tangible capital assets beyond psab 3150
DESCRIPTION
Tangible Capital Assets Beyond PSAB 3150. Nancy Gomerich, BBA, CA www.ngconsulting.ca 604-463-9845. Tangible Capital Assets Beyond PSAB 3150. SESSION 1. Source: David Watt, Senior Asset Management Specialist Associated Engineering. Agenda. Session 1 Course Logistics & Overview - PowerPoint PPT PresentationTRANSCRIPT
1
Tangible Capital Assets Beyond PSAB
3150
Nancy Gomerich, BBA, CAwww.ngconsulting.ca
604-463-9845
2
SESSION 1
Source: David Watt, Senior Asset Management SpecialistAssociated Engineering
Tangible Capital Assets Beyond PSAB
3150
3
Agenda Session 1 Course Logistics & Overview Asset Management & The Finance Officer’s Role Financial Issues and Concerns The Canadian Infrastructure Deficit Long-Term Capital Planning
Limitations of the HC Model Capital Budgeting Framework Funding for Asset Replacement/Renewal – Lifecycle Funding
Impact of interest and inflation Current Cost vs. Proportion of Replacement Cost Funding Models
4
AgendaSession 2 Long-Term Capital Planning
Funding for Asset Replacement/Renewal – Lifecycle Funding Example: Calculating LG Infrastructure Deficit and related annual
funding targets (4 different models) Annual Funding Targets Presentation Model
Overall Conclusions Policy Considerations SORP-4 Q&A and General Discussion – Where do we go From Here?
6
Asset Management & The Finance Officer’s Role
Tangible Capital Assets Beyond PSAB
3150
7
Asset ManagementWhat is Asset Management?“ The application of sound technical, social and economic
principles that considers present and future needs of users, and the service from the asset”
The Local Gov’t Asset Management Working Group of BC
“Operational Perspective Effectively tracking your assets; taking into account the variables
that impact the asset’s lifecycle costs to ensure services are provided in the most efficient and effective manner.
Financial Planning Perspective Projecting the anticipated lifecycle costs of assets and ensuring
there is a funding strategy and plan in place to provide for these costs over the long-term.”
Watson & Associates Economists Ltd.
8
Asset ManagementWhat is Asset Management? Lifecycle Costs
Refers to all costs incurred throughout the life of an asset
Includes: Purchase/Build Cost Operations and Maintenance
Annual O&M Periodic O&M and Renewal
Disposal Costs
9
Source:FCM - National Guide to Sustainable Municipal InfrastructureSelecting a Professional Consultant – June 2006
Asset ManagementWhat is Asset Management?Lifecycle Costs
10
Asset ManagementWhat is Asset Management?
Basic Asset Management Using PS3150 data and variables (useful life, remaining service
life etc.) along with replacement cost estimates to project future capital needs
More Advanced Asset Management Using asset condition and planned maintenance information
along with replacement cost estimates to project future capital needs
Useful life and remaining useful life based on the actual condition of each asset
Factor in the impact of planned maintenance on useful life and remaining service life
Watson & Associates Economists Ltd.
11
Asset ManagementFinance Officer’s Role Responsible for financial planning…
Develop long-term financial plans to identify funding needs and develop related funding plans and strategies
Develop and recommend related financial policy Develop & maintain a Financial Planning System that:
Promotes consideration of all Lifecycle Costs Promotes selection of capital and operating options that are the most
efficient (lowest cost) and effective (meets goals and desired service levels).
Promotes appropriate prioritization b/w alternative services and works
Team Player and Team Leader as required
12
Financial Issues and Concerns
Tangible Capital Assets Beyond PSAB
3150
13Financial Issues and Concerns
To provide sustainable local government services (sanitation, water, development, transportation, recreation etc.) that meet the needs of our citizens, in a cost efficient manner.
Typical Local Gov’t Mission Statement
14Financial Issues and Concerns Are LG going to remain sustainable in the Future?
Most infrastructure in Canada put in 1950-1970s, so end of useful life is looming...
Economic Climate
Infrastructure Nearing End Useful Lifes
Demand Funding Higher Debt
Costs
Limited Grants
= =
15Financial Issues and Concerns Are LG going to remain Sustainable in the Future?
If LG financial position remains unchanged, most LG will have minimal reserves/surplus balances in relation to asset replacement needs…
Local Gov’t Funding Options
No/Little Savings
Demand Funding
Taxation & Other Fee
Increases Affordable or Fair?
Legislated Debt Limit not Sufficient or Affordable? = =
16Financial Issues and Concerns Are community needs being met in the most cost efficient
manner now? What about in the future?
Insufficient Capital
Funding
Asset Condition
Risk of Critical Failure
Shortened Useful Life and
pre-mature replacement
= =Increased Asset O&M
Damage to other Assets
+ lack of debt management and planning = higher debt costs
17Financial Issues and Concerns
Federation of Canadian Municipalities (FCM) 2007 Report: “The Coming Collapse of Canada’s Municipal Infrastructure”
Estimated the Canadian Infrastructure Deficit in ‘07 at $123B Equates to $3,753 per person (2007 population)
3,000 population = $11.3M Deficit 15,000 population = $56.3M Deficit 50,000 population = $187.7M Deficit
Status Quo is NOT sustainable Evidence of deferral of O&M/Renewal works that are shortening asset
useful lifes and increasing other costs
18
The Canadian Infrastructure Deficit(FCM 2007 Report)
Tangible Capital Assets Beyond PSAB
3150
19
The Canadian Infrastructure DeficitFCM 2007 Report
FCM Infrastructure Deficit $123B
Components FCM Infrastructure Deficit
The unfunded investments required to maintain and upgrade existing, municipally owned infrastructure assets
The funding needed over and above current and projected levels to bring existing facilities to a minimum acceptable level for operation over their service life, through maintenance, rehabilitation, repairs and replacement
Same study identified Cdn New Infrastructure needs of $115B
20
The Canadian Infrastructure DeficitFCM 2007 Report
21
The Canadian Infrastructure DeficitFCM 2007 Report
22
The Canadian Infrastructure DeficitFCM 2007 ReportHow did this Happen?
23
The Canadian Infrastructure DeficitFCM 2007 Report
Municipal Share Capital Stock
1961 – 30.9% 2002 – 52.4%
Reason One…
24
LG get less than 10% of all Tax Revenues!
The Canadian Infrastructure DeficitFCM 2007 Report Reason Two…
25
The Canadian Infrastructure DeficitFCM 2007 Report Reason Three…
Lack of infrastructure inventory and information
Limited Asset Management Limited short and medium term planning and no
lifecycle planning
=
26
Long Term Capital PlanningLimitations of the HC Model
Tangible Capital Assets Beyond PSAB
3150
27
Long Term Capital PlanningHC Model Limitations - HC Amortization
PSA HC Amortization
Method to allocate asset HC over estimated useful life
Is “backword” looking
Problems with when used as a funding target: Historical Cost typically much less than Replacement Cost Older the Assets = Lower the HC Amortization Values the same assets differently (HC based on year of
acquisition) Does not account for “ketchup” funding required to fund any
accumulated TCA deficit/shortfall (ie Infrastructure Deficit)
28Long Term Capital PlanningHC Model Limitations-A/C for Deferred Mtnce.
PSA Accounting for Deferred Maintenance
Deferred Maintenance is planned work/maintenance that was to be done on an Asset at some point in the past, but was not done due to resource constraints
Deferred Maintenance can be divided into 2 types, that necessary to:
Maintain the assets established service level Maintain the asset in a manner such that it would reach the
end of its intended useful life
29
PSA Accounting for Deferred Maintenance
Only deferred maintenance that results in a reduction in an assets useful life is accounted for in PSA
Accounted for at the point the useful life is impaired which may be a number of years after the optimal date for performing the related maintenance
Is accounted for as an increase in the related annual HC amortization only
Not identified as a separate component of amortization No note disclosure Likely will go unnoticed since such work would usually occur
well into an asset’s useful life when HC NBV of asset is relatively low
HC Model Limitations HC Model Limitations-A/C for Deferred Mtnce.
30
SourceFCM 2007 Report “The Coming Collapse of Canada’s Municipal Infrastructure”
Long Term Capital PlanningHC Model Limitations-A/C for Deferred Mtnce.
31
SourceFCM 2007 Report “The Coming Collapse of Canada’s Municipal Infrastructure”
Long Term Capital PlanningHC Model Limitations-A/C for Deferred Mtnce.
32
The New PSAB (2009) Financial Statements
Long Term Capital PlanningCapital Budgeting
Framework
33
Capital Funding Envelopes Current Year “Own Source” Funding for Capital Expenditures
(refer to as “general revenue funding”)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
YEARS
DO
LL
AR
S
Capital Envelope Capital Spending
* Note: Due to inflation, in reality, the graph and line angles upwards
Long Term Financial PlanningCapital Budgeting Framework
34
Desired CFE = R + G + N – 0, where: R = annualized amount required to renew/replace* existing
capital assets, same service level Can be broken into two components
Annual Lifecycle Investment (RL) Annual Ketchup Investment (RK)
G = annualized amount required to fund LG’s share of new capital works required due to growth (DCC & other), same service level
N = annualized amount required to fund new capital works, new service level OR to increase the service level of R or G works
O = annualized amount of R, G and N that will be funded from external sources (grants, donations, debt)
Long Term Financial PlanningCapital Budgeting Framework
*Equals Replacement Cost less Salvage Value
35
Setting CFE Targets Calculate desired CFE (RL, RK, G, N) and Id Other Funding Sources (O) Identify actual CFE amount Calculate the Funding GAP (difference) Develop alternative funding strategies and asset capital plans
Long Term Financial PlanningCapital Budgeting Framework
Annual Capital Funding Envelope SummaryR
epla
cem
ent
(RL
)R
epla
cem
ent
(RK
)G
row
th (
G)
New
(N)
Oth
er F
und
ing
(O)
Total Cu
rren
t Fu
nd
ing
GAPBuildingsEquipmentVehiclesPark ImprovementsInfrastructure -Water 100 25 20 0 0 145 75 70 -Seweretc…
100 25 20 0 0 145 75 70
36
Long Term Capital PlanningFunding for Asset Replacement/Renewal
(Funding “R”)
Tangible Capital Assets Beyond PSAB
3150
37
Lifecycle Funding – Funding RImpacts of Time, Inflation, Interest
Scenario 1 Scenario 2Historical Cost 1,000,000 1,000,000Cost Inflation 5.00% 3.00%Interest Rate 3.00% 5.00%
Years To Replacement
Future Replacement
Cost
Annual Lifecycle
Reserve Fund Contribution
Future Replacement
Cost
Annual Lifecycle
Reserve Fund Contribution
1 11,467,400 11,467,400 4,383,906 4,383,9062 11,467,400 5,648,965 4,383,906 2,138,4913 11,467,400 3,710,052 4,383,906 1,390,6134 11,467,400 2,741,019 4,383,906 1,017,1185 11,467,400 2,159,937 4,383,906 793,377
10 11,467,400 1,000,307 4,383,906 348,54115 11,467,400 616,563 4,383,906 203,16020 11,467,400 426,767 4,383,906 132,58125 11,467,400 314,526 4,383,906 91,85430 11,467,400 241,036 4,383,906 65,98435 11,467,400 189,663 4,383,906 48,53740 11,467,400 152,085 4,383,906 36,29145 11,467,400 123,678 4,383,906 27,45150 11,467,400 101,664 4,383,906 20,941
If the LG had funded Historical Cost Amortization from Year 1 (20,000/yr) then: /w Interest @ 3% = 2,255,937 /w Interest @ 5% = 4,186,960
Note: Annual Contribution =
Annualized contribution required to raise the Replacement Cost Value at the end of the assets useful life (same $ value each year)
38
Scenario 2Historical Cost 1,000,000Cost Inflation 3.00%Interest Rate 5.00%
Reserve Contribution in Year
YearCurrent Cost
ModelReplacement Cost Model
1 12,378 20,9412 12,749 20,9413 13,132 20,9414 13,526 20,9415 13,931 20,94110 16,150 20,94115 18,723 20,94120 21,705 20,94125 25,162 20,94130 29,169 20,94135 33,815 20,94140 39,201 20,94145 45,445 20,94150 52,683 20,941
Proportion of Replacement Cost Model The annual reserve contribution is the
same amount every year Annual Contribution = Annualized
contribution required to raise the Replacement Cost Value at the end of the assets useful life
Current Cost Model The annual reserve contribution
increases each year by the cost inflation. 1st Yr Annual Contribution = First year
contribution required to raise the Replacement Cost Value at the end of the assets useful life, assuming the contribution will be increased by the cost inflation each year.
If the inflation rate is equal to the interest rate for the life of the asset, then
Annual Contribution = Current Year Replacement Cost / Useful life
Easier to phase-in funding; Fairer?
Lifecycle Funding – Funding RProp. Replacement vs. Current Cost Model
39
End of Presentation