disposal of an asset should bedetermined as the difference between the estimated net disposal



proceeds and the carrying amount (net book value) of the assetgiven up.It should be noted that Treasury Regulation 10.2 deals with thedisposal of assets, movable as well as immovable. Disposal shouldbe at market-related value (or auction or tender in the case ofmovable assets) unless the relevant treasury approved otherwise.It is therefore necessary that a valuation be done on any asset priorto disposal to ensure compliance with the above regulation and torequest treasury approval should it not be deemed possible oradvantageous to the state to dispose of the asset at market-relatedvalue.For the purposes of disclosure in the financial statements, the gainor loss should be included in the statement of financial performanceas an item of revenue or expense, as appropriate.

Recording of Gains and Losses

Gains or losses on disposal of assets are significant enough, sothey are displayed as a revenue or expenditure item in thestatement of financial performance and separately identified.The disposal of the asset will require the removal of the carryingamount or book value of the asset, which is the net result of twoaccounts namely the Cost and Accumulated Depreciation accounts.The difference between the carrying amount thus calculated andthe proceeds received represents the profit (where the proceeds isthe higher value) or loss (where the carrying amount is the highervalue) on disposal.When an asset is exchanged for a similar asset, it is implied thatthe cost of the acquired asset is equal to the carrying amount of theasset disposed of and no gain or loss results.The surplus arising from the disposal of assets must besurrendered to the relevant Revenue Fund whilst the loss ondisposal must be recorded as expenditure for the fiscal year as itrepresents insufficient depreciation over the useful life or an overestimation of residual value. Refer to the Practical Guide 5.3.



7 Disclosure

The financial statements should disclose, for each class of assetsrecognised in the financial statements (refer to the Practical Guide5.5 for the disclosure requirements):

a) Measurement bases used for determining the gross carryingamount. When more than one basis has been used, the grosscarrying amount for that basis in each category should bedisclosed;

b) The depreciation methods used;c) The useful lives or the depreciation rates used;d) The gross carrying amount and the accumulated depreciation

(aggregated with accumulated impairment losses) at thebeginning and end of the period; and

e) A reconciliation of the carrying amount at the beginning andend of the period showing:

Additions;

Disposals;

Acquisitions through business combinations;

Increases or decreases during the period resultingfrom revaluations and from impairment losses (if any)recognised or reversed;

Increases or decreases during the period resultingfrom disposals and from impairment losses (if any)recognised or reversed directly in net assets;

Impairment losses (if any) recognised/reversed in thestatement of financial performance during the period;

Depreciation; and

Other movements (Transfers in and out).



The financial statements should also disclose for each class ofassets recognised in the financial statements:

a) The existence and amounts of restrictions on title for assetspledged as securities for liabilities;

b) The accounting policy for the estimated costs of restoring theassets;

c) The amount of disbursements on account of assets in thecourse of construction (own account construction andcontracted); and

d) The amount of commitments for the acquisition of assets.(a)

The selection of the depreciation method and the estimation of theuseful life of the assets are matters of judgement and determinedby the entity’s Accounting Policy.Therefore, disclosure of the methods adopted and the estimateduseful lives or depreciation rates provide users of financialstatements with information which allows them to review thepolicies selected by management and enables comparisons to bemade with other entities. For similar reasons, it is necessary todisclose the depreciation allocated in a period and the accumulateddepreciation at the end of that period.An entity discloses the nature and effect of a change in anaccounting estimate that has a material effect in the current periodor which is expected to have a material effect in subsequentperiods, in accordance with International Public SectorAccounting Standard IPSAS 3 Net Surplus or Deficit for thePeriod, Fundamental Errors and Changes in Accounting Policy inthe absence of guidelines of GRAP

Such disclosure may arise from changes in estimates with respectto:a) Residual values;b) The estimated costs of dismantling and removing items of

assets and restoring the site; andc) Useful lives.



Changes in the depreciation method will be seen as a change inaccounting policy and will therefore always require disclosure inaccordance with the above standard.When a class of assets is stated at re-valued amounts thefollowing should be disclosed:a) The basis used to revalue the assets within the class;b) The effective date of the revaluation;c) Whether an independent evaluator was involved;d) The nature of any indices used to determine replacement cost;e) The revaluation surplus, indicating the movement for the

period and any restrictions on the distribution of the balance toshareholders or other equity holders;

f) The sum of all revaluation surpluses for individual items ofassets within that class; and

g) The sum of all revaluation deficits for individual items of assetswithin that class.

Financial statement users also find the following informationrelevant to their needs:a) The carrying amount of temporarily idle assets;b) The gross carrying amount of any fully depreciated assets that

is still in use;c) The carrying amount of assets retired from active use and held

for disposal; andd) When the benchmark treatment is used, the fair value of

assets when this is materially different from the carryingamount.



8 Investment Property

Take Note: This section has been included in the Guidelinespecifically for the Department of Public Works where InvestmentProperty is applicable.Investment property is held to earn rentals or for capital appreciation orboth. Therefore, investment property generates cash flows largelyindependently of the other assets held by an entity. This distinguishesinvestment property from other land or buildings controlled by public sectorentities, including owner-occupied property. The production or supply ofgoods or services (or the use of property for administrative purposes) canalso generate cash flows. For example, public sector entities may use abuilding to provide goods and services to recipients in return for full orpartial cost recovery. However, the building is held to facilitate theproduction of goods and services and the cash flows are attributable notmerely to the building, but also to other assets used in the production orsupply process.

The following are examples of investment property:a) Land held for long-term capital appreciation rather than for

short-term sale in the ordinary course of operations. Forexample, land held by a hospital for capital appreciation, whichmay be sold at a beneficial time in the future;

b) Land held for a currently undetermined future use. (If an entityhas not determined that it will use the land either as owner-occupied property, including occupation to provide servicessuch as those provided by national parks to current and futuregenerations, or for short-term sale in the ordinary course ofoperations, the land is considered to be held for capitalappreciation);

c) A building owned by the reporting entity (or held by thereporting entity under a finance lease) and leased out underone or more operating leases on a commercial basis. Forexample, a university may own a building that it leases on acommercial basis to external parties; and

d) A building that is vacant but is held to be leased out under oneor more operating lease on a commercial basis to externalparties.

8.1 Initial Measurement

Investment property should be measured initially at its cost(transaction costs should be included in this initial measurement).



Where an investment property is acquired at no cost, or for anominal cost, its cost is its fair value as at the date of acquisition.The cost of a purchased investment property comprises itspurchase price and any directly attributable expenditure. Directlyattributable expenditure includes, for example, professional fees forlegal services, property transfer taxes and other transaction costs.The cost of investment property is not increased by start-up costs(unless they are necessary to bring the property to its workingcondition), initial operating losses incurred before the investmentproperty achieves the planned level of occupancy or abnormalamounts of wasted material, labour or other resources incurred inconstructing or developing the property.If payment for investment property is deferred, its cost is the cashprice equivalent. The difference between this amount and the totalpayments is recognised as interest expense over the period ofcredit.An investment property may be received as gift or contributed to theentity. For example, a national government may transfer at nocharge a surplus office building to a local government entity, whichthen lets it out at market rent. An investment property may also beacquired for no cost, or for a nominal cost, through the exercise ofpowers of sequestration. In these circumstances, the cost of theproperty is its fair value as at the date it is acquired.Where an entity initially recognises its investment property at fairvalue in accordance with the allowed alternative where no costvalue is available (as allowed by IPSAS 16, Investment Property),the fair value is the cost of the property. The entity may decide,subsequent to initial recognition, to adopt either the fair value modelor the cost model.

8.2 Subsequent Expenditure

Subsequent expenditure relating to an investment property that hasalready been recognised should be added to the carrying amount ofthe investment property when it is probable that future economicbenefits or service potential over the total life of the investmentproperty, will flow to the entity in excess of the most recentlyassessed estimate of useful life. All other subsequent expenditureshould be recognised as an expense in the period in which it isincurred.Subsequent expenditure on investment property is only recognisedas an asset when the expenditure improves the condition of theasset, measured over its total life, beyond its most recently



assessed standard of performance. The appropriate accountingtreatment for expenditure incurred subsequent to the acquisition ofan investment property depends on the circumstances, which weretaken into account on the initial measurement and recognition of therelated investment, and whether subsequent expenditure isrecoverable. For instance, when the carrying amount of aninvestment property already takes into account a loss in futureeconomic benefits or service potential, subsequent expenditure torestore the future economic benefits or service potential expectedfrom the asset is capitalised. This is also the case when thepurchase price of an asset reflects the entity’s obligation to incurexpenditure that is necessary in the future to bring the asset to itsworking condition. An example of this might be the acquisition of abuilding requiring renovation. In such circumstances, thesubsequent expenditure is added to the carrying amount.

8.2.1 Fair Value Model

A gain or loss arising from a change in the fair value of investmentproperty should be included in net surplus/deficit for the period inwhich it arises.The fair value of investment property is usually its market value.Fair value is measured as the most probable price reasonablyobtainable in the market at the reporting date in keeping with thefair value definition. It is the best price reasonably obtainable by theseller and the most advantageous price reasonably obtainable bythe buyer. This estimate specifically excludes an estimated priceinflated or deflated by special terms or circumstances such asatypical financing, sale and leaseback arrangements, specialconsiderations or concessions granted by anyone associated withthe sale (certain of above mentioned circumstances may not applyto the public sector at large but are noted for the sake ofcompleteness and explanation of the principle involved).An entity determines fair value without any deduction for transactioncosts that the entity may incur on sale or other disposal.The fair value of investment property should reflect the actualmarket state and circumstances as of the reporting date, not as ofeither a past or future date.If an entity has previously measured an investment property at fairvalue, the entity should continue to measure the property at fairvalue until disposal (or until the property becomes owner-occupiedproperty or the entity begins to develop the property for subsequentsale in the ordinary course of operations) even if comparable



market transactions become less frequent or market prices becomeless readily available.

8.2.2 Cost Model

After initial recognition, an entity that chooses the cost modelshould measure all of its investment property using the benchmarktreatment and the guidelines for normal assets as stated in theprevious section that is, at cost less any accumulated depreciationand any accumulated impairment losses.

8.3 Transfers

Transfers to, or from, investment property should be made when,and only when, there is a change in use, evidenced by:

a) Commencement of owner-occupation, for a transfer frominvestment property to owner-occupied property;

b) Commencement of development with a view to sale, fora transfer from investment property to inventories;

c) End of owner-occupation, for a transfer from owner-occupied property to investment property;

d) Commencement of an operating lease (on a commercialbasis) to another party, for a transfer from inventories toinvestment property; or

e) End of construction or development, for a transfer fromproperty in the course of construction or development.

When an owner-occupied property becomes an investment propertycarried at fair value, an entity continues to depreciate the propertyand to recognise any impairment losses that have occurred. Theentity treats any difference at that date between the carryingamount of the property under and its fair value in the same way asa revaluation.

This means that:a) Any resulting decrease in the carrying amount of the

property is recognised in net surplus/deficit for theperiod. However, to the extent that an amount isincluded in revaluation surplus for that property, thedecrease is charged against that revaluation surplus; and



b) Any resulting increase in the carrying amount is treatedas follows:

to the extent that the increase reverses a previousimpairment loss for that property, the increase isrecognised in net surplus/deficit for the period. Theamount recognised in net surplus/deficit for theperiod does not exceed the amount needed torestore the carrying amount to the carrying amountthat would have been determined (net ofdepreciation) had no impairment loss beenrecognised; and

any remaining part of the increase is crediteddirectly to equity under the heading of revaluationsurplus. On subsequent disposal of the investmentproperty, the revaluation surplus included in equitymay be transferred to accumulated surpluses ordeficits. The transfer from revaluation surplus toaccumulated surpluses or deficits is not madethrough the statement of financial performance.

8.4 Disposals

An investment property should be eliminated from the statement offinancial position on disposal or when the investment property ispermanently withdrawn from use and no future economic benefitsor service potential are expected from its disposal.

Gains or losses arising from the retirement or disposal of investment propertyshould be determined as the difference between the net disposal proceeds andthe carrying amount of the asset. For the purposes of display in the financialstatements, the gain or loss should be included in the statement of financialperformance as an item of revenue or expense, as appropriate.

Documents

Asset Management Framework - North West...Asset Management Framework Version 3.3 April 04 - 7 - Framework of the information needed for asset management. Accounting conventions and