Instructions for Use of the
Accrual Accounting and the Use of the
PWGSC Book Value Calculator (BVC) for Determining
Gross and Net Book Values for Opening Balances
Appraisals Directorate
Office Accommodation/Real Estate Sector
Real Property Services
Public Works and Government Services Canada
Accrual Accounting and the Use of the
PWGSC Book Value Calculator (BVC) for Determining
Gross and Net Book Values for Opening Balances
Table of Contents
1. Introduction
2. Background
3. Treasury Board Policy
1. Authoritative Sources
2. Policy Requirements
4. Scope of Application
1. Capital Assets
2. Capitalization of Assets
3. Valuation of Capital Assets
4. Amortization of Capital Assets
5. Materiality Threshold
5. Provision of the Book Value Calculator to Federal Government Departments
6. Related Services Offered by Public Works and Government Services Canada
7. Important Issues in Developing Cost Estimates for Accrual Accounting
1. Reproduction Cost versus Replacement Cost
2. Cost versus Value
8. Historical Cost Estimation
9. Changes Affecting a Property (Betterments)
1. Expenses - Repairs and Maintenance
2. Betterments - Items to Capitalize
3. Capital Additions - Items to Capitalize
10. Economic Life versus Remaining Economic Life versus Effective Age
11. Write-downs
12. Gain or Loss on Disposal
13. Costing Programs for Estimating Reproduction Cost
14. Cost Indices
15. Mathematical Calculation Methodology in the PWGSC Book Value Calculator
1. Land Value Determination
2. Building Value Determination
3. Development of Appropriate Betterment Rates
1. Observed Condition
2. Deemed Betterment Rates
3. Effective Age or Remaining Life
4. Depreciated Reproduction Cost New
4. Refinements
1. Quality Improvement
2. Improved Operating Efficiency
3. Major Betterments
5. Remaining Asset Life
6. Effective Year Built
16. Proof of Concept
17. Project Plan - Assisting in the Development of Book Values for Other Federal Government Departments
1. Partnership Between PWGSC and Client Department’s Real Estate; Finance; and IT Sections
2. Identification of Data Needs and Gap Analysis
3. Development of Asset Lives and Betterment Tables
4. Design of Data Collection Form and Distribution to Field Operations
5. Identification of Field Source Documents
6. Costing of Improvements as Last Option
7. Input of Data to PWGSC Book Value Calculator
8. Output to Finance
18. Form Input
19. PWGSC Quality Assurance
20. Reporting
Appendix
A Treasury Board Accounting Standard 1.1 - Policy and Principles
B Land Value Study
C Building Indices Information
D Sample Input Form
E Screen Print of PWGSC Book Value Calculator
F Visual Basic Program Instructions for PWGSC Book Value Calculator
G Sample Output Report
H Graphic illustrations Showing Different Scenarios
I Definitions
Public Works and Government Services Canada's
Book Value Calculator (BVC) for Determining
Gross and Net Book Values for Opening Balances
1.0 Introduction
At the present time the federal government’s real property holdings are valued at $1.00 in the government’s statements of assets and liabilities. This approach tends to devalue real property as an expenditure of the point of acquisition or construction and as source of funds at the point of disposal.
With the introduction of full accrual accounting, the dollar value of assets will be reported at their historic costs. It follows that readers of the federal government's financial statements will more fully appreciate the extent of the federal government's real property holdings, and better understand the strategy and operating importance of real property for the government.
The introduction of full accrual accounting is more than just technical refinements and is likely to have a variety of significant repercussions for the federal government's real property executives and officers.
To assist in the development of the Gross and Net Book Values for the opening balances the Appraisals Directorate at Public Works and Government Services Canada has developed a "Book Value Calculator" that allows departments to easily determine reasonably accurate estimates of book values.
The "Book Value Calculator" (hereafter referred to as the “BVC”) was designed by the Appraisals Directorate at Public Works and Government Services Canada (PWGSC) to assist in determining the Gross (GBV) and Net Book Values (NBV) necessary for the opening balance statement for PWGSC and for other departments and agencies of the federal government. The "BVC" is essentially an “Access” database program that is designed to use readily available data to estimate the gross and net book values of land and buildings (or infrastructure); remaining life for amortization; and the effective year built (to support systems that must calculate NBV rather than accept it as an input item). The BVC is based on the following rationale:
An asset (building or infrastructure item) will have a current remaining life or observed condition based on a pattern of “betterments” and chronological age. Conversely, with a record of the original or recent construction cost and the current condition or remaining life it is possible to determine a reasonable accurate Gross and Net Book Values that reflect the original cost (actual or deemed) and deemed betterments (inclusive of write offs of both the original item replaced and unamortized balance).
Succinctly put, although we may not have records all cost expenditures and betterments for an asset during its life time, we have evidence based on the existing physical description and condition of the asset that lets us estimate the original cost and deemed betterments based on available data.
The BVC is simply an automation of the instructions in Appendix D of the “Treasury Board Accounting Standard 1.1” - Policy and Principles which advises on a method of estimating the book values for an estimate when there is a lack of complete financial data.
The goals of the Appraisals Directorate in developing the BVC were:
Simplicity The application needed to produce book values based on existing incomplete data with minimal manual input.
Accuracy The application had to produce the most reasonably accurate estimate of book values, inclusive of betterments, based on available data.
Acceptability The application needed the acceptance of the Treasury Board Secretariat and the Office of the Auditor General as a reasonable accurate method to determine book values for the opening balances of client departments.
Universality The application had to operate within existing databases of most departments and had to produce book values that could be electronically transferred into existing financial systems.
2.0 Background
As previously stated, the government intends to adopt full accrual accounting which conforms with generally accepted accounting principles (GAAP) as it is used in the private sector. This change results from recommendations issued by the Public Sector Accounting and Auditing Board (PSAAB). The principal changes will be the capitalization of capital assets and accounting for tax revenues on an accrual rather than a cash basis.
Reporting the true cost of programs and improved accountability of the government will be the most significant direct effect of these changes. Government accounting and financial reporting must provide useful and reliable information for decision making and accountability. The change to accrual accounting will provide:
- Better accounting for the government;
- Better decision making;
- Better accountability for capital assets.
Long-term capital plans will reinforce the need to review the use of capital assets and require planners to consider whether assets are being effectively used. Consequently questions regarding maintenance, renewal, disposal or new purchases will have to be considered in light of the effects on financial statements which will be required by the move to accrual accounting.
Users of this accounting practice, in the public sector (such as the Alberta Government), indicate that accrual accounting resulted in a new awareness among their managers of the difference between operating and capital funds. It has forced a recognition of value for money and improved capital planning.
Purchases of capital assets are long-term prepayments of expenses and will be recorded as such in the government's financial statements. Assets will be amortized over their useful life. This accounting practice will permit decision making on investment (such as, lease or buy); so that the decision will not be influenced or impeded by the immediate deficit impact but on the horizon of possession, based on a cost/benefit analysis of total life cycle costs.
An extensive search of existing documents at PWGSC revealed that insufficient information existed to accurately calculate the original cost and betterments for every asset within the PWGSC inventory. As a result, the Appraisals Directorate at PWGSC was asked to provide its assistance in determining book values. An original concept was presented to PWGSC Capital Assets Working Group and was accepted as an appropriate approach to develop book values based on available existing documentation. This concept was presented to the Treasury Board Secretariat and was accepted as an appropriate method for developing deemed book values.
3.0 Treasury Board Policy
The Realty Group in treasury Board published a draft policy on accrual accounting. To this policy, Treasury Board added another document in September 1999, entitled “Treasury Board Accounting Standard 1.1” - Policy and Principles (in draft format). This document supersedes the original draft policy. The Treasury Board Accounting Standard document is included at the end of this report as addenda. The reader is encouraged to carefully read this document as it states the official policy of Treasury Board which is the authority on realty matters for the government of Canada.
In order to avoid duplication, the policy will not be repeated in this report; but important aspects of the policy must be summarized in order to facilitate the understanding of its application in the context of this Guide.
3.1 Authoritative Sources:
The following documents should be used in the application of accrual accounting; this order of priority must be adhered to:
1. Treasury Board Accounting Standard 1.1 is the first source of reference for accrual accounting;
2. the Public Sector Accounting Handbook (PSA Handbook) will be the authoritative reference manual; if a specific item is not covered in that publication;
3. the Canadian Institute of Chartered Accountants (CICA) Handbook will be used. Other sources of reference are also mentioned, such as;
4. the Canadian Institute of Public Real Estate Companies (CIPREC); and
5. the Original Draft Policy issued by Treasury Board in 1998.
3.2 Policy Requirements:
The policy applies to all organizations considered to be departments as defined by Section 2 of the Financial Administration Act (FAA).
It is also important to mention that the Policy is effective April 1, 2001; and departments that are in a position to implement it earlier (with systems such as FIS) are encouraged to do so.
The policy also states that, by June 15th of each year following the initial year of application, departments must produce financial statements accompanied by a Statement of Management Responsibility to the Receiver General for Canada. They consist of four main statements accompanied by notes and schedules:
- Statement of Financial Position includes the periodic reporting of asset values on a balance sheet. The tracking of the financial implications of key events in the life cycle of any asset; such as, the recording of betterments as the asset’s usefulness is extended through renovation, the recording of write-downs when an asset value declines permanently below the asset book value recorded on the balance sheet.
- Statement of operations comprises the periodic expensing of amortization on the income statement. The recording of “gains” or “losses” when assets are devolved, sold or disposed of.
- Statement of cash requirements shows information about the operating and investing activities of an entity and the effect of those activities on the use of cash.
- Statement of Expenditures Authorities Used provides an accounting of the operating and investing activities in relation to the various expenditures authorities provided by Parliament.
- All required Notes and Schedules are an integral part of the financial statements. They are used to clarify or further explain the items included in the financial statements.
The completion of the first two statements necessitates a thorough review of capital assets in order to show accurately, consistently and conservatively the required information.
As previously mentioned, the purpose of this document is not to regurgitate the Treasury Board Accounting Standards; however, some parts of the policy must be reiterated in order the assist the user of this guide in applying the proper rules to the accrual accounting principles.
4.0 Scope of the Application
Department must apply this policy to capital assets, tangible or intangible, which are purchased, constructed, developed or otherwise acquired and:
- are held up for use in the production or supply of goods, the delivery of services or to produce program outputs;
- have a useful life extending beyond one fiscal year and are intended to be used on a continuing basis;
- are not intended for resale in the ordinary course of operations.
For the government, capital assets have the following characteristics:
- beneficial ownership and control clearly rest with the government;
- the asset is used to achieve the government objective; and
- risks and benefits of ownership clearly rest with the government as it is the case for capital leases.
4.1 Capital assets:
1) include land, buildings, heritage buildings, military assets, infrastructure assets, purchased computer software, in-house developed software, intangibles such as copyrights, trademarks, patents, etc., and asset acquired by capital leases or by donations;
2) do not include transfers for which no goods or services are received directly in return, assets located on Indian reserves or obsolete and surplus items;
3) do not include museum collections, works of art and historical treasures that have cultural, aesthetic or historical value except for a heritage buildings.
4.2 Capitalization of Assets
- All costs required to make capital assets operational must be recorded;
- differences between betterments which are capitalized and repair and maintenance which are expenses must be set in place;
- provisions for future asset removal and site restoration cost must be accrued in the rational systematic manner;
- When capital assets are sold or traded-in, the historical cost and accumulated amortization amounts relating to the particular capital assets must be removed from the appropriate general ledger accounts and a gain or loss on disposal must be recognized at that time.
- When capital Assets become obsolete and/or are removed from service and the long-term expectation is that the asset no longer has a value in use to the government, the department must write down the net carrying amount of the asset to its net realizable value. If the capital asset is subsequently returned to service, departments must not “write up” its book value unless betterments have been made;
- Useful life of capital assets must be estimated on a consistent basis;
- Amortization methodology must be applied rationally and systematically appropriate to the nature of the capital assets and its use by the department. Asset type categories will be necessary.
4.3 Valuation of Capital Assets
- All capital assets held by a department on the date on which this policy becomes effective must be identified and valued using an appropriate cost base. Departments should consider reasonableness and materiality in their approach;
- Existing capital assets will be valued using historical cost adjusted for the proportion of the useful life of the asset that has already been consumed;
- Where it is not practical and cost-effective to establish a reasonable estimate of an asset’s historical cost, departments may use appraised or some appropriate measures of current value and extrapolate back to the estimated historical cost using a relevant price/cost index;
- Building and other assets acquired more than 40 years ago where no betterments have been undertaken should be carried at zero cost;
- All lease agreements must be reviewed to determine if they should be accounted for as capital leases.
4.4 Amortization of Capital Assets
- Periodic amortization expense should be an allocation of the original acquisition cost of the asset less expected salvage value;
- the service life of an asset should be determined on a basis that is linked with the expiration of the economic benefits. Service life may be measured in terms of years, total unit of output, or total hours of operating time;
- Where the appropriate measure of service life is “in years” it is recommended that the amortization of assets be on a straight-line basis;
- Departments are in the best position to estimate the expected life of an asset. The maximum amortization period should be limited to 40 years unless the department can estimate that the useful life of the asset is expected to exceed 40 years.
The reader can refer to the Policy to obtain further details on typical life expectancy for various types of assets.
4.5 Materiality Threshold
Capital assets generally include all assets treated as capital assets under Public Sector Accounting and Auditing Board recommendations and generally accepted accounting principles having an initial unit cost of $10,000.00.
At this time, the theshold value does not exceed $10,000; it is possible that Treasury Board will review this figure in the future to alleviate the workload of all departments. Departments may elect to choose a value lower than $10,000 but it is important to realize that this option would increase the amount information to capture and process and, would not add a significant amount of materiality to that department’s financial statements.
5.0 Provision of the “Book Value Calculator” to Federal Government Departments
The Book Value Calculator has been copyrighted on behalf of the Federal Government. Any federal government department or agency has authorization to use the application, without charge, on the following conditions:
□ The use of the application is for that department’s own use only and they do not use the application to develop book values for any other department, whether for a fee or not,
□ The application is not being used by a non-government employee or private company utilizing the program in direct competition with services offered by Appraisals Directorate at PWGSC, and
□ The program is not to be modified without the authorization of the Appraisals Directorate at PWGSC.
If a department is unsure whether they are in compliance with the above restrictions please contact the Appraisals Directorate at PWGSC c/o Michael D. Blaschuk, Director/Chief Appraiser (613) 736-2461.
6.0 Related Services Offered by PWGSC
The BVC is part of a module of Accrual Accounting services offered by PWGSC in conjunction with the Real Estate Services Directorate. The BVC was developed by the Appraisals Directorate at PWGSC and is offered as part of a broad service offering which includes:
□ Geographic Information Services
□ Data Mining and Analysis
□ Training in Accrual Accounting
□ Financial System Development and Modification
□ Strategic Planning
□ Accrual Based Budgeting
□ Ongoing Reporting Requirements
For more information on the broad service package available from PWGSC please contact Pamela Bacchus at (416) 512-5573.
7.0 Important Issues in Developing Cost Estimates for Accrual Accounting
There are a number of important issues that that must be considered and understood in developing accurate estimates of the gross and net book values for the opening balances for the Government of Canada's Accrual Accounting initiative. These are:
7.1 Reproduction Cost versus Replacement Cost
The application of the Policy on accrual accounting requires that a historical cost be recorded in order to amortize capital assets; in most instances, the original cost of such capital assets will not be available and a deemed historical cost will have to be determined. In the determination of that cost, a distinction must be made between reproduction cost and replacement cost.
Reproduction cost may be defined as the amount of expenditures necessary to erect a new improvement which would represent an exact facsimile, imitation, or replica of an existing one, as nearly as is possible under the conditions existing at the time of construction.
Replacement cost may be defined as the amount of monies necessary for erection of a new improvement, under conditions existing at the time of construction, which will be equal in utility to the original and serve as a substitute in function. The new structure may provide comparable shelter and amenities and produce equal net income, but it needs not correspond exactly to the original.
Treasury Board Accounting Standard 1.1 requires that capital assets be shown on the government books at their historical cost. As a result, reproduction cost must be used in order to obtain a cost figure as close as possible to the amount of money spent at the time of construction using the original materials and construction techniques.
7.2 Cost versus Value
It is also important to clarify the concepts of cost and value. Is cost equal to value? It is said that the cost new of a building tends to establish the upper limit of its possible value. This is based on the assumption that no one would be warranted in paying more for structure than the cost of duplicating it.
Cost, however, is not always indicative of value. To have value, a property must have adequate utility, and it is possible to incur cost without creating commensurate usefulness. A poorly design building lacking appeal, desirability, and marketability may cost as much to build as a well designed building of similar size and quality. The cost of the two may be the same, but desirability, utility, and appeal will affect the value of each and in the long run that value will not be the same.
Cost may also vary from value in the case of properties designed for a specific use. Such properties have value to a specific user, but they have limited demand in the open market. Supply and demand, except in unusual cases, influences market value.
Two identical properties, the first one new, and the second one ten years of age, will not have the same value, as the second building has had wear and tear which may not have been experienced by the first building. However, over long periods of time value generally tends to approximate cost (minus: all types of depreciation) because of the balancing factors between cost and value.
Market value for a property implicitly includes the following:
- value for the land;
- value for the building (as if new) less depreciation
- the building market value excludes all types of depreciation (amortization) incurred by the building over the years.
According to accrual accounting requirements, government books must show a historical cost as if new minus amortization.
Where the original cost of an asset is not available, one cannot take the market value of a building and extrapolate it back in time to the original date of construction since this would be a double counting of the depreciation. Therefore, one must determine a building cost as if new, at a given date and index that cost, back in time to its original date of construction. The next step is then to apply the amortization rate, and based on the life expectancy of the building, amortize the original cost, starting from that date until the present time.
8.0 Historical Cost Estimation
If the historic actual costs are known, they should be used. Without this information, the following is a method to accurately estimate this amount:
The reproduction cost new as of a specific year, subsequent to any major additions or renovation, must be determined. Sources for this include recent commissioned appraisals, data from Municipal Grants records in PWGSC (obtain their building cost new – if available); calculations from the Appraisal Directorate or development of “model” costs by the Appraisal Directorate.
If an existing appraisal report is used and if it contains a Cost Approach; it is important to take the following into consideration: it is likely that the appraisal report will contain a Replacement Cost. If this is the case, two adjustments may be necessary:
1- the depreciation applied by the appraiser will be added to the depreciated Replacement Cost, this will revert the cost figure to a Replacement Cost New; AND
2- an adjustment will be required to add to the Replacement Cost New, the deficiencies and super-adequacies embodied in the cost of a replica building which is normally obtained when a Reproduction Cost is calculated. After this adjustment is completed, a Reproduction Cost New will be obtained.
An alternate solution would be to calculate a Reproduction Cost new for the entire building with the appropriate unit prices, taking into consideration the existing materials and construction technique in place.
After these calculations are completed, the Reproduction Cost New will require a time adjustment, in order to adjust the cost figure to the historic date of construction or acquisition by the Crown.
It is important to note that, in some cases the Reproduction Cost and Replacement Cost may be identical if the building is relatively new and the material and technology used to erect that building are recent. In that particular situation, no adjustment will be necessary to the Replacement Cost New.
If the acquisition date is after the construction date, then the historic indexed reproduction cost new should be set at the acquisition date and appropriate depreciation applied.
To adjust to either of these dates, an index should be utilized to reflect changes in building costs. Sources of this index include Statistics Canada or published
construction cost indices (e.g. Marshall and Swift Historic Cost Index, Boeckh Valuation Cost Index, etc.).
The cost of significant capital additions will have to be determined. The cost of these additions should be indexed to the acquisition date and deducted from the historic indexed reproduction cost new. This prevents double counting of the same item.
The PWGSC Book Value Calculator automatically makes the appropriate time adjustments based on the land/building allocation; geographic location; and property type.
9.0 Changes Affecting a Property (Betterments)
When funds are expended into a property, a number of reasons motivate this course of action. The owner(s) of the subject property may have decided to make changes of various natures:
- repair and maintenance;
- betterment; or
- capital addition to the property.
The definition of each term must be clearly understood in order to properly allocate the amounts resulting from each transaction in the right accounts. In accounting terms, disbursements can be categorized as expense or capital investment. If they are considered as expenses they will be subtracted from the revenues in the Statement of Operations. If by nature, the reason for the disbursement covers a period longer than the fiscal period, it should appear in the Statement of Financial Position and be capitalized. A portion of the investment should be subtracted every year from the capitalized amount and taken as amortization.
9.1 Expenses - Repairs & Maintenance:
Any expenses incurred to keep the building competitive on the market in term of desirability and income generating capacity.
Ex: painting, changing windows, cleaning heating ducts, etc.
9.2 Betterments - Items to Capitalize
When costs are incurred to improve the service potential of a capital asset, it is a betterment; it should therefore be capitalized if the total costs exceed the established threshold limit ($10,000). The service potential may be enhanced when:
1) there is an increase in physical output and service capacity;
2) operating costs are lowered;
3) useful life is extended; and
4) quality of the output is improved.
Ex: The cost of refurbishing and rebuilding rolling stock and costs associated with other property upgrading are considered betterment when they improve the service value or extend the useful life of a property.
Examples of “betterments” typical to a building asset are, as follows:
1. Increase in Physical Output and Service Capacity
Space optimization projects would be the most common type of project that would be deemed a betterment under this category. Also included would be upgrades from one type of space to another that increased the assets output. Major additions that expand the floor space or volume of a building would also be considered as a betterment under this category.
2. Operating Costs Lowered
The most common betterment items under this category would be those items that improve the energy efficiency of a building or serve to reduce maintenance expenses.
3. Extended Useful Life
This is the most common type of betterment for a building asset. These include replacement of depreciable items that extend the life of the asset past its original design life. This would include most physical components of a building with the exception of the foundation and superstructure.
4. Improved Quality of the Output
Upgrades in the quality of the space or improvements that reduce vacancy rates would be the common betterment items under this category.
9.3 Capital Additions - Items to Capitalize
These are betterments addressed under item 1.) Increase in Physical Output and Service Capacity. Capital addition costs are incurred to increase the area of a property in most cases. They must be capitalized if the total costs exceed the established threshold limit.
Ex: A decision is made to add 10,000 m.2 to a government warehouse.
The cost of major capital additions must be estimated. The best source of this data is existing records. If this information is not available (or incomplete), the actual area of the addition can be estimated, as a percent of the total building area, and that percentage of the current production costs of new (RCN) can be indexed to the known or estimated date of the construction of the addition. The resulting amounts must also be indexed to the acquisition date and deducted from the historic indexed reproduction cost (new or depreciated) to avoid double counting of the same item.
10.0 Economic Life vs. Remaining Economic Life vs. Effective Age:
As previously mentioned, capitalized items must be amortized over their useful life; this process takes place by estimating the economic life and remaining economic life of a capital asset. By deriving the effective age, one can determine the amount of amortization.
The economic life is the period of time over which total utility of a structure is measured. It is the period over which a structure may reasonably be expected to be competitive on the market in the use for which it was intended.
The remaining economic life is a period of time from the date of the value estimate to the expiration of the economic life, over which the remaining utility of the structure is absorbed. It is the period of time over which the prudent buyer anticipates receiving all the benefits or amenities from ownership of the real estate asset. This is the period of discounting future benefits to present worth, or remaining utility.
The effective age is the difference between economic life and remaining economic life of the structure. Effective age may be greater or less than actual (chronological) age, depending upon the physical condition or market acceptance of the structure.
Ex: A building has the following attributes:
- Economic life : 40 years;
- Remaining economic life : 30 years;
- Effective age : 10 years;
- Chronological age : 15 years;
- Accumulated Amortization : 10 years/40 years or 25%
Economic Age-Life Method Calculation of Amortization (Depreciation):
The Economic Age-Life Method can be used to determine the effective age and remaining economic life of a building by reversing the typical process and using the market value determined by the Income Approach or Direct Sales Comparison Approach.
The steps involved in this process are:
1. Determine the market value of the property from the original appraisal report.
2. Subtract the land value in the report from the market value. to determine the contributory value of the building.
3. Divide the contributory value of the building by the replacement cost new to determine the overall percentage condition. This number can be used to determine the overall percent depreciation.
4. Use the overall percent condition or percent depreciation to determine the remaining economic life and effective age based on one of the following options:
a.) Applying a proportionate ratio to the economic life identified by the appraiser.
b.) Applying a proportionate ratio to the economic life identified by PWGSC.
c.) Applying the overall condition/depreciation percentage to established life expectancy tables (such as Marshall & Swift or Boeckh Valuation Services)
Ex: Calculation of Remaining Economic Life and Effective Age:
Current Value of Property = MV
Land Value = LV
Building Value = BV
Replacement Cost New = RCN
Percent Depreciated = Dep.(%)
Total Economic Life = EL
Effective Age = EA
Remaining Economic Life = REL
1) Example based on proportionate calculations (office building):
Formulas Example
MV - LV = BV $2,500,000 - $500,000 = $2,000,000
1-(BV/RCN) = Dep. (%) 1 - ($2,000,000/$3,000,000) = 33% Total Depreciation
Dep.(%) x EL = EA 33% x 50 Years = 17 years Effective Age
EL - EA = REL 50 Years - 17 years = 33 Years Remaining Economic Life
Conclusion:
Effective Age: 17 years
Remaining Economic Life 33 years
2) Example based on Marshall Valuation Table for a Construction Class B – Average quality office Building
Formulas: Example:
MV - LV = BV $2,500,000 - $500,000 = $2,000,000
1-(BV/RCN) = Dep. (%) 1 - ($2,000,000/$3,000,000) = 33% Total Depreciation
Life Expectancy = 50 years
Conclusion: (Tables from Marshall Valuation Manual)
Effective Age: 29 - 30 years
Remaining Economic Life 20 - 21 years
Effect of Straight-line Depreciation Methodology:
The above two examples are using the same values but yet, show two very different conclusions (effective age: 17 years vs. 30 years for 33% of depreciation). This parallel was purposely drawn in order to illustrate the effect of using a straight-line depreciation methodology that assumes a value of zero at the end of the economic life of a building.
Conversely, Marshall and Swift Tables are assuming that the building will still have a value of 20% after 50 years; this takes into consideration, the economic aspect of the expected life of a building and assumes that the building will still have some minor income generation capacity at the end of its life expectancy and therefore, that a residual value will still remain. This is representative of a declining balance type of depreciation methodology.
In simple terms, one methodology is based on accounting principles while the second is based on market observations. Considering that Treasury Board Accrual Accounting Policy is suggesting the use of an accounting based methodology for depreciation, government capital assets will be amortized using the straight-line methodology, as shown is Example #1.
Important Note: Based on the above-mentioned explanation, although Marshall & Swift or Boeckh Valuation Services (as well as other sources) Index Tables are recommended for time adjustment, depreciation tables provided by these suppliers are not recommended for the application of the Treasury Board Accrual Accounting Policy.
11.0 Write-downs
The cost of a tangible capital asset is reduced to reflect its decline in value:
- when a capital asset no longer provides service outputs
- when the value of future benefits is below net book value.
This situation occurs when there is:
- a decline in need for the asset;
- a change in the extent or manner of use;
- significant technological development(s);
- physical damage;
- a removal of asset from service;
- a decision to halt construction; and
- a change of law affecting the extent of use of the asset.
Note: A write-down should not be reversed unless betterments were made to the capital asset that would have the effect of increasing its value.
Ex: Capital Asset - Cost $3,000,000
Accumulated Amortization $1,800,000
Net Book Value $1,200,000
Note: As a result of a change in departmental policy, the capital asset is no longer required for the delivery of the program. Its residual value is $200,000.
Write-down $1,000,000
Residual Book Value of Capital Asset $ 200,000
Note: If the capital asset had no residual book value, we would have instead a write-off of $1,200,000.
12.0 Gain or Loss on Disposal:
Disposals occur through sale, destruction, loss, or abandonment. A positive difference / negative difference between the net cash inflow from the sale of an asset and its book value equals to a gain / loss on disposal.
Note: Considering that net book values are likely to be negligible, losses on disposal are likely to be rare.
Ex : Gain on Loss on
Disposal Disposal
Acquisition of asset in Year 0 $20.0M $20.0M
Service Life of Asset 20 years 20 years
Salvage value in Year 20 0 0
Annual Amortization Expense $1.0M $1.0M
Sale of Asset in Year 15 $8.0M $3.0M
Net Book Value in Year 15 $5.0M $5.0M
Gain or Loss on Disposal of Asset $3.0M ($2.0M)
13.0 Costing Programs for Estimating Reproduction Cost
A number of computerized Cost Programs were reviewed in view of determining the best suited program to meet the needs of cost determination for accrual accounting. A number of mandatory features were taken into consideration during the review, such as:
- speed of data entry;
- quantity of entries required for the completion the estimate;
- ability to use and process historical data;
- ability to print and quality of printed cost estimate
- availability of a hard copy book accompanying the program;
- relevance for the purpose of accrual accounting;
Although many cost estimators could be effectively used to estimate costs for buildings and/or some structures, three suppliers seem to meet the most number of criteria defined above:
- The Marshall & Swift Commercial Estimator 6 Software;
- The Boeckh Commercial Building Valuation System; and
- The Commercial Square Foot Model Costs 2000 by R.S. Means Building Construction Cost Data.
All three costs estimator programs were reviewed and the following features were observed:
The Marshall & Swift Commercial Estimator 6 Software/
(Cost: $599.95 US or approx. $900.00 Canadian):
- the list of building type includes about two hundred types of building, such as government buildings, office buildings, post offices, motels and so on;
- the demo software does not support all categories and about five examples are provided;
- the program is relatively easy to use;
- a minimum amount of data entry is required to produce an output report;
- additional information, specialties, and sub-systems can be added;
- three types of report can be printed:
- summary report;
- detailed report;
- input data listing.
- the cost breakdown is relatively similar for the two reports, while the third one is just an input data listing;
- the base structure cost is broken down into about 6 components, with one entitled “base cost” and that represents about half the base structure cost;
- the report generated may be restrictive for the use of accrual accounting.
The Boeckh Commercial Building Valuation System (Cost: $795.00 Canadian):
- it can be configured to use historical data;
- the metric system is supported;
- the program provides a quick take-off sheet to summarize the required information;
- the program is relatively easy to use;
- data entry can be completed relatively quickly;
- it compares well in most respected to the data entry requirement of the Marshall & Swift Estimator 6 Program;
- two types of report can be printed:
- a summary report; and
- a standard report. The Standard report produced is a more detailed and could probably fulfill more of our requirements.
The Commercial Square Foot Model Costs 2000 by R.S. Means Building Construction Cost Data (Cost: $205.95 Canadian):
The Commercial Square Foot Model Costs 2000 would best suit the requirement of the cost estimation activities. The program is relatively easy to use and data entry can be completed relatively quickly from drop-down menus. It compares well in most respect to the data entry requirement of the Marshall & Swift Estimator 6 Program, and the Boeckh Commercial Building Valuation System.
Some additional features include an illustration of the building selected as data entry is being completed. The program prints standard “off the shelf” typical construction, and also allows adding extra features. The printed output is broken down into nine components such as: foundation, roofing, mechanical, etc., and each with sub-components.
However, this program has limited accuracy for estimations of office components in excess of 170,000 square feet. Otherwise, the program seems to be quite interesting, and could probably fulfill the requirement of the TB Policy.
The three companies which can provide users with the appropriate software are listed thereafter (For further information, please, contact the Chief Appraiser, PWGSC (736-2461):
Marshall & Swift
P.O. Box 26307
Los Angeles, California
90026-0307
Tel: Main Office (213) 683-9000
Toll-Free National Line (800) 526-2756
E-mail:
Boeckh Canada
100 Sheppard Avenue East, Suite 460
Toronto, Ontario
M2N 6N5
Tel: (416)-733-1633
Toll-Free: 1-800-661-3619
R.S. Means Company, Inc
Construction Plaza,
63 Smiths Lane
Kingston, MA
02364-0800
Tel: (781) 585-7880
E-mail:
Note: PWGSC (Appraisal Directorate) can provide assistance in the completion of actual cost estimates with the various cost estimator programs.
13.1 Costing Structures and Infrastructure Items (bridges, dams, roadways, etc.):
Structures such as, bridges, dams, roadways, etc. are considered highly specialized assets, Architecture and Engineering Services in PWGSC (Denis Chartrand, 613-956-4028 - Heavy Civil Works), already have several cost figures for existing bridges, dams and roadways.
Architecture and Engineering Services Representatives in PWGSC believe that, when a cost estimate exists and there is a need to apply a cost index for time adjustment, construction cost indices are the best tools to complete time adjustments since nothing else exists to extrapolate these specialized costs.
If a cost figure is non-existent for a given structure, Architecture and Engineering Services in PWGSC can provide the service of an engineer to estimate historical costs (Cost: $1,000 per day + travel and accommodation).
14.0 Cost Indices
The original cost for capital assets may not be available in all cases. There may be situations where cost figures will become available, but for a different date than the original construction date. When that situation occurs cost figures may need to be extrapolated in time and Time Cost Indices/factors will be necessary in order to adjust the cost figure for the desired date/year. Several cost indices are available on the market; based on experience, here are some suggestions:
Statistic Canada publishes construction indices which can be applied to capital assets;
The Marshall & Swift Commercial Estimator 6 Software Time indices;
The Boeckh Commercial Building Valuation System. Time Indices; and
Means Cost Estimators time Indices.
There are no known published indices for land values in Canada.
The Appraisals Directorate at PWGSC developed land and building indices for use in its Book Value Calculator program.
A detailed analysis of the various building cost indices in Canada was completed. All indices were compared and various idiosyncracies were identified within each index and the strengths and weaknesses within each index were analyzed. As a result of the analysis of the various indices a series of building cost indices were developed for each province and territory for residential and non-residential property types from 1867 to 2000. These indices are incorporated in the PWGSC Book Value Calculator and automatically apply the appropriate time adjustments to the building cost.
The land development of the land indices proved to be more difficult. An analysis of land values for residential, commercial and industrial properties in major Canadian cities was completed in January 2000. The study produces values for the years, 1960, 1970, 1980, 1990 and 2000. The cost of developing values for dates prior to this range was prohibitively expensive. As the 1960 values were a fraction of the values as of today’s date, a decision was made to project the index back to 1867 based on the building index amount at that date. This amounts in indexed values that, although not highly accurate, are within acceptable parameters, particularly as a percentage of current book value. These indices are included within the PWGSC Book Value Calculator.
Graphs of the land and building indices and extracts from the various reports are included in the addenda of this report.
15.0 Mathematical Calculation Methodology in the Book Value Calculator
The PWGSC Book Value Calculator uses various cost indices and calculated betterment rates to develop estimates of Gross and Net Book Values, remaining asset life and effective year built. Most of the mathematics were pre-calculated and input to tables. This greatly speeds the application of the program and allows for rapid refinement for a department’s needs.
The application uses actual or deemed historic costs and deemed betterment rates to develop Gross and Net Book Values for the opening balance of the financial statement for Accrual Accounting.
Specifics of the calculations and mathematical processes are, as follows:
15.1 Land Value Determination (Gross Book Value)
The application uses the actual historic land acquisition cost and date, if known. In many cases, the date will be known, or can be estimated, however, the actual acquisition cost will not be known. The user is able to input a land valuation from another date (subsequent to the original purchase date), perhaps from an existing appraisal or assessment, and through use of a Land Index, factor that value back to the “deemed historic cost” as of the known or estimated acquisition date. The Land Index is based on an analysis of historic land values in each region. This analysis was coupled with construction cost indices to yield an index for each province by industrial, residential and commercial land types back to 1867.
15.2 Building Value Determination (Gross and Net Book Values)
The determination of Gross and Net Book Values presented the greatest challenge in this application. While replicating historic cost for the original improvement was readily possible using the developed building index, determining the historic betterments and their effect on the remaining amortized life of the asset presented a difficult problem. Ultimately it was identified that betterment rates could be determined from a number of sources. These include observed condition; deemed betterment rate; effective age or remaining life; and depreciated reproduction cost new. Analysis indicated that once the applicable betterment rate was identified, a factor based on the current reproduction cost new could replicate the appropriate Gross and Net Book Value for the asset as well as the remaining life to be amortized. The determination of the current reproduction cost new of the asset is calculated based on the application of an index to the actual historic cost or to an estimated reproduction cost new from another source such as an appraisal or assessment.
15.3 Development of Appropriate Betterment Rates
The various methods for determining the appropriate betterment rates are presented, as follows:
15.3.1 Observed Condition
The observed condition of an asset is indicative of its chronological age and the degree of replacement of its depreciable components. By establishing overall replacement rates based on various levels of “condition”, deemed betterment rates can be developed for various asset types. Replacement rates can be developed for major asset types such as residential, commercial and industrial property types as well as asset types unique to a department. The betterment rate is determined based on asset models, as follows:
Poor Condition % replacement/replacement period = betterment rate
Fair Condition % replacement/replacement period = betterment rate
Average Condition % replacement/replacement period = betterment rate
Good Condition % replacement/replacement period = betterment rate
Excellent Condition % replacement/replacement period = betterment rate
In applying a designated “condition” to a specific asset the appropriate betterment rate is applied.
15.3.2 Deemed Betterment Rates
For many assets, particularly infrastructure items, betterment rates may be relatively consistent or it may be difficult to determine the observed condition. This would be particularly true of subterranean or submersed assets or assets of long design life with low betterment rates. If betterment rates are known it is possible to simply enter the rate, through the available drop down menu, and the appropriate Gross and Net Book Value will be determined.
15.3.3 Effective Age or Remaining Life
The application uses the estimate of the remaining life or effective age to develop deemed betterment rates. Similar to the “observed condition method” this method rationalizes that an asset with an effective age or remaining life similar to a newer asset will have a similar Net Book Value as that same asset. The current amortized net value is analyzed against the original amortized value, assuming no betterments, and a betterment rate is determined based on the recovered portion of the asset during the amortization period. This betterment rate is then applied to determine the Gross Book Value.
4. Depreciated Reproduction Cost New
This method operates in a similar style to that method illustrated above. In some case, if a recent appraisal is available, there will be an indication of the recovered amortization expressed as a relationship between the depreciated and current reproduction cost new. A betterment rate can be determined based on this analysis and Gross and Net Book Values readily estimated.
3. Betterment Refinements
The application refines the betterments further based on improvements in quality; improvements in operating efficiency; additions; and major betterment expenditures.
1. Quality Improvement
The program allows for modifications to overall quality. A percentage adjustment is input, from a drop-down menu. This increases the cost base of the structure. Only quality improvements occurring since the most recent costing or valuation are captured, as they are already included in those same costings or valuations.
2. Improved Operating Efficiency
This input item uses a drop-down percentage adjustment to apply modify the cost base for the analysis. The year of the betterment is compared to the most recent costing or valuation to ensure that the adjustment is properly applied.
3. Major Betterments
The application uses a "Major Betterment" section to allow multiple entry of major betterments not captured in the balance of the program. The pre-calculated book values and remaining life from the application are refined by entries from this section. The calculated gross book value is modified by adding the cost of the betterment less the deemed original cost of the item it replaced. The net book value is modified by the cost of the item less any amortization to be charged from the original installation date to the current date. The remaining asset life is modified based on the portion of the original component replaced as a comparison to the asset life.
4. Remaining Asset Life
The "Remaining Asset Life" looks at the current unamortized portion of the property as a percentage of its 100% cost. The calculations assume a straight-line amortization. The unamortized amount prorated against the 100% amount and multiplied against the asset life to yield the "Remaining Asset Life"
5. Effective Year Built
Most existing financial systems allow for the input of the Gross Book Value but not the Net Book Value. These systems must calculate the Net Book Value based on the amortization rate for the asset. Therefore, it is necessary to derive an "Effective Year Built", sometimes referred to as a "Year put into service", to allow the financial system to calculate the correct net book value. The application develops this "effective year built" based on an analysis of the calculated Gross and Net Book Values and the asset life. The "effective year built" is calculated as the input year that will produce the pre-calculated Net Book Value based on the asset life of the building.
16.0 Proof of Concept
The PWGSC Book Value Calculator is based on the following conclusions:
• Different betterment levels will result in different levels of overall condition for a structure,
• Betterment rates are related to the overall Reproduction Cost New of the building or asset as of the year they were incurred.
Based on these conclusions it is possible, utilizing the “deemed” reproduction cost new of the structure at each year in its life, to estimate a “deemed” betterment amount for each year of the asset’s life in the appropriate “year-dollar” amounts. The original “deemed” cost and “deemed” betterment amounts can then be amortized by the appropriate rate to indicate the Net Book Value.
Under ideal conditions it should be possible to test this conclusion against existing structures with known betterment amounts during the last 30 years of the structure’s life. Unfortunately, it has not been possible to accomplish this feat due to the lack of historical data that is known to be accurate.
It is necessary to show a direct correlation between observed condition, effective age and betterment rates to substantiate this application.
To test this model it was necessary collect cost and life cycle information from a typical structure based on published information and compare the known results to the model. The following steps were completed:
• Development of an accurate building cost index,
• Identification of a model structure,
• Segregation of the various building components,
• Estimation of the degree of replacement of the components during the amortization period relative to the observed condition of the building,
• Determination of the Net Book Value based on the amortized historic costs and betterments and identification of effective age.
• Comparison to the “Age-Life-Condition” model for degree of accuracy.
Development of an Accurate Building Cost Index
Research was conducted on various Building Cost Indices. The strengths, weaknesses and “gaps” in each index were analyzed and a new synthesized index was developed that represented the strengths from each source. The year 1999 was identified as the base year (100 factor) and indices were developed for each province and territory, as well as a national index.
Identification of a model structure
The model structure used in the test is a 100,000 square foot, ten-story government-type office structure of reinforced concrete construction and average quality.
Segregation of the Various Building Components
The components of the office building were stratified into the following categories:
□ Excavation
□ Site Preparation
□ Foundation
□ Frame
□ Floor Structure
□ Floor Cover
□ Ceiling
□ Interior Construction
□ Electrical/Lighting
□ Sprinklers
□ Plumbing
□ Heating, Ventilation, Air Conditioning
□ Exterior Wall
□ Roof Structure
□ Roof Cover
□ Elevators
Estimation of the Degree of Replacement of the Components during the Amortization Period Relative to the Observed Condition of the Building
For the purpose of this test the amortization period of 25 years was selected based on two reasons:
1. It is within the Treasury Board Secretariat’s recommended range, and
2. It is the amortization period selected by PWGSC for its office buildings.
It is recognized that various degrees of replacement of the building components will result in different building conditions. Typical replacement is based on average replacement with no differed items. Poor and fair rated condition represent incremental levels of differed maintenance, whereas good and excellent ratings recognize advanced levels of replacement during recent time periods. The “poor”, “fair” and “average” conditions represent betterments at a consistent level over the twenty-five year amortization period. The “good” and “excellent” conditions represent significant renovations in the last 15 and 7 years, respectively. The following table illustrates the level of component replacement and their applicable replacement time periods relative to the condition of the structure:
|Building Component |% of Total |Poor % |Fair % |Avg.% Replaced|Good % |Excel.% |
| | |Replaced |Replaced | |Replaced |Replaced |
|Excavation |0.11% |0% |0% |0% |0% |0% |
|Site Preparation |0.02% |0% |0% |0% |0% |0% |
|Foundation |2.29% |0% |0% |0% |10% |20% |
|Frame |10.80% |0% |0% |0% |10% |20% |
|Floor Structure |8.86% |0% |0% |0% |10% |20% |
|Floor Cover |6.34% |100% |100% |100% |100% |100% |
|Ceiling |3.14% |50% |75% |100% |100% |100% |
|Interior Construction |25.40% |25% |50% |75% |100% |100% |
|Sprinklers |1.62% |25% |50% |75% |85% |100% |
|Plumbing |5.17% |25% |50% |75% |85% |100% |
|HVAC |8.68% |25% |50% |75% |85% |100% |
|Electrical/Lighting |10.05% |25% |50% |75% |85% |100% |
|Exterior Wall |12.88% |25% |50% |75% |85% |100% |
|Roof Structure |0.94% |0% |0% |0% |10% |20% |
|Roof Cover |0.37% |100% |100% |100% |100% |100% |
|Elevators |3.31% |10% |25% |50% |75% |100% |
| |100.00% |25% |42% |59% |73% |82% |
|Incurred over (years) | |25 |25 |25 |15 |7 |
*Note - This assumes an owner-occupier office building that incorporates items that would be considered leasehold improvements in a tenanted building
Determination of the Net Book Value Based on the Amortized Historic Costs and Betterments and Identification of Effective Age
The above betterment rates were applied to the model building based on a percentage of Reproduction Cost New over the amortization period, as follows:
Building Condition Betterment % Expensed over
Poor 1.0% per annum 25 years
Fair 1.7% per annum 25 years
Average 2.4% per annum 25 years
Good 4.8% per annum Last 15 years
Excellent 11.6% per annum Last 7 years
Using the above betterment rates the following effective ages are determined for a twenty-five year old office building based on chronological age; building condition; and betterment rate:
|Condition |Effective Age |Annual Betterment Rate |
|Poor |21 |1% |
|Fair |19 |1.70% |
|Average |17 |2.40% |
|Good |12 |4.80% |
|Excellent |7 |11.60% |
As anticipated, this test demonstrated the direct correlation between building condition; effective age; and betterment levels.
It should be recognized that the levels of accuracy are dependent on the subject property receiving betterment rates at typical levels and during typical periods in its cycle. It will be necessary to make judgement calls as to observed condition and betterment rates for buildings that are atypical. The PWGSC Book Value Calculator is designed to allow flexibility in determining the appropriate betterment treatment. If betterment rates are discovered to be above or below average rates for a facility the PWGSC Book Value Calculator allows for input of rates ranging from 0.25% to 25% per annum. In many cases departments will have completely records of betterments over the last five to ten years. These records can be analyzed and typical long-term betterment rates for the specific asset of type of asset can be developed and input to the PWGSC Book Value Calculator.
The test model applied represents a typical office building structure. It is acknowledged that various levels of replacement exist for residential and industrial type structures. Specific tables have been developed for these property types for use in the PWGSC Book Value Calculator.
17.0 Project Plan – Assisting in the Development of Book Values for Other Federal Government Departments
Based on our experience we have developed the following project plan for developing the gross and net book values:
17.1 Partnership Between PWGSC and Client Department’s Real Estate, Finance and IT Sections
Success in determining the appropriate Gross and Net Book Values is contingent upon the development of a team consisting of resources from the Appraisals Directorate at PWGSC and the Real Estate, Finance and IT sections of the client department. PWGSC will not solely determine the necessary values for a client department; however, we will work in partnership to determine the appropriate values.
The Real Estate section of a client department is the source most familiar with the existing asset inventories and internal document sources. They need to work with regional offices to assist in gathering data.
The Finance section is familiar with its needs related to posting the values to the applicable financial systems. These are also the key resource in providing accounting advice in the preparation of the book values.
The IT section is key in working within the existing departmental databases. Data needs to be retrieved and analyzed and the resulting data from the PWGSC Book Value Calculator needs to be electronically merged with the departmental finance systems.
2. Identification of Data Needs and Gap Analysis
Most of the information that is required to establish deemed gross and net book values will exist in departmental databases (electronic or paper). Gaps are identified and a strategy developed to efficiently supply required data from various external sources.
External sources include appraisal reports; municipal grants records, property assessment records, area screening lists; asset management reports; building condition reports; etc. PWGSC will work with departments to identify the most accurate source of necessary data.
1. Development of Asset Lives and Betterment Model Tables
Departments need to “group” their assets and develop asset lives for their amortization schedules. Both buildings and infrastructure items need pre-established asset lives.
PWGSC will work with departments to develop appropriate asset life tables. We will also share asset life table from other departments to promote a consistent approach.
Betterment models help provide a more accurate estimate of betterment rates for a department’s common assets.
PWGSC will assist in the development of betterment models and will share results from the analysis of its property types and those of other departments.
2. Design of Data Collection Form and Distribution to Field Operations
The data collection form or “Input Form” (see sample in Addenda) needs to be custom designed for a department’s unique asset types. This ensures that the collection is quick and efficient and that the resulting book values are as accurate as possible.
PWGSC will work with a department to design and modify the form and to assist in the integration with existing data bases to ensure the most efficient posting and retrieval of data. PWGSC will provide a list of regional contacts across the country that are trained in the collection of this data and that can assist a department’s regional offices.
3. Identification of Field Source Documents
Departments need to be familiar with internal and external sources of data required to create the deemed book values. Data sources, and their relative accuracy, vary from region to region.
PWGSC trained staff are available to assist headquarters and regional departmental staff to identify the most accurate document sources. We will also assist in the interpretation of the documentation.
4. Costing of Improvements as Last Option
In some cases it will be necessary to develop a reproduction cost new for an improvement. This will be a last option and only used when there are no other viable options. In most cases there will exist sufficient information concerning the physical aspects of a property to readily develop an accurate estimate of its current cost.
PWGSC will work with a department to develop current reproduction costs when need. We use trained appraisal personnel and the Marshall Valuation Commercial Cost estimator to ensure the most efficient and accurate estimates of current cost. PWGSC, through its Architectural and Engineering Sector will assist in the development of cost estimates for infrastructure and unusual structures.
5. Input of Data to the PWGSC Book Value Calculator
Central processing of the data is recommended. This will ensure speed of entry; consistency; central audit and review process; and the maintenance of a single source database. It is possible to have the program split into a number of databases for eventual reintegration.
PWGSC will assist in the coordination and serve as a resource to assist in resolving issues that come apparent during this important stage of the project.
6. Output to Finance
The output to finance, in paper and electronic format, includes:
□ Property Identification customized to a department’s needs
□ Gross and Net Book Values of land and buildings (including infrastructure).
□ Land acquisition date
□ Asset life and remaining asset life
□ Effective year built*
* this allows departments to key data into financial systems that will not accept a net book value as an input item and must calculate the net book value based on the amortized gross book value at the current date.
The Chief Appraiser at PWGSC will attest that the reported gross and net book values for the opening balance represent reasonably accurate estimates based on available data. This will only occur on projects where the Appraisals Directorate has significant involvement in the creation of the book values and has been involved in the review and audit process.
This attestation will not be given to departments that complete the majority of the tasks in this project without the involvement of the Appraisal Directorate at PWGSC. Use of the PWGSC Book Value Calculator only does not imply acceptance of the values by the Appraisals Directorate.
18.0 Form Input
The following are the input instructions and explanation of the functions for the fields in the input form for the application, by field name:
Property Identification Fields
DFRP No. This is the Directory of Federal Real Property identification number that is assigned to each property. Initial observations indicated that not all properties have a DFRP number or that multiple assets may report to a single DFRP number. As a result, this field only forms part of the “key” field, coupled with the Asset Number and Building Number to form a unique “key” for each property.
Asset No. It was recognized that each department also tends to report a specific property identifier that is unique and different from the DFPR number. To ensure that the application allows for searching and “rolling-up” of financial results by either DFRP number or the department’s asset number, this field was added. As mentioned above it forms part of the “key” fields.
Building No. In some cases there are multiple buildings reporting to a single DFRP number or asset number. This application calculates the book values on a “per building” basis. Therefore, it was necessary to add this field. This field accepts up to a 10 digit alphanumeric input. This allows input of building numbers or short building or asset names (i.e. building 12A or “piping”.) Many properties are formed by a combination of buildings and infrastructure items. By recording each as a “building number” it is possible to apply different amortization schedules and betterment rates.
Asset Name This is a non-mandatory field that allows for identification of the property by its Asset Name.
Street This non-mandatory field indicated the property's address or location.
City/Location A non-mandatory field, this identifies the city or geographic location of the asset.
Province A mandatory field that uses a drop-down list of provinces or territories (or “other countries”). This field serves a number of functions in the application. Firstly, it identifies the location of the asset and allows for provincial or regional reporting. Secondly it drives the land and building time adjustment indices. These tables are driven, in part, by the location of the asset.
Land Information
Land Type The is a mandatory field that works in conjunction with the “Province” field to develop the appropriate factor to develop the “deemed” land cost when the actual land cost is not available. This field uses drop-down menus based on “commercial”, “residential” or “industrial/other” land type.
Land Source This field uses a drop-down menu to identify the source of the land cost to allow for follow-up and to create an audit trail.
Land Acquisition Cost The original acquisition cost of the property, if known. Either this field or the “Land Valuation” field must be input.
Land Acquisition Date This is a mandatory field. The actual or estimated acquisition date must be entered. This field is used to either post the actual date if the known land cost is available or to factor a valuation of the land back to the actual or estimated acquisition date based on the land value index.
Land Valuation: Either this field or the Land Acquisition field must be filled out. Input here is a market value estimate of the subject land at any time between the acquisition date and the current date. The land index will adjust the value of the property back to a “deemed” cost as of the date of acquisition.
Land Valuation Date If the “Land Valuation” is input because the original cost in not known then this becomes a mandatory field. The application adjusts the value estimate of the subject site back to the acquisition date based the land index used in the application.
Building Information
Asset Type: This is a mandatory field that uses a drop-down menu to select the appropriate valuation type. The asset type determines the appropriate amortization period for the asset based on a pre-established schedule. The drop down menu should be modified for other departments based on their specific asset types and concluded asset lives.
Building Type: This is a mandatory field that uses a drop-down menu for “commercial”, “residential” or “industrial/other” building types. This field works in conjunction with the “Province” field to provide the appropriate time adjustment to the building cost based on its geographic location and building type.
Building Source: This field uses a drop-down field to identify the source of the building cost information to allow for follow-up and to create an audit trail.
Construction Cost: Either this field or the “Recent Reproduction Cost” field must be input. The “Recent Reproduction will yield a more accurate book value estimate for buildings with a chronological age greater than the amortization life. Actual construction cost will yield a more accurate estimate for newer buildings or buildings with little to no betterments.
Construction Date: If the “Construction Cost” field has been entered then the “Construction Date field must also be entered. This allows the application to reflect that the construction expense was as of a specific date and to apply appropriate time adjustments.
Recent Reproduction Cost: Either this field or the “Construction Cost” field must be input. This field will yield a more accurate book value estimate for buildings with a chronological age greater than the amortization life. The most recent cost estimate should be used. Ant cost estimate with a date between the year of construction and the current date can be used. Actual construction cost will yield a more accurate estimate for newer buildings or buildings with little to no betterments. It must be remembered that this is the new cost of the building and not a depreciated cost. Do not input the “market value” of the building as this value includes physical depreciation and functional and economic obsolescence. Reproduction cost new is preferred over replacement cost. See the definitions section of this report for a discussion of both cost definitions.
(Building Information continued)
Recent Reproduction Cost Date: If the “Recent Reproduction Cost” field is entered then that date of that cost estimate must also be entered. This allows the application to adjust to the original acquisition date and to apply betterment amounts based on the appropriate dates and cost amounts.
Actual Date of Construction: The actual or estimated date of construction must be entered if using the Recent Reproduction Cost as an entry. This allows the application to make the appropriate time adjustments
Purchase Price In some instances the property will have been purchased subsequent to the construction dates. This means that the GBV is based on a depreciated value of the asset and a remaining asset life less than the amortization period typical for this type of asset. The application assumes a remaining asset life at two-thirds of the asset life for that type typical for the building. Betterments continue to accrue based on the method of estimating betterments selected later in the application.
Purchase Date If the Purchase Price field is selected then this field becomes a mandatory field. This allows the application to make the appropriate time adjustments.
Condition Information (preliminary betterment information)
These fields allow the application to provide appropriate adjustments to the GBV and NBV based on betterments that extend the design life of the asset. One of the four main fields in this section must be utilized.
Building Condition: This field works in conjunction with the “Condition Type” field. Predetermined betterment rates are applied to a specific type of asset based on its observed condition. These are input into the system as a table and betterment rates are consistently applied based the pre-selected criteria. An example of a Building Condition table is provided, as follows:
[pic]
. The condition types include:
o No betterment/Obsolete
o Poor
o Fair
o Average
o Good
o Excellent
The “Condition Type” is relative to the age of the asset. That is, a new building is not automatically in excellent condition. Typically it would be in “average” condition for its age. Conversely, a building may need some repairs and updating, however, if it is in “Good” condition for its chronological age then “Good” is used as the input item.
Department may design betterment rate for assets unique to their holdings. This table will be expanded when additional betterment rates are determined in the course of assisting other Federal Government departments in the development of Gross and Net Book Values.
Condition Type: This is a mandatory field when the Building Condition field is used and utilizes a drop-down menu of condition types. The “Condition Type” is a list of buildings that have pre-calculated betterment rates.
This field interacts with the Building Condition field to form a matrix to utilize predetermined betterment rates.
Remaining Building Life: The remaining building life can be utilized to determine the historical betterment rate for the subject building. An existing appraisal can be a good source for this information. It is difficult to estimate this input figure without substantial training in this facet of valuation. The indicated remaining life in an appraisal report need to be examined against the life of the asset and modified based on asset life used for the amortization period. That is, if the asset life is determined to be 25 years for accrual accounting purposes and the appraiser has used a building life of 35 years it will be necessary to modify the remaining life indicated in the appraisal report. An example of the calculations is provided, as follows:
Remaining life in report x Asset Life = Remaining life as input
Total life in report
15 years x 30 years = 10 years as input
45 years
Annual Betterment Rate: This field uses a drop-down menu of pre-determined betterment rates. The rate represents the average annual betterment rate over the last asset life cycle. Rates can be pre-determined based on asset type or can be based on partial evidence from existing records. That is, a building experiencing typical levels of betterment over the last five years amounting to 10% of the reproduction costs new would likely have a long-term betterment rate of 2% per annum.
This field can be extremely useful for infrastructure and non-building items. Opinions of average annual betterment rates for these types of structures can be obtained and utilized in this application.
Recent Depreciated Cost New: This field can be utilized if the Recent Reproduction Cost field is used in the building cost section. Input the depreciated reproduction cost new from an appraisal report. This method is generally only accurate if the valuation has been completed in the last 10 years.
Major Betterment Button
Betterments can also occur that improve the quality of an asset; improve its operating efficiency; or expand its utility. To assist in the capture of these additional types of betterments, refinements are available in this application that estimate the appropriate adjustments to the book values.
Quality Improvement and Date: These two fields adjust the book values to reflect and improvement in quality to an asset over the original design. The date field is required as the application reviews this data relative to the cost source data and date. If the cost source is a cost estimate calculated subsequent to the quality improvement date then this item is not utilized as an adjustment as they occurred prior to the cost estimate and are already included in this same estimate. This field uses a drop-down menu of pre-established percentage adjustments to quality. Uses of this refinement are anticipated to be rare.
Improve Operating Efficiency Net % and Date: Similar to the above field this entry refines the book values based on betterments that have improved the operating efficiency of an asset. This could include improvements in energy efficiency or asset redesign such as a “space optimization” project. For income producing properties that adjustment would be based on the improvement to the property’s net income. For cost valued properties this would be the increased cost of the replacement unit versus the cost of the original unit (i.e. cost of a high-efficiency furnace less the cost of a typical furnace. This field uses drop-down rates and employs a date field to ensure this betterment is not already captured in a recent cost valuation.
Betterments
The Major Betterments section allows for entry of specific betterment amounts not captured in the deemed betterment rates. This could include major capital additions or “off-cycle” major renovations. In this section the cost of the betterment or percentage expansion over the original area is input, as is the date of the betterment
Other Sections
Client Code This is a two-digit alphanumeric field that allows a user to enter pre-determined coding for a use associated with this application.
Comments The comments field allows for input to provide comments relative to the accrual accounting process such as assumptions; reasons for specific adjustments, etc.
Approval Process The “Approval Process” field records the completion and follow-up audit status of the process. This field uses a drop-down menu. The field results of “incomplete” and “complete” are available to all users. The “reviewed” and “audited” results are available on applications where the Appraisals Directorate has significant involvement.
19.0 PWGSC Quality Assurance
The application of the Treasury Board Policy on accrual accounting can be complex and the scope of application can be vast. It is expected that the capital assets (real property) component will account for a large proportion of the total sums of money in the federal government’s books.
For this reason, PWGSC (Appraisal Directorate) has undertaken to offer assistance, expertise and training (as required) to all federal departments in the application of the real property component of this policy. The resource-person(s) and/or reviewer(s) will provide consulting services to federal departments. The PWGSC National Chief Appraiser can be contacted at (613) 736-2461.
The importance of well supported historical costs and amortization, as a basis for the application of the accrual accounting principle in the government cannot be overstated. To accomplish this, the PWGSC Guideline for the application accrual accounting has been designed for use by staff from various federal departments.
The Accrual Accounting Policy should be applied to assure that the high standards and quality requirements are satisfied in all cases. In PWGSC’s opinion, it is important that a review process take place during the application of the policy on accrual accounting:
- to correct errors as they occur;
- to ensure consistency of application of the policy immediately;
- to adhere to the principle of simplicity of application as recommended by TB;
- to ensure that conclusions are logical, well founded and are fully capable of supporting the operational decisions which have to be made;
- to ensure that the application of the Treasury Board Policy on accrual accounting has been followed adequately in all its aspects;
The reviewer should examine, on a random test basis or more as required, the results of the application in order to determine its adequacy for a decision making process and to be confident that the conclusions are sound and will stand up to any postmortem scrutiny.
There are additional benefits from the use of a review process. It will render possible to highlight recurring problems in the application of the Policy, and from this to develop immediate solutions for these problems.
The reviewer’s primary responsibilities are:
1. verification of the source of information used for assigning a value to the land;
2. verification of the source of information for costing the building;
3. verification of the cost indices used (land and building), if applicable;
4. verification of the basis used to assign an effective age to a building (if different than the chronological age);
5. verification of the proper estimation of the amortization;
6. ensure that all the appropriate capital additions have been applied to the property;
7. verification of the rationale used for the application of the right proportion for betterment as opposed to repair and maintenance;
8. the proper utilization of the materiality threshold ($10,000) mentioned in the Treasury Board policy on accrual accounting;
9. justification for write-down or write-off of capital assets;
10. justification for writing-up an asset (presence of betterment);
11. Verification of the reporting of a gain or loss as a result of a devolution, sale or disposition of a capital asset.
PWGSC can provide reviewer(s) for the real property component only; reviewers should have the following qualifications and expertise:
- good knowledge of the Treasury Board Policy on accrual accounting;
- good knowledge of real property and/or real estate appraisal;
- general knowledge of accounting;
- Experience as reviewer or auditor.
The reviewer will provide the federal department with a report indicating the scope of the review, including the size of the inventory, the size of the reviewed sample, the percentage of errors observed. The reviewer will add comment(s) and recommendation(s) to management pertaining to the level of compliance of the inventory of capital of assets with the Treasury Board Policy on accrual accounting.
Although this Review is not a 100% guarantee; it will provide senior management of federal departments, who will take advantage of PWGSC’s service offer, with a high level of comfort on the accuracy and reliability of the information appearing on their financial statements as far as capital asset inventory is concerned
The final output of the PWGSC Book Value Calculator, once reviewed, and if completed in partnership with PWGSC Appraisal Directorate will receive the following certification on behalf of the Chief Appraiser, Government of Canada.
“The above stated estimates of Gross and Net Book Value, remaining asset life and effective year built represent a reasonably accurate estimate based on the information readily available and, in the opinion of the Chief Appraiser, Government of Canada, follow the Treasury Board guidelines and policies in estimating costs inclusive of betterments.
Michael D. Blaschuk
Chief Appraiser
Government of Canada”
20.0 Reporting
The PWGSC Book Value Calculator reports the information input and calculated in a number of formats. These formats can be modified to a department’s needs. See the addenda section of this report for a sample of a paper output.
Reporting is also available in electronic formats for smooth transition to a department’s financial information systems.
Addenda
Appendix A
Treasury Board Accounting Standard 1.1 - Policy and Principles
(see file on CD)
Appendix B
Land Value Study
(not available)
Appendix C
Building Indices Information
Appendix D
Sample Input Form
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Appendix E
Screen Print of PWGSC Book Value Calculator
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Appendix F
Visual Basic Program Instructions for PWGSC Book Value Calculator
(not available)
Appendix G
Sample Output Report
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Appendix H
Graphic Representations of Amortization and Betterment Process
A. GRAPHIC ILLUSTRATIONS SHOWING DIFFERENT SCENARIOS
The following graphs illustrate the factors in determining book values based on time-adjusted costs and estimates of betterments. In reality, these graphs vary by inflationary impacts and other influences. This information is provided as a visual representation of the complex matters involved in determining book values.
Scenario No. 1
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This is a renovated and remodeled structure with no capital additions. The acquisition date and construction dates are the same. As previously explained, the market value of the building excludes the depreciation and therefore cannot be used by itself to estimate a historical cost. The reader will notice that the reproduction cost new less depreciation (RCNLD) equals the market value of the building.
Scenario No. 2
This is a renovated and remodeled structure with no capital additions. The acquisition date of land predates the construction date of the structure. Note the shift in historic land value and the de-linking of construction date and land acquisition date.
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Scenario No. 3
This is a renovated and remodeled structure with no capital additions. The acquisition date is after the construction date. Note the shift in the acquisition date and the shift in betterment. It is rationalized that some of the betterment incurred in prior ownership.
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In this case the historic reproduction cost new less depreciation would be posted as the “cost of acquisition of building + the value of land, i.e. (value of building + value of land = market value for the property)”.
Scenario No. 4
This is a renovated and remodeled structure. There was a major capital addition. The acquisition date and the construction date are the same. Note the need to adjust betterment in order to reflect the change in value attributable to the capital addition. The capital addition must also be deducted from the historic reproduction cost new.
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Appendix I
Definitions
Definitions
Acquisition (Acquisition) means a transaction that adds new real property to the federal inventory by purchase, lease, exchange, gift, easement, expropriation, or any other means, such as the acceptance of the surrender of a lease or the acceptance of the relinquishment of a license or easement; or a transfer of administration of real property from a department or an agent Crown corporation to a department; or a transfer of administration and control of real property to the federal government.
Administration (Gestion) refers to the stewardship between a department and the real property that it uses for its program purposes and for which it is accountable.
Amortization depreciation for the public sector.
Annual consideration (Versement annuel), in relation to a lease or license,
means the total consideration divided by the length of the term in years.
Appraisal (Évaluation) means an adequately supported written opinion of the market value of the real property on a specified date that evaluates the real property rights involved according to accepted appraisal practices,
and is obtained from, and signed by, a person who is a real property appraiser accredited by a provincial, national, or international real property appraisal organization, or who is experienced as an appraiser of real property and is either established in a real property-related business or employed in the federal Public Service. Appraisals may be provided in the form of narrative, letter or form reports. The meaning of "appraisal" includes "estimate", except where there is a differentiation between them. Where an applicable statute, regulation or authority defines appraisal differently, that different definition shall apply.
Appraisal approach a systematic way of developing in value indication using methods and techniques; examples, Cost Approach, Income approach, and sales comparisons Approach.
Assets economic resources controlled by a government as a result of past transactions or events so and from which the future economic benefits may be obtained (PS 3150).
Betterment costs incurred to improve the service potential of a capital asset and should therefore be capitalized if the total costs exceed the established threshold limit. For example, the service capacity may be enhanced when there is an increase in physical output or service capacity, operating costs are lowered, the useful life is extended, or quality of output is improved. (TB Policy on Accounting for Capital Assets).
Book value The sum of the asset accounts (less provisions for depreciation, depletion and, amortization) minus the liability accounts shown on the balance sheet. For corporations, book value is synonymous with network and shareholders’ equity.
Capital assets A tangible or intangible asset that is purchased, constructed, developed or otherwise acquired and: is held for use in the production or supply of goods, delivery of services or program outputs; has a useful life extending beyond one fiscal year and is intended to be used on a continuing basis; and is not intended for resale in the ordinary course of operations.
Capitalization Recording of the cost of construction and or acquisition of an asset in the Statement of financial position (Balance Sheet) of the public sector entity.
Chronological age The actual number of years that have passed since the structure was built.
CICA Canadian Institute of Chartered Accountants, the body of professional accountants that issues the key accounting handbooks used in Canadian practice.
CIPREC with headquarters and Toronto, the Canadian Institute of Public Real Estate Companies issued an accounting practices handbook for Real Estate Investment and Development Companies.
Classified building (Édifice classé) means a federal building to which the Minister of the Environment has assigned the highest heritage designation.
Cost amount of consideration given up to acquire, construct, development or better a tangible capital asset, and includes all costs directly attributable to acquisition, construction, development or betterment of the tangible capital asset, including installing the asset at the location and in the conditions necessary for its intended use. The cost of a contributed tangible capital asset is considered to be equal to its fair value at the date of contribution. (PSAAB 3150).
Comptrollership a set of principles underpinned by a guiding philosophy that describes how management wishes to carry out the stewardship dimension of its responsibilities to the institution management is serving and to broader governing bodies; comptrollership is embedded in every management activity. Modernization of comptrollership refers to numerous mutually supportive initiatives within the government of Canada that to strengthen integrative accountability and governance.
Custodian department (Ministère ayant la garde de biens immobiliers) means a department whose Minister has administration of real property for the purposes of the department's programs.
Custody transfer (Transfert de la garde des biens immobiliers) means a transfer of administration of real property that supports an adjustment to or transfer of program accountability, such as transfers to support the government's reassignment of program responsibility; transfers to support government restructuring; and transfers to recognize a more appropriate custodian (usually the existing federal tenant).
Depreciation a process of cost of allocation whereby the gross book value of a tangible capital asset is expensed over the course of its useful life.
Discount rate Rate of return used to convert cash flows generated by an income-producing property to present value.
Disposition (Aliénation) means a transaction that alienates real property by sale, lease, exchange, gift, easement, or any other means, such as the surrender of a lease or the relinquishment of a license or easement; or a transfer of administration of real property from one department to another department or an agent Crown corporation; or a transfer of administration and control of real property from the federal government.
Economic Life The economic life is the period of time over which total utility of a structure is measured. It is the period over which a structure may reasonably be expected to be competitive on the market in the use for which it was intended.
Effective Age Age indicated by the condition and utility of a structure. Effective age may be greater or less than chronological age.
Expenditures cost of goods and services acquired in the accounting. (PSAAB 3150).
Expenses cost of resources consumed in and identifiable with the operations of the accounting period.
Estimate (Estimation) means a written opinion of the value of an interest in real property as of a specified date that evaluates the property rights involved and is obtained from, and signed by, a person experienced in real estate who is established in a real estate-related business such as real estate appraisal, banking, real estate brokerage, real estate sales, real property management or timber rights surveying, or is employed in the federal Public Service. The meaning of "estimate" includes opinions consequent to market rental surveys or analyses such as are sometimes carried out in support of leasing and licensing transactions. Estimates may be provided in the form of short notes or letters of opinion.
Fair value amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties, who are under no compulsion to act (PSAAB 3150).
FIS Financial Information Strategy is a crucial element to the modernization of comptrollership, and refers to a range of initiatives that improve the strategic use of financial information, that enhance government stewardship decision-making and improve organizational performance.
Fixed asset a tangible capital asset that is firmly implanted and stationary, such as land and buildings.
GAAP Generally accepted accounting principles. In Canada these are formulated by the Canadian Institute of Chartered Accountants (CICA).
Gain The difference between the selling price obtained from the sale of an asset and the net book value (where the selling price exceeds net book value).
Gross book value Historic costs plus any betterments to the asset.
Highest and best use In appraising real property: the reasonably probable and legal use of property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value in the appropriate market place, consistent with the purpose of the appraisal.
Impairment Condition of an asset leading to a write-down.
Incremental costs (Coûts différentiels) means costs incurred as a result of an action, that is, costs that would not have been incurred had the action not been carried out. For example, in a letting, it means any costs that result from the letting activity, including any additional operation and maintenance costs and any costs of servicing the real property to make it more suitable for letting.
Investment (Investissement) means the use of financial resources to acquire real property assets, through traditional capital expenditures, lease or lease-purchase, and expenditures for the maintenance, preservation and disposal of such real property assets.
Life cycle The entire span of time over which an asset is seen to exist.
Life cycle management The series of decisions that seek to optimize the use of an asset - maintaining or enhancing value, while controlling and assessing costs.
Loss The difference between the selling price obtained from the sale of an asset and the net book value (where the selling price is below net book value).
Market value (Valeur marchande) means the estimated amount that would be paid for the real property rights or license being acquired or disposed of if the real property or license were offered in the open market by a willing seller allowing for a reasonable time of exposure and done in a manner that would attract a reasonable interest.
Net book value The cost of a tangible capital asset less both accumulated amortization and the amount of any write-downs (PSAAB 3150).
Net carrying amount Net book value.
PSAAB In September 1997, the Public Sector Accounting and Auditing Board of the CICA issued guidelines for the reporting of capital assets in the financial statements of public sector organization.
Recognized building (Édifice reconnu) means a federal building to which the Minister of the Environment has assigned the second highest heritage designation.
Remaining economic life The estimated period during which improvements will continue to contribute to property value; an estimate of the number of years remaining in the economic life of the structure or structural components as of the date of the appraisal.
Repair and maintenance costs incurred to maintain the service potential of an asset; these costs are not capitalized.
Replacement cost Cost to build at current prices an asset with the utility or service potential equivalent to the subject asset, using modern materials and current standards, design and layout.
Reproduction cost Cost to build at current prices an asset that is exactly the same as the subject asset in terms of materials, standards, design and layout.
Residual value Estimated net realizable value of the tangible capital assets at the end of its useful life to a government (PSSAB 3150).
Salvage value Estimated net realizable value of a capital asset at the end of its life. Salvage value is normally negligible. (CICA 3060).
Service potential The output or service capacity of a tangible capital asset, and is normally determined by reference to attributes such as physical output capacity, quality of output, associated operating costs, and useful life (PSAAB 3150).
Service life See useful life.
SOA Special Operating Agencies enjoy greater decision-making latitude; their financial performance is consolidated in the financial statements of the Department through which they report.
Sustainable development (Développement durable) means development which ensures that:
- the use of resources and the environment today does not damage prospects for their use by future generations; and
- the management of our economic system maintains or improves our resource and environmental base.
Tangible capital assets Non-financial assets (including computer software) having physical substance that are acquired, constructed or developed and:
i) are held for use in the production or supply of goods and services;
ii) have useful lives extending beyond an accounting period and are intended to be used on a continuing basis; and (iii) are not intended for sale in the ordinary course of operations (PSAAB 3150).
Useful life Estimate of either the period over which a tangible capital asset is expected to be used by a government, or the number of production or similar units that can be obtained from the tangible assets by a government. The life of a tangible capital asset may extend beyond the useful life of a tangible asset to a government. The life of a tangible capital asset, other than land, is finite, and is normally the shortest of the physical, technological, commercial and legal life. (PSAAB 3150).
Write-down An enduring decrease in the service potential of asset, such as through fire, flood, obsolescence, etc. Write-downs are recorded as a decreased to the net book value of the asset.
Note: These definitions are included for the convenience of the users of these general guidelines on Accrual Accounting; the definitions were extracted from the Treasury Board Glossary on real property, the definitions included in the Accrual Accounting Course Manual and the manual on real estate appraisal “Real Estate Appraising in Canada”
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