Infrastructure assets – what are they and how should they be accounted for?

August 23, 2021
Posted by: Julianne Vissie
Category: Blog

Background

The IPSASB is proposing changes to IPSAS 17 on Property, Plant and Equipment by adding requirements and guidance for heritage assets, infrastructure assets and measurement of property, plant and equipment. Stakeholders are given the opportunity to comment on these proposals by responding to ED 78 on Property, Plant and Equipment (published locally as ED 190).

This article will explore the proposals in ED 78 related to infrastructure assets.

What is infrastructure?

ED 78 proposes that infrastructure assets are property, plant and equipment, because they are:

tangible assets;
used in the production or supply of goods or service; and
expected to be used during more than one reporting period.

Therefore the existing principles in the Standard apply to infrastructure assets. The IPSASB acknowledged that infrastructure is a specific type of property, plant and equipment with unique characteristics. The ED describes these characteristics as follows:

(a) They are networks or systems.

They comprise a number of assets that make up networks or systems that serve the community at large. If a number of these assets were removed, the network or system may not achieve its service potential objective.

(b) They have long useful lives.

The number of assets that make up these networks or systems are continually maintained, replaced and refurbished, resulting in long useful lives.

Examples of infrastructure assets that display these characteristics include electricity power systems, road networks and water systems.

It is worth noting that IPSAS 17 currently includes a description of infrastructure assets. In addition to them being networks or systems, they are described as specialised in nature and do not have alternative uses, they are immovable, and they may be subject to constraints on disposal. The IPSASB determined many of these characteristics to be unhelpful in describing infrastructure assets and were deleted.

What guidance is provided on infrastructure assets?

Stakeholders raised infrastructure-specific accounting issues related to the unique characteristics of these assets. These issues and the proposed guidance are included below. The proposed guidance clarifies the application of the existing principles of IPSAS 17 to infrastructure assets; no new authoritative guidance is proposed.

Issue	Guidance proposed in ED 78	Example
Assessing control of land over or under infrastructure assets is a challenge where different entities own the land and infrastructure assets.	The indicators of control from the IPSASB’s Conceptual Framework have been added to ED 78 in the context of property, plant and equipment broadly. Since the principles are clear, non-authoritative guidance has been added to discuss how the indicators of control apply where different entities own land and infrastructure. Although legal ownership is one indicator of control, all the indicators should be assessed together and no one indicator is more important than another.	Entity B owns a road (infrastructure) and Entity A owns the land under the road. Entity B considers the rights it has to continue to operate the road. If the ongoing operation of the road is dependent on Entity A continuing to grant Entity B access to the land, it is unlikely Entity B controls the land.
There is uncertainty how land over or under infrastructure assets should be valued because the related infrastructure assets are specialised and held for operational capacity.	IPSAS 17 is clear that: (a) Land should be accounted for separately. (b) Land accounted for under the current value model is valued at current operational value or fair value. There are different techniques that could be used to determine these bases. Because infrastructure assets are specialised, the market approach may be challenging to apply, and land may be more easily valued using the cost approach. The replacement cost of land is the current value of the land based on the existing site. These measurement concepts are explained in ED 77 on Measurement.	If a road (infrastructure) runs through agricultural land, the current value of the land under that section of the road will reflect the agricultural value. If the road runs through an industrial area, the current value placed on the land under that section of the road will reflect the industrial value.
It is difficult to identify individual parts of infrastructure assets.	The principle in IPSAS 17 has been emphasised in the Application Guidance. Entities allocate the amount initially recognised to its significant parts and separately depreciate each part that will have a material impact or effect on the annual depreciation expense. This assessment may require judgement. Non-authoritative implementation guidance has been added in the form of the following indicators that may be helpful to identify individually significant parts: (a) separately identifiable and measurable; (b) significant value in relation to the asset; and (c) different estimated useful lives.	The substructure and surface of a road are determined to be individually significant and are therefore depreciated separately.

Issue

Guidance proposed in ED 78

Example

Assessing control of land over or under infrastructure assets is a challenge where different entities own the land and infrastructure assets.

The indicators of control from the IPSASB’s Conceptual Framework have been added to ED 78 in the context of property, plant and equipment broadly.

Since the principles are clear, non-authoritative guidance has been added to discuss how the indicators of control apply where different entities own land and infrastructure. Although legal ownership is one indicator of control, all the indicators should be assessed together and no one indicator is more important than another.

Entity B owns a road (infrastructure) and Entity A owns the land under the road.

Entity B considers the rights it has to continue to operate the road. If the ongoing operation of the road is dependent on Entity A continuing to grant Entity B access to the land, it is unlikely Entity B controls the land.

There is uncertainty how land over or under infrastructure assets should be valued because the related infrastructure assets are specialised and held for operational capacity.

IPSAS 17 is clear that:

(a) Land should be accounted for separately.

(b) Land accounted for under the current value model is valued at current operational value or fair value. There are different techniques that could be used to determine these bases. Because infrastructure assets are specialised, the market approach may be challenging to apply, and land may be more easily valued using the cost approach. The replacement cost of land is the current value of the land based on the existing site.

These measurement concepts are explained in ED 77 on Measurement.

If a road (infrastructure) runs through agricultural land, the current value of the land under that section of the road will reflect the agricultural value. If the road runs through an industrial area, the current value placed on the land under that section of the road will reflect the industrial value.

It is difficult to identify individual parts of infrastructure assets.

The principle in IPSAS 17 has been emphasised in the Application Guidance. Entities allocate the amount initially recognised to its significant parts and separately depreciate each part that will have a material impact or effect on the annual depreciation expense. This assessment may require judgement.

Non-authoritative implementation guidance has been added in the form of the following indicators that may be helpful to identify individually significant parts:

(a) separately identifiable and measurable;

(b) significant value in relation to the asset; and

The substructure and surface of a road are determined to be individually significant and are therefore depreciated separately.

The IPSASB has also added non-authoritative general guidance to respond to the following issues raised on infrastructure assets:

There is divergence in practice as entities expense costs that meet the recognition criteria based a threshold set by management.
It is uncertain what the potential financial reporting implications of “under-maintenance” of assets could be.
It is uncertain under what circumstances the information from asset management plans may be useful for financial reporting purposes, and what the use of the information could be.

The Secretariat is interested in stakeholders’ views on the appropriateness and usefulness of the guidance proposed in the ED for the local environment.

Where can the ED be accessed and how can you provide comment?

ED 78 (locally published as ED 190) has been published on the ASB’s website and can be accessed here: https://www.asb.co.za/comment-on-proposals/.

An education session will be held on 20 August 2021, followed by a roundtable discussion on 15 September 2021. Contact elizna@asb.co.za for an invitation. A recording of the education session is available on the ASB website: https://www.asb.co.za/asb-webcast-updates/

Written comment can be submitted to the Secretariat of the ASB at info@asb.co.za, by 1 October 2021.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.

Infrastructure assets – what are they and how should they be accounted for?

Background

What is infrastructure?

What guidance is provided on infrastructure assets?

Where can the ED be accessed and how can you provide comment?

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