Doctoral thesis of philosophy aas27 and accountability with emphasis on depreciation as the critical test

Title AAS27 and accountability with emphasis on depreciation as the critical test by Allan Molland B.Bus.(Acc/Eco), Grad Dip Ed., CPA, M Bus School of Accounting and Law 2006 A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy from RMIT University Declaration The content of this thesis is my own work, except where otherwise indicated The work has not been submitted previously by me, in whole or in part, to qualify for any other academic award The content of the thesis is the result of work which has been carried out since the official commencement date of the approved research programme Allan Molland ii Acknowledgements I wish to thank Professor Sheila Bellamy and Professor Robert Clift for being supervisors Professor Robert Clift (affectionately known as Bob) has been an inspiration He was always questioning and furthering my learning process A special thank you is extended to all these who participated in the research I dedicate this work to my mother and late father who were always there for me Allan Molland iii Abstract The purpose of this study is to investigate how senior accounting staff in Victorian local councils are recording and reporting infrastructure assets (IAs) with their relevant depreciation in General Purpose Financial Reports (GPFRs) Infrastructure assets are long-lived assets such as roads, drains and bridges Historically, the purpose of public sector accounting in Western countries has been to demonstrate that funds have been raised and expended strictly within the authority of the annual budget This short-term charge/discharge objective, involving the use of a cash-based system of accounting, has effectively prevented the provision of information for long-term decision making and the assessment of those decisions The major disadvantage for management purposes is the loss of information relating to the longterm benefits of expenditures with one of the major issues being the failure to record IAs and their relevant depreciation The introduction of Australian Accounting Standard No 27 Financial Reporting by Local Governments (AAS27), which applies to all Australian local authorities and the Statements of Accounting Concepts (SACs) require IAs to be reported in the Statement of Financial Position and depreciation to be charged in the Statement of Financial Performance in order to reflect the loss of service potential in the operating period concerned It is anticipated that the study will report the implications for the accountability of the implementation of IA accounting and the utility and relevance of IA information and depreciation for decision-making by both internal and external users Conclusions on the consequences of current practices and recommendations for change will be developed to assist local government authorities and accounting bodies iv Abbreviations Abbreviation Name of Abbreviation AAM Asset Accounting Manual AARF Australian Accounting Research Foundation AAS Australian Accounting Standard AAS27 Financial Reporting by Local Governments AASB Australian Accounting Standards Board CBD Condition-Based Depreciation CCA Current Cost Accounting Method CCF Consolidated Capital Fund CF Conceptual Framework GASB Government Accounting Standards Board GPFRs General Purpose Financial Reports IAs Infrastructure Assets IAS International Accounting Standards ICAA Institute of Chartered Accountants Association IMM Victorian Institute of Municipal Management NCA Non-Current Assets NCGA National Council on Government Accounting NZSA New Zealand Accounting Research and Standards Board PSACE Public Sector Accounting Centre of Excellence PSASB Public Sector Accounting Standards Board v SACs Statement of Accounting Concepts VOLG Victorian Office of Local Government UIG Urgent Issue Group vi Table of Content Title i Declaration ii Acknowledgements iii Abstract iv Abbreviations v Table of Content vii List of Tables xvii Chapter Introduction 1.1 Introduction and Rationale 1.2 Relevance of Depreciation 1.3 Local Government Accounting Information 1.4 Reporting the Cost of IAs and Relevant Depreciation 1.5 Purpose of IA Depreciation in Local Authorities’ GPFRs 1.6 Local Government Depreciation Issues 12 1.7 IA Depreciation Implications 14 1.8 Methodology 16 1.9 Overview of Thesis 17 Chapter II 21 Literature Review 21 2.1 History 21 vii 2.2 Developments in the 19 and 20 Centuries for Depreciation 23 2.2.1 19 Century Private Sector IA Accounting Practices 24 2.2.2 19 Century Municipal IA Accounting Practices 28 2.2.3 20 Century IA and Depreciation Accounting Practices 31 2.2.5 Argument for Change to Asset Accounting 34 2.3 Local Authorities 41 2.4 The Past—Fund Accounting 42 2.4.1 Cash and Modified Accrual Accounting Practices 43 2.5 Change to Accrual Accounting in the Public Sector 48 2.6 The Standard AAS27 Financial Reporting by Local Governments 51 2.7 Victorian Local Government Developments on Financial Reporting 55 2.8 Development of Financial Reporting in the Public Sector 61 2.8 Statement of Accounting Concepts (SACs) and GPFRs 70 2.8.1 Service Potential or Future Economic Benefits 90 2.8.2 Control by an Entity 90 2.8.3 The Result of a Past Transaction or Event 91 2.9 IA Accounting and User Needs under SACs 93 2.10 Infrastructure Assets 96 2.10.1 Definitions of Infrastructure Assets (IAs) 97 2.10.2 Private and Public Sectors are Different 104 2.10.3 IAs are Different from Other NCA 109 2.11 Identification of Infrastructure Assets 111 2.12 Valuation of Infrastructure Assets 116 viii 2.12.1 Historical Cost 117 2.12.2 Current Cost 118 2.13 2.12.2.1 Current Market Value 118 2.12.2.2 Current Reproduction Cost 118 2.12.2.3 Current Replacement Cost 119 2.12.2.4 Net/Realisable Value 119 Depreciation 123 2.13.1 Generational Equity Issues 126 2.13.2 Accounting Records and Policies 128 2.13.3 Effect of Depreciation in GPFRs 129 2.13.4 Depreciation of Infrastructure Assets 133 2.13.5 Alternative Viewpoints on Depreciation 135 2.13.5.1 Renewal Accounting 136 2.13.5.2 Condition-Based Depreciation (CBD) Method 142 2.13.6 Depreciation Issues 146 Chapter III 153 Methodology 153 3.1 Motivation for Study 153 3.2 Research Method 154 3.3 Preliminary Data Gathering 157 3.4 Research Problem 158 3.5 Questions Raised 160 ix 3.5.1 What information is necessary and sufficient for decisions relating to the use, maintenance and replacement of infrastructure assets? 160 3.5.2 Has the charging of depreciation on IAs affected budgets, rating estimates and policy decisions? 162 3.5.3 Has the charging of depreciation on IAs affected day-to-day management decisions? 163 3.5.4 What are the implications of depreciation charges on IAs for intergenerational equity? 164 3.6 Data Collection 164 3.6.1 Interviews 165 3.6.2 Research Instrument 167 3.6.3 GPFRs Review 168 3.7 Data Analysis 169 3.7.1 Interviews 169 3.7.2 Questionnaire 169 3.7.3 GPFRs Review 170 Chapter IV 171 Interviews 171 4.1 Issues Investigated 171 4.2 The Interviewees 172 4.3 Responses from Interviewees 172 4.3.1 Technical Issues in Financial Reporting of IAs under AAS27 173 4.3.2 Benefits of IA Information 174 x Appendix 7.1 399 Appendix 7.1 City of Melbourne IAs accounts reconciliation Table 7.6 City of Melbourne IAs accounts reconciliation Roads & Laneways Opening balance (carrying amount) Plus additions 2001 2000 $’000s $’000s 499,440 445,250 2,244 5,127 Plus/(less) net valuation increment/(decrement) 74,240 Less disposals/transfers to external parties (6,663) Less depreciation (13,931) (18,514) Closing amount 487,753 499,440 Footpaths 2001 2000 $’000s $’000s 51,098 42,078 Opening balance (carrying amount) Plus additions 3,153 6,406 Plus/(less) net valuation increment/(decrement) 10,290 Less disposals/transfers to external parties (568) Less depreciation (6,403) Closing amount 47,848 (7,108) 51,098 Kerb & channel Opening balance (carrying amount) Plus additions 2001 2000 $’000s $’000s 105,868 95,537 197 1,463 Plus/(less) net valuation increment/(decrement) 13943 Less disposals/transfers to external parties (1,727) Less depreciation (2,918) Closing amount Bridges Opening balance (carrying amount) (3,348) 103,147 105,868 2001 2000 $’000s $’000s 9,442 11,618 Plus additions Plus/(less) net valuation increment/(decrement) (119) Less disposals/transfers to external parties (1,663) Less depreciation ( 241) (394) Closing amount 9,206 9,442 (GPFR 2000/01, p.17) Appendix 7.2 400 Appendix 7.2 Table 7.13 Melton Shire Council IAs Account Reconstruction Table 7.13 Melton Shire Council IAs Account Reconstruction Roads & Streets 2001 2000 At cost 1,341,600 616,891 nil 151,749,881 At valuation January 2000 At valuation 30 June 2001 At valuation July 2000 Less Accumulated depreciation Closing amount 9,041,864 nil 171,585,109 nil (56,389,667) 125,578,906 Bridges 2001 At Cost 25,407 At valuation January 2000 Less Accumulated depreciation 25,407 (2,360,395) (2,273,175) 2,132,527 2,219,747 2001 At valuation January 2000 nil 2000 63,311,007 5,101,314 nil 67,402,711 nil Less Accumulated depreciation (13,670,086) Closing amount 2000 4,467,515 Drainage At valuation July 2000 111,091,361 4,467,515 Closing amount At valuation 30 June 2001 (41,275,411) (11,889,914) 58,833,939 51,421,093 (GPFR 2000/01, p.75) Appendix 7.3 401 Appendix 7.3 Table 7.18 IA Accounts Depreciation & Reconstruction Table 7.18 IA Accounts Depreciation & Reconstruction Note Depreciation—Roads, streets & bridges Depreciation—Drainage $9,981,883 $1,326,539 Note 19 Infrastructure Council Valuation January 2000 Roads 287,372,351 Drainage 78,638,952 Footpaths 17,847,961 Kerb & Channel 20,793,757 Bridges 2,259,505 Roundabouts 1,336,910 Regulatory Signs 1,367,494 Street Furniture 248,112 Natureship Trees 2,472,635 Bike Paths 922,454 413,260,131 At Cost Roads 3,351,215 Drainage 2,114,675 Footpaths 1,362,938 Kerb & Channel 199,836 Bridges 164,307 Roundabouts 243,911 Regulatory Signs 160,151 Street Furniture 246,470 Natureship Trees 125,553 Bike Paths 343,695 8,312,751 Total Infrastructure 421,572,882 Less Total Accumulated Depreciation 256,556,521 165,016,361 Total Written Down Value 270,646,179 (GPFR 2000/01, p.35) Appendix 7.4 402 Appendix 7.4 Table 7.20 City of Greater Bendigo Non-financial Information Table 7.20 City of Greater Bendigo Non-financial Information Report of Operations & Major Achievements Physical Plan, develop, maintain and manage Greater Bendigo’s physical assets which will contribute to the amenity, safety, mobility and other needs of the local and wider community Roads and Bridges The development, maintenance and implementation programs for road maintenance and construction of Major Achievements Comprehensive survey completed of Council bridge stock and subsequent development of a maintenance program; Installation of new bridges at three rural locations on roads, and two new bridges on the main road network; Capital expenditure on roads and bridges totaling $11.7M, including $834,000 of Roads to Recovery funding being spent on road improvement works; Total expenditure of $7.6M on urban and unsealed road maintenance (including street lighting and drainage); Re-tendered the major Road Maintenance Contract, incorporating higher standards for road maintenance with inhouse Business Unit BenCon the successful tenderer; Absorbed reduction in Grants Commission funding for local roads of $600,000 over three years; Completed a detailed survey of the sealed road network, including a revised year resurfacing program; In State Government Survey, increased community satisfactory rating from 56 to 61 In Council Survey, increased satisfaction 6.1 to 6.2 for unsealed country roads, and for sealed roads in urban areas from 7.1 to 7.5 (GPFR 2000/01, p.12) Appendix 7.5 403 Appendix 7.5 Table 7.26 Swan Hill Rural Council Non-financial information Table 7.26 Swan Hill Rural Council Non-financial information Services Average Operating Expenditure per Assessment This indicator represents the total operating expenses of the Council (including depreciation and asset write off), divided by the total number of property assessments, and seeks to identify the amount expended on services per assessment being $2,413.28 (2000/01) and $2,205.71 (1999/00) The total expenditure is derived after charging of depreciation, and the writing off $860,000 of road infrastructure improved during the year, and therefore includes accounting treatments, which not represent actual services delivered to the community When these accounting treatments are removed, the result is $1,663.21 (2000/01) and $1,569.48 (1999/00), and indicates that there has been a $93.72 increase in the cost of expenditures on services per assessment (GPFR 2000/01 p.17) Infrastructure Average Capital Expenditure per Assessment This indicator represents total funds expended on infrastructure to review, enhance or extend the current infrastructure network divided by the total number of property assessments, and seeks to identify whether Council is spending more or less on maintaining infrastructure base being $294.52 (2000/01) and $366.55 (1999/00) (GPFR 2000/01, p.17)