Appendix 4: Valuation challenges that we believe need to be addressed
Insights into local government: 2019
This Appendix expands on the valuation challenges we list in paragraph 1.26.
| Valuation challenge | Comment |
|---|---|
| Understanding what an asset's "useful life" is | The useful life of an asset is the least of its physical life, economic life, legal life, or the service benefit it provides. These types of lives are defined as:
Too often, councils consider only the physical life when assessing an asset's useful life. |
| Regularly reviewing asset useful lives | Councils and valuers will generally reassess asset lives when revaluing assets. Accounting standards require councils to review asset lives in the intervening years. This is not always evident. |
| Being over-reliant on asset useful lives that have not been properly assessed for the council's situation | The Institute of Public Works Engineering Australasia produces guidance on valuations. This guidance provides indicative ranges of asset useful lives for common council assets. The guidance stresses that this is merely a starting point for each council to make specific assessments. However, many valuations appear to default to the template range without considering the council's own circumstances, such as ground conditions and soil type. |
| Collecting enough asset condition and performance data | Condition assessments focus on the structural integrity of an asset, while performance assessments measure whether an asset is "performing its job". Aside from being crucial for broader asset management in a council, condition and performance data provides a valuation input on the expected remaining useful life of an asset. Many councils do not yet have systematic and comprehensive asset condition and performance information, so this is not able to assist asset valuations. |
| Weak records about the cost of asset renewals | To arrive at reliable replacement costs, councils should keep good records on the cost breakdowns of all its renewal and replacement contracts. Often, these records are not as complete as they should be. |
| Actively considering new asset replacement techniques | Asset revaluations tend to assume traditional methods of renewing assets. Increasingly, new techniques for renewing assets are being identified, often at a lower cost than the traditional methods. Revaluations often do not consider these new techniques, which might mean that the replacement cost of the asset and the resultant depreciation is more than it should be. |
| Ensuring that council staff who rely on valuation information are involved early in the valuation process so the valuation meets everyone's needs | We tend to find that the key people involved in an asset valuation, the valuer and councils' asset management, finance, information technology and planning staff, are not involved early enough in the valuation process. This lessens the effectiveness of the resulting valuation, because the valuation process does not consider all relevant views. Effective collaboration, especially at the initial stage, would set the valuation parameters, agree the valuation methodology and articulate the valuation assumptions in a way that works for all. |
| The industry guidance developed by the Institute of Public Works Engineering Australasia that councils use to inform asset valuations is updated | The Institute of Public Works Engineering Australasia guidance was last updated in 2006. The Institute of Public Works Engineering Australasia has signalled that an update is an urgent priority. Although the core methodology is still sound, the guidance needs to be reviewed to take account of:
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