There are different accounting standards in the U.S. and internationally for valuing assets for the purpose of financial reporting. These standards describe best practices in accounting that agencies should carefully consider when valuing assets to support TAM. However, particularly in the U.S., the approach an agency uses to value assets for TAM often differs from that used for financial reporting. The following subsections provide further detail on U.S. standards and international standards, and the applications of these standards to support TAM.
GASB Statement Number 34: Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments published in 1999 (1) describes how U.S. public agencies should prepare their basic financial statements, including the reporting of capital assets. GASB 34 requires agencies to report capital assets by their historic cost, also known as purchase price. This approach is recommended to maintain consistency with the U.S. GAAP.
GASB 34 allows for two different approaches for handling depreciation of capital assets. By default, an asset is depreciated over its estimated useful life. The standard does not specify how depreciation is calculated, only that it should be calculated “…in a systemic and rational manner.” In practice, agencies typically assume an expected useful life by asset class and apply straight-line depreciation.
GASB 34’s alternative approach to account for depreciation is the “modified approach.” In this approach, an asset’s historic cost is reported but no adjustment is made for depreciation. Instead, a separate calculation determines the cost to maintain and preserve the asset at a specific level of service, and this cost is disclosed. The asset is treated as an “ongoing concern”, and the cost of maintaining the asset is considered a part of the cost of operating the transportation system, rather than as an adjustment to the asset value.
The modified approach may be used for infrastructure assets that are part of a network or subsystem of a network. To use the approach an agency must:
- Have an up-to-date asset inventory;
- Perform periodic condition assessments at least every three years and summarize the results;
- Maintain assets “approximately at (or above)” the established condition level based on the three most recent condition assessments; and
- Estimate each year the annual amount to maintain and preserve assets at a specified condition level.
Internationally, the IFRS are the predominant accounting standards. The IFRS Foundation reports that globally 166 jurisdictions and 15 of the 20 G20 countries use its standards (the exceptions are the U.S., Japan, China, India, and Indonesia). As noted in Chapter 1, IFRS standards are not specific to the public sector, and IPSAS standards have been developed for public agency use. However, as a practical matter IPSAS standards typically refer to relevant IFRS standards, so the text here focuses on the relevant IFRS standards.
The IFRS standard IAS 16: Property, Plant and Equipment (2) describes how to calculate costs and depreciation for fixed assets. This standard was developed prior to IFRS Number 13, which is described further below, but it has since been updated to reference it. IAS 16 describes that an organization should recognize an asset at its cost when it is originally acquired. Following the original recognition of the asset, an organization can use one of two models for measuring its value: the cost model or the revaluation model.
The cost model is similar to that described in GASB 34. With this model, the value of an asset is its cost adjusted for depreciation. To calculate depreciation, one must first establish the useful life of the asset considering the expected usage of the asset, expected wear and tear, technical or commercial obsolescence, and legal or other limits on the use of the asset. One must also establish the residual value of the asset once it reaches the end of its useful life and the depreciation method for adjusting its value over time. The standard explains that different depreciation methods may be used and that the selected method should be that which “…most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.”
The revaluation model may be used as an alternative to the cost model. In this model, the asset is periodically revalued to determine its fair value. Between revaluations, the cost model is used to adjust the valuation. The standards note that revaluation should be made with sufficient regularity to ensure there is no material difference between the calculated cost and the asset’s fair value.
IFRS Number 13: Fair Value Measurement (3) defines fair value. It recommends using the price of an asset for financial reporting, where this can be determined, and it provides guidance on estimating the price where it cannot. The standard also describes a hierarchy used to categorize fair value estimates based on what type of data are used. Ideally, the fair value is established using Level 1 inputs, the asset’s (or an identical asset’s) quoted price in an active market. When Level 1 inputs are unavailable, Level 2 inputs should be used. These include market prices of similar assets or prices from inactive markets and observable data, such as interest rates. Level 3 inputs, “unobservable inputs for the asset or liability”, are relied on when there is no discernable market, and they are accorded to the lowest priority.
IFRS Number 16: Leases (15) includes additional information relevant to fair value calculations for certain situations. In this standard, fair value is defined in the context of a lessor’s account requirements as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.”
It is important to note that while international standards allow for use of either historic costs or fair value for valuing assets, the general trend of public agencies in Europe and Australia has been to value assets based on their depreciated replacement cost (DRC), consistent with the fair value approach. This trend is exemplified by recent U.K. and Australian asset valuation guidance for public agencies (12, 16).
The standards described above are applicable to asset valuation for financial reporting. U.S. agencies must follow GASB 34 for financial reporting, but they are under no obligation to use the GASB 34 asset values for other purposes. Furthermore, they are under no obligation to comply with international accounting standards for any purpose. Nonetheless, the U.S. and international standards are important for defining key concepts and establishing best practices. The different accounting standards have been adapted for use in the context of calculating asset value to support TAM with the following considerations:
- While it is not required, some agencies may prefer to maintain consistency between estimates of asset value prepared for financial report based on GASB 34 and for supporting TAM. The guidance describes an approach for maintaining this consistency where desired.
- Agencies using the GASB 34 modified approach have already made a strong linkage between financial reporting and TAM. This approach requires that an agency uses its asset management systems to calculate the cost to maintain its assets. Given that assets are treated as an “ongoing concern” in this approach, they are not depreciated. Ideally, agencies using this approach should utilize the same cost to maintain assets for TAM and for financial reporting. This helps ensure consistency between the financial asset register and technical asset register (e.g., asset values as captured in an Enterprise Asset Management software system).
- While it is not binding for U.S. agencies, IFRS 13 describes best practices for calculating fair value of an asset. The IFRS concepts, terms and guidance are applicable to U.S. agencies calculating asset value using a cost or market perspective.
Other IFRS and IPSAS standards, as well as the standards and guidance of international agencies based on these, help define concepts, terms, and best practices for aspects of the asset valuation calculation process, such as in establishing useful life, calculating residual value, selecting a depreciation method, and deciding how to componentize assets. These concepts are highly applicable to U.S. agencies calculating asset value for TAM.