The implications of not accurately and consistently assessing asset fair value can have significant adverse effects on the financial position of a council. One of the key drivers for financial sustainability is the cost and investment in infrastructure assets. These assets represent a significant component of a council’s equity, and it is critical that the carrying value of these assets reflect the current value.
A stark reminder of this lesson comes from across the ditch, where Morrison Low undertook a body of work for New Zealand’s Central Government for the amalgamation of council water, sewer and stormwater networks in the nation's south. The region has been plagued by a series of highly public, premature asset failures and our analysis found that there were significant discrepancies with asset values and lives, particularly between councils, a message which has been consistently echoed by the NSW Audit Office. Further, it was identified that 80% of assets were of unknown condition (due to the nature of underground assets), and where condition was known, there was a disconnect between condition and remaining life. Approximately $70 million worth of assets, which will need to be replaced in the short term, still had a remaining life of over 20 years. This represents a significant risk in the context of the entire network.
As such, we can see the value of accurately representing performance in the value of the network and it is imperative that councils are fully aware of any possible deficiencies in their current asset valuation processes.
Morrison Low has undertaken a number of fair value asset reviews for councils, including:
Having worked with most councils in NSW, we have a detailed understanding of where councils should tighten or improve their asset management and asset valuation processes. Typically, we see significant variation in asset valuations, usually based, in our opinion, on a lack of understanding of the link between asset management and financial reporting. As a result of our extensive work with councils, we can provide high-level benchmarking of your depreciation costs against similar councils. Further, we can provide a written opinion on your methodology, systems, processes, and outcomes of council’s assessment of the fair value for infrastructure assets.
Morrison Low’s review of the fair value of assets is conducted in accordance with the Australian Infrastructure Financial Management Manual and complies with the Local Government Code of Accounting Practice and Financial Reporting.