060202 - asset valuation guide

Guidance Document for Highway InfrastructureAsset ValuationCounty Surveyors Society/TAG Asset ManagementWorking Group

Roads Liaison Group

2005 Edition TSO: London July 2005

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Foreword by the President ofthe County Surveyors’ Society

The Framework for Highway Asset Management, published by the CSS in 2004,provided an excellent introduction to a subject which is manifestly growing inimportance. As authorities throughout the UK have begun to embrace this newapproach to highway management, there has been a clear and urgent need for adviceand guidance on the valuation of highway assets. I am delighted that, once again, theCSS and its partner organisations have risen to the challenge.

I extend my thanks to all who have helped to develop this guidance, and I wouldespecially like to acknowledge Transport for London who have contributed generouslyto the project. I also want to mention the involvement of government departments: theOffice of the Deputy Prime Minister, Her Majesty’s Treasury, and the Department forTransport, whose support for this work makes it all the more authoritative.

The aim has been to deliver guidance which will enlighten and assist both highwayengineers and accountants and bring about mutual understanding and closer workingrelationships. I believe this document achieves that objective, and I commend it to you.

ALASTAIR JEFFORDMay 2005

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Preface

It is widely accepted that Asset Management provides the framework and principles forgood highway management. In 2004 the County Surveyors Society (CSS) produced theFramework for Highway Asset Management to assist Local Highway Authorities in thedevelopment and implementation of Asset Management. Central to Asset Managementis the development of cost effective long term plans, and the importance of these hasalso been recognised by the Government:

Transport is vital to the economy and the way we live. Decisions we makenow will have an impact for decades to come. It is essential that we takethe long-term view.

The Future for Transport: A Network for 2030White Paper, Department for Transport, 2004

A fundamental component of long term planning is to ensure the asset base ispreserved and replenished in a sustainable way without imposing an undue financialburden on future generations. The preservation of the asset base can be measured andmonitored over time using a robust asset valuation procedure that provides a true andfair value of the assets.

WHAT IS ASSET VALUATION?

Asset valuation is the calculation of the current monetary value of an authority’s assets.The current monetary value is evaluated as the Depreciated Replacement Cost (DRC) ofan authority’s highway infrastructure assets, where:

DRC = Gross Replacement Cost – Accumulated Consumption

The Gross Replacement Cost (GRC) for the highway infrastructure is determined from abottom up calculation using a standardised procedure involving standardised Unit Ratesand GRC models which represent the cost of replacing an existing asset with a ModernEquivalent Asset. Assets are consumed during service due to ageing, usage,deterioration, damage, a fall in the Level of Service (assessed through appropriatePerformance Measures) and obsolescence.

DRIVERS FOR ASSET VALUATION

The key drivers for highway infrastructure asset valuation are:

1. To emphasise the need to preserve the highway infrastructure by placing a monetaryvalue on highway infrastructure assets.

2. To demonstrate asset stewardship by monitoring the Asset Value over time.

3. To support Whole of Government Accounts and promote greater accountability,transparency and improved stewardship of public finances.

4. To support Highway Asset Management – Asset Valuation provides one facet of therobust financial framework that Asset Management should operate within.

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PURPOSE OF THE GUIDANCE DOCUMENT

The purpose of this Guidance Document is to provide a common framework for thediscussion, development and implementation of highway infrastructure asset valuationby Local Highway Authorities in the UK. The general procedure to be used for assetvaluation is described; however, some of the detailed work, such as derivation of UnitRates and establishing asset service lives, will need to be undertaken by Local HighwayAuthorities. It is recommended that regional groups are set up for this purpose to poolthe data and share the experience and learning.

SCOPE OF THE GUIDANCE

The guidance document describes a generic procedure for calculating the asset valueof highway infrastructure assets. Specific guidance is provided for roads, segregatedfootpaths and cycle routes, structures, highway lighting, street furniture, trafficmanagement systems, off-highway drainage and land (associated with the highway).

If required, the generic procedure can be used to value other highway infrastructureassets that are not covered explicitly by the document.

STATUS OF THE GUIDANCE DOCUMENT

The Guidance Document is a companion to the CSS Framework for Highway AssetManagement. The recommendations of the Guidance Document are not explicitlymandatory on authorities. The term ‘should’ associated with an action is used to denotea recommendation, except where clearly relating to a statutory requirement.

The Guidance Document is endorsed by the Treasury, the Office of the Deputy PrimeMinister (ODPM), the Department for Transport (DfT), the County Surveyors Society(CSS), the Local Government Technical Advisors Group (TAG) and the Society of ChiefOfficers of Transportation in Scotland (SCOTS).

Implementation

The following timeframe is recommended for the implementation of highwayinfrastructure asset valuation to support Asset Management and Whole of GovernmentAccounts:

• interim valuation of a sample of assets in Financial Year 2005-06.

• benchmark valuation in Financial Year 2006-07 (provides opening book value for2007-08).

• calculate in-year movements (e.g. depreciation) in Financial Year 2007-08.

Guidance is provided on the valuation regime, systems, data and resource requirementsthat should be considered by Local Highway Authorities when planning theimplementation of asset valuation.

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Contents

Glossary 8

Abbreviations 12

1. Introduction 13

2. Asset Valuation Requirements 17

3. Overview of Highway Asset Valuation Procedure 21

4. Valuation Principles, Basis and Rules 24

5. Asset Inventory 32

6. Unit Rates 40

7. Gross Replacement Cost 46

8. Depreciation 49

9. Impairment 57

10. Depreciated Replacement Cost 64

11. Asset Preservation Measures and Valuation Report 67

12. Roads 70

13. Segregated Footpaths & Cycle Routes 75

14. Structures 79

15. Highway Lighting and High Mast Lighting 86

16. Land associated with the Highway 92

17. Other Highway Assets 94

18. Implementation and Recommendations 96

19. References 99

APPENDIX A Asset Valuation Explanatory Examples 101

APPENDIX B Depreciated Replacement Cost Example 103

APPENDIX C Renewals Accounting Example 110

Acknowledgements 113

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LIST OF TABLES

Table 5.1 Classification of Highway Assets 37

Table 5.2 Asset Valuation Data for each Asset 39

Table 6.1 Recommended Units for Measuring Asset Quantities 43

Table 14.1 Gross Replacement Cost Models and Unit Rates for Structures 82

Table 14.2 Additional Cost Factors on “New-Build” Unit Rates 84

Table 18.1 Key Recommendations 98

LIST OF FIGURES

Figure 3.1 Overview of the Procedure for Highway Infrastructure Asset Valuation 22

Figure 3.2 Detailed Steps in Highway Infrastructure Asset Valuation Procedure 23

Figure 5.1 Asset Classification 34

Figure 8.1 Straight Line Depreciation of Finite Life Asset 51

Figure 8.2 Straight Line Depreciation and Residual Value 52

Figure 8.3 Treatment of Reduction in Remaining Service Life 53

Figure 9.1 Calculating Impairment 61

Figure 9.2 Grouping of Assets by Age Bands 62

Figure 9.3 Performance Measure and Restoration Cost Factor 63

Figure 11.1 Accumulated Asset Consumption Measure 68

Figure 11.2 In-year Asset Consumption and Renewal Measures 69

Figure 15.1 GRC and Component Replacement Cost 89

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Glossary

Accruals Accounting a method of recording expenditure as it is incurredand assets as they are consumed, regardless ofwhen the cash is received or paid out.

Admissible Costs costs that are directly attributable to bringing theasset into a working condition for its intended use.

Asset in the context of this guidance an asset is an integralfeature of the highway infrastructure, e.g. roads,structures, lighting and traffic management systems.

Asset Consumption measured in terms of depreciation and impairment ofassets.

Asset Management a strategic approach that identifies the optimalallocation of resources for the management,operation, preservation and enhancement of thehighway infrastructure to meet the needs of currentand future customers.

Asset Management a plan for managing the asset base over a period ofPlan (AMP) time in order to deliver the agreed Levels of Service

and Performance Targets in the most cost effectiveway. This may be referred to as a Highway AssetManagement Plan (HAMP) or Transport AssetManagement Plan (TAMP) in other guidancedocuments and codes of practice.

Asset Management the hardware and software that supports AssetSystem Management practices and processes and stores

the asset data and information.

Asset Valuation the procedure used to calculate the asset value.

Asset Value the calculated current monetary value of an asset orgroup of assets. It should be correctly referred to asthe Net Asset Value, however it is normally shortenedto Asset Value. Where the term Asset Value is used inthis Guidance Document it should be interpreted asthe Net Asset Value. Asset Value in this document issynonymous with Depreciated Replacement Cost andNet Book Value.

Authority used in this document to mean a Local HighwayAuthority, this covers all forms of Local HighwayAuthority having responsibility for highwaymaintenance as defined in Section 1 of the HighwaysAct 1980 amended.

Balance Sheet a financial statement showing the assets andliabilities of an authority.

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Benchmark Valuation a full valuation that includes a review of the valuationbasis and calculation of the Unit Rates, GrossReplacement Cost and Depreciated ReplacementCost, typically undertaken once every 5 years.

Carriageway the part of the highway laid out for use by motorvehicles.

Current Performance see Performance.

Cycle Route a way constituting or comprised in a highway, being away over which the public have a right of way onpedal cycles (other than pedal cycles which aremotor vehicles within the meaning of the Road TrafficAct 1972) with or without a right of way on foot[Section 329(1) Highways Act 1980]. The words inbrackets were inserted by section 1 of the CycleTracks Act 1984.

Depreciation the systematic consumption of economic benefitsembodied in an asset over its service life arising fromuse, ageing, deterioration or obsolescence.

Depreciated the calculated current monetary value of an asset orReplacement Cost/ group of assets, normally calculated as the GrossNet Asset Value Replacement Cost minus accumulated depreciation

and impairment. This is synonymous with Net BookValue.

Footway a way comprised in a highway, which also comprisesa carriageway, being a way over which the public hasa right of way on foot only [Section 329(1) HighwaysAct 1980]. Footways are the pedestrian pathsalongside a carriageway.

Footpath a highway over which the public have a right of wayon foot only, not being a footway [Section 329(1)Highways Act 1980].

Generally Accepted an international accounting convention for preparingAccounting Practice financial reports by private companies. These are

customised in each country to comply with thenational accounting standards.

Gross Replacement the total admissible cost of replacing a highway assetCost/Gross Asset Value as part of the existing highway network.

Heritage Asset a listed asset or an asset that, due to its constructionform or character, is considered to be important tothe heritage and/or character of an area.

Highway collective term for publicly maintained facilities laidout for all types of user, and for the purpose of thisguidance includes, but is not restricted to, roads,streets, footways, footpaths and cycle routes.

Glossary

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Highway Infrastructure an authority’s portfolio of highway assets includingAsset roads, segregated footpaths and cycle routes,

structures, lighting, traffic management systems, etc.Together they function as a system or network whichas a whole is intended to be maintained at aspecified Level of Service (assessed throughPerformance Measures) by the continuingreplacement and refurbishment of its assetsand elements.

Impairment a reduction in Net Asset Value due to a sudden orunforeseen decrease in condition and/or performanceof an asset, compared to the previously assessedlevel, which has not been recognised throughdepreciation.

Initial Measurement determining a monetary value of a newly constructed,re-constructed or improved asset.

Levels of Service a statement of the performance of the asset in termsthat the customers can understand. Levels of Servicetypically cover condition, availability, accessibility,capacity, amenity, safety, environmental impact andsocial equity. They cover the condition of the assetand non-condition related demand aspirations, i.e. arepresentation of how the asset is performing interms of both delivering the service to customers andmaintaining its physical integrity at an appropriatelevel.

Modern Equivalent an asset which provides the same PotentialAsset Performance as the existing asset, but takes account

of up-to-date technology.

Net Book Value the amount at which fixed assets are included in thebalance sheet, i.e. the Net Asset Value.

Network the highway network inclusive of all its elements, e.g.roads, segregated footpaths and cycle routes,structures and lighting.

Performance three aspects of performance should be recognisedas defined below:

Current Performance the performance and/or condition currently providedby an asset. The Current Performance is likely to belower than the Potential Performance due to usage,ageing and deterioration. The Current Performancemay also be different from the Required Performance.

Potential Performance the maximum or full performance that an asset canprovide if it is in an “as new” condition. This may begreater than the Current Performance.

Highway Infrastructure Asset Valuation Guide – County Surveyors Society/TAG Asset Management Working Group

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Required Performance the performance and/or condition currently requiredof an asset. This may be different from the CurrentPerformance and Potential Performance due tochanges in demand or changes in statutory/regulatory requirements or standards.

Performance Measure a generic term used to describe a measure orindicator that reflects the condition and/orperformance of an asset, e.g. Best ValuePerformance Indicators (BVPI) and other PerformanceIndicators (PIs).

Potential Performance see Performance.

Renewals Accounting a technique for estimating depreciation that allowsthe level of annual expenditure required to maintainthe Level of Service to be treated as the depreciationcharged for that period and deducted from thecurrent asset value. The expenditure required shouldbe identified from an Asset Management Plan and theLevel of Service is assessed through PerformanceMeasures.

Required Performance see Performance.

Resource Accounting an accounting procedure adopted by Centraland Budgeting Government in 2001 that aims to produce a set of

accounts in a style similar to the private sectorfollowing Generally Accepted Accounting Practice.

Special Structures structures that due to a combination of their size,construction, and character are not suitable to bevalued using standardised Unit Rates and GrossReplacement Cost models.

Statement of Accounts a set of financial statements which present thefinancial performance and position of an authorityduring the accounting period covering its assets,liabilities, income and expenditure, the cash flow, andany provisions for the future.

Unit Rates the cost per unit measure(number/length/area/volume) to replace an asset orpart of an asset.

Valuation Report a report which summarises the results of valuationand provides supporting information relating to anauthority’s highway infrastructure assets.

Whole of Government a central Government initiative to produce aAccounts comprehensive set of accounts from 2006-07 for

the whole of the public sector covering centralgovernment departments, local government,agencies, NHS trusts and other public bodies in astyle similar to the private sector, following GenerallyAccepted Accounting Practice.

Glossary

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Abbreviations

AAC Accumulated Asset Consumption

ADF Adjustment factor

AMP Asset Management Plan

AMS Asset Management System

BVPI Best Value Performance Indicator

CSS County Surveyors Society

CIPFA Chartered Institute of Public Finance and Accountancy

DfT Department for Transport

DRC Depreciated Replacement Cost

FRS Financial Reporting Standard

GAAP Generally Accepted Accounting Practice

GRC Gross Replacement Cost

HMT Her Majesty’s Treasury

IAC In-year Asset Consumption

IAR In-year Asset Renewal

LASAAC Local Authority Scotland Accounting Advisory Committee

MEA Modern Equivalent Asset

NBV Net Book Value

ODPM Office of the Deputy Prime Minister

PI Performance Indicator

PROW Public Rights of Way

RAB Resource Accounting and Budgeting

RAM Resource Accounting Manual

RCPI Road Construction Price Index

RCTPI Road Construction Tender Price Index

RV Residual Value

SCOTS Society of Chief Officers of Transportation in Scotland

SL Service Life

SORP Standard of Recognised Practice

TAG The Local Government Technical Advisors Group

UR Unit Rate

WGA Whole of Government Accounts

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Section 1Introduction

1.1 WHAT IS ASSET VALUATION?

1.1.1 Asset valuation is the calculation of the current monetary value of anorganisation’s assets. The value is reported annually in the organisation’sBalance Sheet and is one of the key components supporting Whole ofGovernment Accounts (WGA) and public sector financial management.

1.1.2 Asset valuation is an important mechanism for demonstrating properstewardship of public assets. It provides a means for quantifying the capitalemployed in the assets and the cost of use of the assets in delivering servicesto the public.

1.1.3 The methodology used to calculate the current monetary value depends on theasset under consideration. This Guidance Document has been producedspecifically for the valuation of highway infrastructure assets.

1.2 DRIVERS FOR ASSET VALUATION

To Emphasise the Need to Preserve the Highway Infrastructure

1.2.1 Placing a monetary value on highway assets emphasises their importance andhence the need to maintain them. Monitoring how the asset value is changingwith time can indicate if costs are being unduly passed to future generations,and can provide compelling arguments for investing in the preservation of theasset base.

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1.2.2 Experience in other countries (Finland, New Zealand, Australia, US, Canada)has shown that implementing financial reporting of asset values forinfrastructure assets has a significant impact on how maintenance and renewalwork is funded and utilised. This has generally resulted in an improvement inthe maintenance of assets.

1.2.3 It is, however, important to recognise that asset value represents only themonetary value or capital value of the assets and not the service provided orthe “worth” of the assets to society.

To Support Improved Asset Management

1.2.4 Authorities are implementing improved highway Asset Management practices,as described in the CSS Framework for Highway Asset Management [Ref. 1]and the respective Codes of Practice for roads, structures and lighting [Ref. 2,3 & 4]. A key component of Asset Management is to value the assets anddemonstrate that the forward work volumes, defined in the Asset ManagementPlan, will sustain and, where appropriate, enhance the value of the asset.

1.2.5 Asset valuation, in the context of Asset Management, acts as an importantindicator of good asset stewardship. However, asset valuation should not beused in isolation, but should be used in combination with other recognisedPerformance Measures such as Best Value Performance Indicators (BVPIs) andother Performance Indicators (PIs), and with processes such as valuemanagement, whole life costing, risk management and optimisation.

To Support the Whole of Government Accounts

1.2.6 The UK Government introduced new Resource Accounting and Budgeting(RAB) [Ref. 5] procedures for all Government Departments from 2001-02.Whole of Government Accounts (WGA) extends the RAB agenda by developinga consolidated standard and processes for the whole of the public sector inone set of accounts.

1.2.7 WGA uses accruals accounting methods in line with the Generally AcceptedAccounting Practice (GAAP) and brings public sector accounting in line withthat of the private sector. By relying on proper accounting practice this buildson the prudential system for local government finance and the ResourceAccounting procedures for central government.

1.2.8 The objectives of WGA and RAB are to promote greater accountability,transparency and improved stewardship of public finances. Resourceaccounting is intended to provide a systematic link between an authority’sobjectives, resources consumed and outcomes delivered. Under RAB anauthority is required to report in its accounts the resources, including physicalassets, invested and consumed in the delivery of public services. The benefitsof RAB are stated as including [Ref. 6]:

1. Enhancing the fiscal framework by distinguishing more clearly betweenconsumption and investment.

2. Providing better information on costs, assets and liabilities to assistresource management.

3. Linking resource allocation and capital spending to the deliveryof services.


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4. Measuring the full costs of activities (whether or not there is a cashelement) and recording costs when they are incurred rather than whenthey are paid.

5. Apportioning assets over the years in which they are consumed in theprovision of services.

1.2.9 The central objectives and intentions of RAB and consolidation through WGAalign closely with those of good Asset Management.

1.3 PURPOSE OF THIS GUIDANCE DOCUMENT

1.3.1 The purpose of this Guidance Document is to provide guidance on assetvaluation of highway infrastructure assets that aligns with financial reportingand Asset Management requirements. The guidance is presented in the form ofa step by step procedure covering asset classification, data requirements,calculation of Gross Replacement Cost, calculation of depreciation andimpairment, and the reporting and monitoring of asset value. Examples areprovided in the appendices to illustrate the application of the methods.

1.3.2 The guidance provides a common framework for the discussion, developmentand implementation of highway infrastructure asset valuation by authorities inthe UK. It is recommended that authorities work together, possibly at regionallevel, to develop some of the inputs for asset valuation, e.g. Unit Rates, GrossReplacement Cost models and service lives.

1.4 SCOPE

1.4.1 This Guidance Document covers all fixed assets that form an essential part ofthe highway network, for example the earthworks, pavement, drainage, verges,fencing, structures, lighting, street furniture, traffic management andcommunication assets. Assets such as vehicles, plant and equipment, anddepots are excluded from the scope.

Section 1 – Introduction

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1.5 STATUS OF THE GUIDANCE DOCUMENT

1.5.1 This Guidance Document is a companion to the CSS Framework for HighwayAsset Management [Ref. 1]. The recommendations of this Guidance Documentare not explicitly mandatory on authorities. The term ‘should’ associated withan action is used to denote a recommendation, except where clearly relating toa statutory or mandatory requirement.

1.5.2 However, authorities who elect, in the light of local circumstances, to deviatefrom the recommendations given here should identify these in their ValuationReport together with the reasons for the departure.

1.5.3 The guidance is endorsed by the Treasury, the Office of the Deputy PrimeMinister (ODPM), the Department for Transport (DfT), the County SurveyorsSociety (CSS), the Local Government Technical Advisors Group (TAG) and theSociety of Chief Officers of Transportation in Scotland (SCOTS).

1.6 KEY RECOMMENDATIONS

1.7 IMPLEMENTATION OF ASSET VALUATION

1.7.1 The following timeframe is recommended for the implementation of highwayinfrastructure asset valuation in order to support Asset Management and WGA:

• Interim valuation of a sample of assets in Financial Year 2005-06.

• Benchmark valuation in Financial Year 2006-07 (provides opening bookvalue for 2007-08).

• Calculate in-year movements (e.g. depreciation) in Financial Year 2007-08.

1.7.2 An implementation plan is proposed in Section 18.1.

1.6.1 Key recommendations are boxed, like this paragraph, when they appear in thetext. They are also summarised in Section 18.4.


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Section 2Asset Valuation Requirements

2.1 FINANCIAL REPORTING REQUIREMENTS

2.1.1 Asset valuation for highway infrastructure assets should comply with thefinancial reporting requirements summarised below. The asset valuationprocedure described in this Guidance Document enables authorities to complywith these requirements.

Compliance with Standards

2.1.2 The methodology adopted for calculating asset values for an authority’sstatutory accounts should comply with the SORP [Ref. 7]. The methodologyshould also be consistent with Financial Reporting Standards 15 and 11[Ref. 8 & 9]. Consistency with Treasury’s Resource Accounting Manual [Ref. 10]is also desirable for the preparation of the Whole of Government Accounts.

2.1.3 The valuation principles, basis and rules established for highway infrastructureasset valuation are presented in Section 4. The principles, basis and rulescomply with the aforementioned standards where appropriate.

2.1.4 The guidance recommends the use of Renewals Accounting for roads,segregated footpaths and cycle routes, and structures because they form anintegral part of the highway network and meet the requirements set down inFRS 15 [Ref. 8]. It is recognised that FRED 29 [Ref. 11], following on from IAS16 [Ref. 12], does not refer to Renewals Accounting. However, in the opinion ofthose endorsing this guidance (Section 1.5.3), Renewals Accounting is a robustand systematic basis for estimating the consumption of the aforementionedparts of the highway network.

2.1.5 The inclusion of highway infrastructure asset values derived in accordance withthis guidance into the statutory accounts is dependent on agreement of theprocedure with CIPFA/LASAAC and necessary amendments to the SORP [Ref.7]. It is recognised that the 2004 publication of the SORP guidance [Ref. 7]requires highway infrastructure assets to be reported in the Balance Sheet athistorical cost and a current valuation of these assets is not required. At thetime of publication of this Guidance Document, discussions betweenCIPFA/LASAAC, HMT, ODPM, DfT and CSS/TAG were assessing the suitabilityof historical cost for highway assets and the practicality of moving towards a(re)valuation regime based on current value. This Guidance Document has beenprepared on the assumption that highway infrastructure assets will be requiredto be valued on the basis of current value.

True and Fair Value

2.1.6 An authority should provide a true and fair current value of the highwayinfrastructure assets for reporting in the Balance Sheet. The asset value isintended to represent the current value of the capital employed by the authorityin delivering its services.

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Depreciation and Impairment

2.1.7 Depreciation of assets should be calculated annually and recognised as a cost,with appropriate in year phasing for financial management purposes.Depreciation represents the consumption of assets in delivering services to thepublic, and should be allocated on a systematic basis over the useful servicelife of an asset. In addition, any drop in value of assets due to a suddenreduction in their condition/performance should be recognised as impairment.

2.1.8 The accumulated depreciation and impairment are deducted from the GrossReplacement Cost to give the Depreciated Replacement Cost.

2.2 HIGHWAY ASSET MANAGEMENT REQUIREMENTS

2.2.1 Key objectives of highway Asset Management, as with RAB, are to promotegreater accountability and improved stewardship of public assets, and tosystematically link resources to the delivery of an authority’s objectives. Thistranslates into two categories of work for highway infrastructure assets:

1. A programme of improvement works to cater for increases in demand orto improve Levels of Service (e.g. safety, environmental, accessibility,condition, also see Ref. 1); and

2. A programme of routine, programmed and reactive maintenance andrenewal to preserve or restore the condition/performance of existingassets.

2.2.2 These programmes of work influence the asset value, i.e. the work programmemay maintain or increase the asset value or, if it is not adequate, then the assetvalue may decrease. Monitoring asset value over time can therefore be used todemonstrate stewardship of assets. This information provides an importantinput to a business case for investing in the maintenance and upkeep of publicassets.

2.2.3 To enable effective use of asset valuation within highway Asset Management,the valuation procedure should meet the following specific requirements:

1. Treat the assets in the “right way”, reflecting that they are part of ahighway network and operate together to provide the specified Levels ofService for the network. This integrated approach to asset managementshould be reflected, where appropriate, in the procedure used forhighway infrastructure asset valuation.

2. Reflect good engineering practice and support the right investmentchoices for maintenance, renewal and improvement works.

3. Be sensitive to works that add or protect asset value.


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4. Be consistent with, and be a component of, the suite of processes usedin highway Asset Management such as Performance Measures,prioritisation, value management and whole life costing.

5. Support decision making and long term investment planning by formingan important element of the business case for funding in the upkeep ofcondition and performance of the assets.

6. Be relatively straightforward and operate on data that is readily availableor can be collected with marginal effort.

2.3 VALUATION REGIME

2.3.2 It is recognised that the robustness and reliability of valuation are likely toimprove with time as Asset Management Systems (AMS) progress and thequality of data about asset inventory, condition and performance improves.Also, as authorities develop and populate their AMS they can expect toimprove the level of detail used in asset valuation and to streamline theprocedure. If suitable advances are made in AMS, then asset valuation maybecome largely, or completely, automated and it may become feasible to alignannual adjustments more closely with the tasks undertaken in a benchmarkvaluation.

2.3.3 An authority should review the scope of the benchmark valuation and annualadjustments described below and, based on the characteristics of its highwaystock, the availability of data and the functionality of its AMS, adopt a suitablevaluation regime. An authority should also consider how their data and systemsare likely to change over time, as identified from the Asset Management gapanalysis [Ref. 1], and assess the impact this may have on the asset valuationregime.

Benchmark Asset Valuation

2.3.4 As a minimum, the asset valuation regime should include a full benchmarkvaluation every five years. The benchmark valuation should comprise:

1. A review of the valuation basis, rules and algorithms, and making anynecessary amendments if this results in a fairer valuation.

2. Determination or updating of the Unit Rates using a representativesample of construction/replacement schemes that cover specific assettypes and groups.

3. Determination and/or updating of the service lives used to depreciatefinite life assets or elements.

4. Collation of up-to-date data on all assets, including recentadditions/deletions, information on dimensions, condition andperformance of each asset.

2.3.1 An authority should establish a valuation regime for their highwayinfrastructure. It is recommended that, as a minimum, a benchmark valuationis performed every five years with annual adjustments to take account ofchanges to the stock and fluctuations in construction prices.

Section 2 – Asset Valuation Requirements

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5. Calculation of Gross Replacement Cost, depreciation, impairment andDepreciated Replacement Cost for individual assets and groups ofassets, as appropriate, based on the valuation and depreciationmethodology applied.

2.3.5 A benchmark valuation should be undertaken before the five year milestone, ifthere is reason to believe the current value is materially different from a trueand fair value.

Annual Adjustments

2.3.6 Asset valuation should include annual adjustments to reflect any in-yearchanges compared to the previous year and, if appropriate, adjust the assetvalue. The adjustments should take account of:

1. Changes in asset condition and performance, i.e. in-year depreciationand impairment.

2. Changes in construction prices. These should be assessed using suitableindices, e.g. Baxter Indices.

2.3.7 Changes to the stock resulting from improvements, detrunking, retrunking,highway adoptions, decommissioning etc., should be recognised immediatelyrather than at year end.

2.3.8 Capitalisation of subsequent expenditure (Section 4.5) also influences assetvalue. However these costs should be applied when incurred rather than atyear end.

2.3.9 If an authority wishes to accrue in-year depreciation, e.g. quarterly or monthly,this should be done by phasing the annual depreciation charge equally acrossthe in-year accounting periods.


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Section 3Overview of Highway AssetValuation Procedure

3.1 OVERVIEW

3.1.1 The general procedure for the valuation of highway infrastructure assetsconsists of the following steps and is illustrated in Figure 3.1.

1. Establish the principles, basis and rules for asset valuation (Section 4).These should comply with the valuation requirements given in Section 2.

2. Compile an Asset Inventory that provides the base data for calculatingasset values for all highway infrastructure assets owned by an authority(Section 5). The assets should be appropriately classified and grouped.Also see Section 2 of the CSS Framework for Highway AssetManagement [Ref. 1].

3. Produce the initial value of the highway infrastructure assets. Thisinvolves:

a. Deriving appropriate Unit Rates for the different asset groups andsub-groups (Section 6).

b. Calculating the Gross Replacement Cost for each asset within agroup or sub-group (Section 7).

4. Calculate the consumption of the assets, which involves:

a. Calculating in-year depreciation (Section 8); and

b. Assessing for in-year impairment and calculating loss in valuewhere required (Section 9).

5. Calculate the Depreciated Replacement Cost (Section 10) which involves:

a. On the introduction of the asset valuation regime, calculating theDRC (which is the opening Net Book Value) by reducing the GrossReplacement Cost to reflect the current age, condition andperformance of assets; and

b. Annual adjustments to the asset value to account for in-yeardepreciation and impairment.

6. Prepare the Valuation Report (Section 11).

3.1.2 Sections 4 to 11 apply to all highway infrastructure assets, except whereexplicitly stated. Guidance specific to each asset type is provided in Sections12 to 17.

3.2 DETAILED PROCEDURE

3.2.1 The specific tasks involved in steps 2 to 5 above are shown in Figure 3.2 anddescribed in detail in Sections 5 to 10. The relevant sections are crossreferenced in Figure 3.2.

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3.2.2 Several tasks in the procedure are interrelated and may need to be carried outin a different order, depending on whether the valuation is being undertaken forthe first time or whether it is a benchmark valuation or annual adjustment.Figure 3.2 shows some of the relationships between tasks as appropriate forinitial implementation of asset valuation.

Figure 3.1 Overview of the Procedure for Highway Infrastructure Asset Valuation

Financial ReportingRequirements

(Section 2.1)

Asset Valuation Regime(Section 2.3)

Valuation Principles,Basis and Rules

(Section 4)

Asset Inventory(Section 5)

Unit Rates(Section 6)

CONSUMPTION

INITIAL VALUE

GrossReplacement Cost

(Section 7)

DepreciatedReplacement Cost

(Section 10)

Impairment(Section 9)

Depreciation(Section 8)

Valuation Report(Section 11)

Asset ManagementRequirements

(Section 2.2)


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Figure 3.2 Detailed Steps in Highway Infrastructure Asset Valuation Procedure

Establish assetclassification(Section 5.4)

Identify keycost drivers(Section 5.3)

Establishsub-groups &

adjustment factors(Section 5.5)

Review assetinventory

requirements(Section 5.2)

Compile assetvaluation data(Section 5.6)

Selectschemes

(Section 6.2)

Establish unit ofmeasurement(Section 6.3)

Develop GrossReplacement Cost

model(Section 7.2)

Classify assets &components

(Paragraph 8.2.2)

Adopt RenewalsAccounting(Section 8.3)

Determine actualexpenditure

(Paragraph 8.3.9)

AdoptConventional

Method(Section 8.2)

Determine AMPfunding

requirements(Paragraph 8.3.4)

Calculatedepreciation

charge(Paragraph 8.3.10)

Determineservice lives &depreciation

(Paragraph 8.2.4)



Calculate GrossReplacement Cost

(Section 7.3)

Calculateimpairment

(Section 9.3)

Assess forimpairment

(Section 9.2)

Calculateinitial DRC

(Section 10.3)

Determinecondition &

performance(Section 10.2)

Calculate annualadjustments

to DRC(Section 10.4)

DeriveUnit Rates

(Section 6.4)

Deriveadjustment factors

(Section 6.5)

ASSET INVENTORY(Section 5)

IMPAIRMENT(Section 9)

DEPRECIATEDREPLACEMENTCOST(Section 10)

UNIT RATES (Section 6)

DEPRECIATION (Section 8)

GROSSREPLACEMENTCOST(Section 7)

Section 3 – Overview of Highway Asset Valuation Procedure

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Section 4Valuation Principles, Basis and Rules

4.1 GENERAL

4.1.2 It is important that authorities do not deviate from the principles, basis andrules described below unless there is a good reason to do so. This is necessaryto ensure consistency in the asset values and the related asset preservationmeasures produced by different authorities. If an authority deviates from thefollowing rules they should fully document the reasons for the deviation in theirValuation Report (Section 11.2).

4.1.3 The principles, basis and rules for highway infrastructure asset valuation aredescribed under the following headings:

1. Accounting principles (Section 4.2)

2. Valuation basis (Section 4.3)

3. Admissible costs (Section 4.4)

4. Capitalisation of subsequent expenditure (Section 4.5)

5. Indexation of costs (Section 4.6)

6. Modern Equivalent Asset (Section 4.7)

7. Assets under construction (Section 4.8)

8. Assets under a PFI Scheme (Section 4.9)

9. Special structures (Section 4.10)

10. Heritage assets (Section 4.11).

4.2 ACCOUNTING PRINCIPLES

4.2.1 Highway infrastructure asset valuation and its annual reporting should followthe established principles of financial accounting; in particular:

1. Reliability – the information contained can be depended upon for thestated purpose; it is free from deliberate or systematic bias; it is free frommaterial error; and a prudent approach has been taken in dealing withuncertainty.

4.1.1 Before carrying out valuation it is important that the principles, basis and rulesare set down and agreed by the authority with its auditors, as they have asignificant impact on the calculated asset values. The principles, basis andrules presented below provide an appropriate basis for the valuation ofhighway infrastructure assets and are strongly recommended for adoption byall authorities. They underpin the asset valuation procedure and guidancepresented in this document.

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2. Comparability – the information provided can be compared with similarinformation about the organisation for previous accounting periods andwith other similar organisations. Comparability depends on consistency invaluation between like items, such as pavement and structures, andbetween accounting periods, and recognising that changes may beappropriate if they would result in a fairer valuation.

3. Materiality – all information is included that might be expected to have aninfluence on the purpose for which the financial statements are used.Materiality depends on the size and nature of the item considered andshould be judged on the circumstances of the case.

4.3 VALUATION BASIS

4.3.1 Highway assets are largely publicly owned and have rarely if ever been sold onthe open market. They are not created to produce revenue and therefore do nothave a defined revenue stream, although revenue may be associated with themin certain cases (e.g. congestion charging, tolls and parking charges). Hencethe ‘market value’ or ‘revenue stream’-based valuation methods are notappropriate for highway assets.

4.3.3 The Depreciated Replacement Cost is evaluated as:

Where:

• Depreciation is the systematic consumption of economic benefitsembodied in an asset over its service life arising from use, ageing,deterioration or obsolescence; and

• Impairment is a reduction in Net Asset Value due to a sudden orunforeseen decrease in condition and/or performance of an assetcompared to the previously assessed level which is not alreadyrecognised through depreciation.

4.3.4 This Guidance Document describes the approaches that should be used tocalculate depreciation and impairment. Guidance on the accounting treatmentof depreciation and impairment in the Statement of Accounts is beyond thescope of this document, and for this purpose authorities should refer to theSORP [Ref. 7].

Depreciated Replacement Cost =

Gross Replacement Cost – (Accumulated Depreciation & Impairment)

Equation 1

4.3.2 The Resource Accounting Manual (RAM) [Ref. 10], based on the requirementsof FRS 15 [Ref. 8], recommends that highway infrastructure assets are valuedon the basis of Depreciated Replacement Cost (DRC). (NB: at the time ofpublication of this document the SORP Guidance [Ref. 7] required historicalcost to be used for the valuation of highway infrastructure assets; but theSORP requirement has not been followed, for the reasons given inparagraph 2.1.5).

Section 4 – Valuation Principles, Basis and Rules

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4.3.5 When an asset is constructed, reconstructed or improved within the currentfinancial year, the asset could initially be valued at cost. At the next valuation(i.e. annual adjustment or benchmark valuation) these assets should be re-valued based on the DRC approach using the standard procedure. Sincevaluation may not give the same monetary value as the actual constructioncost, this could result in writing down the asset value soon after an assetenters into service. To avoid this fluctuation in asset value an authority maychoose to value such new assets using the standard procedure for valuationand include the asset in the Balance Sheet at the re-valued amount rather thanat cost. This may lead to an immediate “write-down” of capital costs whichshould be treated according to established capitalisation (Section 4.5) andaccounting procedures [Ref. 7].

4.4 ADMISSIBLE COSTS

4.4.1 In valuing and revaluing highway infrastructure assets it is important to clearlyestablish the costs that are admissible. The same applies to (re)constructedassets and costs incurred when carrying out maintenance.

4.4.2 FRS 15 [Ref. 8] states that “Costs, but only those costs that are directlyattributable to bringing the asset into working condition for its intended use,should be included in its measurement”.

4.4.3 Directly attributable costs for highway infrastructure assets are all costsincurred by the authority when constructing the asset, e.g. labour, plant,material, site preparation, traffic management and professional fees. However,certain costs such as utility service diversion/disruption, pre-feasibility costs,the authority’s overall programme management, monitoring and overhead costsnot directly attributable to a specific asset or scheme, are not admissible. Anyabortive costs including those related to design errors, industrial disputes, idlecapacity, wasted resources and production delays are also not admissible.

4.4.4 The actual outturn costs incurred in constructing a highway asset can bebroadly grouped under the following cost elements:


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1. Direct cost of material, labour, plant and equipment including siteclearance and preparation costs, including contractor’s profit margin andfinance costs.

2. Project management and supervision costs including scheme design.

3. Costs of authority’s own staff time.

4. Cost of demolishing or breaking out of the existing assets andtheir disposal.

5. Cost of temporary works, e.g. diversions and temporary bridging.

6. Temporary traffic management costs, e.g. coning, traffic lightsand signage.

7. Possession costs for assets over, or that impact on, railway lines,canals, etc.

4.4.5 The majority of highway infrastructure assets can be considered as ‘mature’assets. The admissible costs for mature highway infrastructure assets shouldinclude all costs incurred in the current location, subject to the rules above.These costs should be taken into account in the derivation of Unit Rates andthe calculation of Gross Replacement Cost.

Utility Diversion Costs

4.4.6 It is recognised that the diversion of utility services (e.g. gas, water, telephonesand cables) during asset replacement or renewal work and their subsequentreinstatement can contribute a significant proportion to project costs. However,these costs are uncertain and difficult to estimate and should therefore bewritten off when incurred (except for highway lighting, and similar assets, asexplained in paragraph 15.3.1).

4.5 CAPITALISATION OF SUBSEQUENT EXPENDITURE

4.5.1 The valuation procedure should preferably align with the capitalisationprocedures used for accounting for subsequent expenditure on assets in theirmaintenance, renewal and enhancement. Guidance for this is provided in theSORP [Ref. 7].

4.5.2 Authorities should establish proper policies and procedures, in agreement withtheir auditors, for the capitalisation of costs and their classification intoadmissible and non-admissible costs for valuation purposes. In doing so, dueconsideration should be given to the approach adopted for depreciationbecause this has an influence on how the subsequent expenditure iscapitalised [Ref. 8]. The recommended approaches for depreciation aredescribed in Section 8.

4.6 INDEXATION OF COSTS

4.6.1 Valuation is carried out using standardised Unit Rates (Section 6) for each assetgroup or sub-group. The Unit Rates are derived from outturn costs from arepresentative sample of previously completed highway (re)constructionschemes. The Unit Rates need to be adjusted, using an appropriate priceindex, to represent present day prices.


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4.6.2 Authorities should adopt an index that best reflects the increases in roadconstruction prices in their authority. The indices widely used by authorities inthe UK are:

1. Baxter Indices – published by the Department for Trade andIndustry (DTI).

2. Road Construction Price Index (RCPI) – published by Departmentfor Transport until 1995.

3. Road Construction Tender Price Index (RCTPI) – published byDepartment for Transport since 1995.

4.6.4 If an authority uses an alternative price index, then they may adopt this forasset valuation provided the authority and their auditors are satisfied with itssuitability for highway infrastructure assets.

Baxter Indices

4.6.5 Baxter Indices were developed in order to apply Price Adjustment Formulae toconstruction contracts to allow for variations in contractors’ costs over theduration of a contract. Whilst they are published by the DTI on a monthly basis[Ref. 13], there is a working group, which has a wide representation from allsides of the construction industry, that is responsible for reviewing the indicesand deciding issues arising in the compilation of the indices. Indices arepublished as provisional in the first instance and are subsequently changed tofirm values.

4.6.6 Two sets of indices are published; one for building work and one for specialistand civil engineering works. The latter should be used for highwayinfrastructure asset valuation and consists of 14 indices for differentcomponents of labour, plant and materials:

1. Labour and supervision in civil engineering

2. Plant and road vehicles: provision and maintenance

3. Aggregates

4. Bricks and clay products

5. Cements

6. Cast iron products

7. Coated roadstone for road pavements and bituminous products

8. DERV fuel

9. Gas oil fuel

4.6.3 It is recommended that a price index based on a basket of appropriatelyweighted Baxter Indices are used for highway infrastructure asset valuationbecause these are more stable compared to the other indices. Further detailson the Baxter Indices are provided below.


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10. Timber

11A. Steel for reinforcement

11B. Metal sections

12. Fabricated structural steel

13. Labour and supervision in fabricating and erecting steelwork

4.6.7 In order to adjust the Unit Rates (Section 6), it is necessary to use a basket ofindices weighted based on the proportion the above components contribute tothe Unit Rate under consideration. Whilst this can be done separately for eachUnit Rate an authority may decide to produce a weighted basket appropriate toeach Level 1 asset type (Section 5.4) and use this combined index for all assetgroups and sub-groups within the category. Similarly this could be done atLevel 2, for example, for a concrete bridge one would use indices 1, 2, 3, 5, 10& 11A as their movement would affect the Unit Rate significantly.

4.7 MODERN EQUIVALENT ASSET

4.7.1 The concept of Modern Equivalent Asset (MEA) is used to determine thestandardised Unit Rates (Section 6) and Gross Replacement Cost (Section 7)when valuing existing assets of technologically obsolete construction form,e.g. the modern equivalent of a masonry arch bridge may be a compositebeam and slab bridge.

4.7.2 The MEA is defined as one which provides the same Potential Performance asthe existing asset, but takes account of up-to-date technology. If theconstruction form of an existing asset is no longer considered appropriate as areplacement, or when existing assets can be replaced more economically bynew construction forms to provide a similar function, then this should bereflected in asset valuation by using the MEA instead of the existingconstruction form.


29

4.7.3 MEA should reflect current good practice and should therefore implicitlyaccount for the latest construction techniques, delivering minimum whole lifecosts, and meeting sustainability and environmental requirements. The MEAshould be identified, where required, for the asset groups and sub-groupsdescribed in Section 5 and a replacement Unit Rate derived for each. The MEAcan be readily identified by reviewing recent construction practice.

4.7.4 In some cases the Potential Performance provided by an existing asset cannotbe replicated by a MEA, e.g. the Potential Performance of an existing bridgemay be 10 tonne however a MEA would be designed to provide 40 tonnecapacity. In such cases the GRC should be evaluated as the cost of a MEA thatmeets the Current Performance, even if it provides an improvement on theexisting Potential Performance, provided the GRC of the MEA is considered tobe representative. If the GRC of the MEA is considered to be unrepresentativeof the cost of replacing the existing asset, with an asset that provides the samePotential Performance, then the costs should be factored accordingly. A factorshould be applied when the GRC for the existing asset is considered to bemore than ±10% of the GRC of the MEA.

4.7.5 Appendix A provides some examples of how to use MEA. The examplesexplain the appropriate treatment of impairment (Section 9).

4.8 ASSETS UNDER CONSTRUCTION

4.8.1 Schemes which have not reached the ‘open for traffic’ stage but are inprogress at the valuation date are classed as ‘assets under construction’.These assets should be included in the accounts either at cost or a proportionof the value of the complete asset evaluated using the standard procedure. Theproportion of the value considered should be based on the progress of thework or spend to-date compared to the full asset when completed.

4.9 ASSETS UNDER A PFI SCHEME

4.9.1 Assets which are managed under a Private Finance Initiative (PFI) scheme as“off the Balance Sheet assets” should not be included in the valuation. Wherethis is not the case a proportion of the full asset value (evaluated using thestandard procedure), based on the elapsed period of the PFI concessionrelative to the total concession period, should be included in the BalanceSheet. For example, if the total asset value of lighting assets in an authority is£20 million and the total period of the PFI concession is 20 years with 15 yearselapsed, then the asset value to be included in the Balance Sheet is £15million.

4.10 SPECIAL STRUCTURES

4.10.1 Highway infrastructure assets are classified into groups and sub-groups(Section 5) to enable standardised Unit Rates (Section 6) and GRC models(Section 7) to be determined. However, Special Structures are those that due toa combination of their size, construction and/or character are not suitable to bevalued using standardised Unit Rates and GRC models, for example, theJubilee Bridge.

4.10.2 Special Structures should be valued individually using the principles given inthis Guidance Document, including the concept of Modern Equivalent Asset.Specific guidance on the treatment of Special Structures is provided inSection 14.


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4.11 HERITAGE ASSETS

4.11.1 Many authorities have a significant number of heritage and/or listed highwayassets, principally bridges, e.g. Tower Bridge, but they may also include otherassets that are deemed to be important to the character of the area, e.g. ornatelighting columns and cobbled streets. It would not be appropriate to valuethese assets using the Modern Equivalent Asset (MEA) approach because thiswould not reflect the true costs incurred by the authority in maintaining and/orreplacing the existing asset. That is, a heritage asset would be expected to bereplaced with a ‘like for like’ or ‘nearly as like as is feasible’ asset. This is likelyto result in a significantly higher cost compared to replacing it with a MEA.Therefore, the standardised Unit Rates derived for MEA groups, or sub-groups,should not be used to calculate the asset value for heritage assets.

4.11.2 Unit Rates and Gross Replacement Cost models may be determined forindividual heritage assets or groups/sub-groups of heritage assets. Theapproach adopted depends on the type and number of heritage assets in theauthority, or in the region if the authority is working with other authorities.

4.11.3 The Unit Rates and Gross Replacement Cost models should be based on anoptimised replacement cost that provides the required appearance andfunction but seeks to make cost savings and efficiencies where appropriate.Examples include:

• Lighting Column – an existing cast iron lighting column with decorativefeatures that reflects the character of the area has been classified as aheritage asset. The column should be valued by assuming it will bereplaced by a lighting column that looks the same and provides the sameservice, although a modern material (steel) may be used to optimisethe cost.

• Pavement – a cobbled street is deemed to reflect the character of thearea and is an important aspect of tourism. The pavement shouldbe valued by assuming it will be replaced by structural layers ofappropriate modern materials and standards but the surface layer willbe cobbled stone.

4.11.4 If sufficient (re)construction cost data is not available from within the authorityor other similar authorities then engineering judgement and experience shouldbe used in valuing Special Structures and Heritage Assets. If necessary, advicemay also be sought from a Quantity Surveyor.


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Section 5Asset Inventory

5.1 GENERAL

5.1.1 The asset inventory provides the base data required for asset valuation. Thissection describes the asset inventory requirements, asset classification (andthe key cost drivers to be considered when classifying the assets), asset sub-groups and adjustment factors. The data required for asset valuation is alsosummarised.

5.2 ASSET INVENTORY REQUIREMENTS

5.2.2 In order to support asset valuation the asset inventory should contain thefollowing:

1. Asset Register – a listing of each individual asset owned by theauthority. The assets should be appropriately classified into types, groupsand sub-groups to ensure valuation, depreciation and impairment arecorrectly applied.

2. Valuation Data – the data for each asset required to calculate assetvalues, e.g. dimensions, material type, age and useful service life.

5.2.3 The refinement of the asset register directly influences the accuracy andreliability of valuation. Greater refinement is likely to increase the quantity ofdata required to support asset valuation thereby increasing the storagerequirements and the resources needed to keep it up-to-date and accurate. Itis recommended that authorities identify the asset classifications required forgood Asset Management and seek to align asset valuation with these. Aclassification that is suitable for asset valuation is presented in Section 5.4.

5.2.1 It is recommended that authorities develop an asset inventory for AssetManagement that also covers the needs of asset valuation. Guidance ondeveloping an inventory for Asset Management is provided in the CSSFramework for Highway Asset Management [Ref. 1] and the relevant Codesof Practice [Ref. 2, 3, & 4]. The data needs for asset valuation are describedin the following.

ASSET INVENTORY

Review assetinventory

requirements(Section 5.2)

Establish assetclassification(Section 5.4)

Identify keycost drivers(Section 5.3)

Establishsub-groups &

adjustment factors(Section 5.5)

Compile assetvaluation data(Section 5.6)

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5.2.4 To expedite asset valuation it is desirable that the asset inventory and thevaluation procedure are automated using a computerised system. Section 18.2provides further guidance on the functionality of asset valuation systems.

5.3 KEY COST DRIVERS

5.3.1 Asset valuation requires a true and fair monetary value to be placed on thehighway assets. The standardised Unit Rates and Gross Replacement Costmodels should take account of the factors that have a significant influence onreplacement cost. The key cost drivers should therefore be identified and usedto inform asset classification.

5.3.2 The key cost drivers that influence the GRC of a highway asset include:

1. Asset type, e.g. road, structure and lighting.

2. Construction form, e.g. bridge, retaining wall and culvert.

3. Usage, e.g. single or dual carriageway.

4. Location, e.g. urban or rural.

5.3.3 Sections 12 to 17 present a range of key cost drivers for each asset type; theasset classification presented in Section 5.4 takes account of these key costdrivers.

5.4 ASSET CLASSIFICATION

5.4.1 The entire highway infrastructure is defined as an asset class. The highwayinfrastructure operates as a single network and is managed and maintained in amanner that reflects the interaction and inter-dependence between theindividual assets that comprise the network. However, for the purpose of assetvaluation it is necessary to distinguish between assets of different function andform in order to derive appropriate Unit Rates and GRC.

5.4.2 The highway infrastructure asset class is divided into asset types, assetgroups, asset sub-groups and components. This helps to:

1. Distinguish assets by key cost drivers (e.g. function, form and material)that influence their replacement cost; and

2. Distinguish between assets and components with different useful livesand deterioration characteristics which could be treated separately fordepreciation and impairment calculations.

Section 5 – Asset Inventory

33

5.4.3 The proposed classification for asset valuation has three levels, shown inFigure 5.1. The three levels are defined as:

Level 1: Asset Types – broad categories based on the general function of theassets. They divide the asset base into categories that may be suitable forreporting in the financial statement and provide an appropriate basis for highlevel management information.

Level 2: Asset Groups – used to distinguish between assets that have asimilar function and form. The asset groups should distinguish between assetsthat are likely to require different Unit Rates (Section 6) and Gross ReplacementCost models (Section 7). Each asset group may need to be further divided intosub-groups if the Unit Rates are likely to vary significantly between assets ina group.

Level 3: Components – distinguishes between components that are likely torequire different depreciation and impairment models, e.g. different servicelives and/or rates of deterioration. [NB: it is not necessary to explicitly identifyall components for asset types depreciated under Renewals Accounting(Section 8)].

Figure 5.1 – Asset Classification

Increasinglevel ofasset

informationrequired

Level 1: Asset TypesBroad categories based on thegeneral function of the assets

Level 2: Asset Groups and Sub-GroupsAssets of similar function and form whichprovide suitable detail for calculating Unit

Rates and Gross Replacement Costs (GRC)

Level 3: ComponentComponents that are likely to have differentdeterioration rates and/or service lives andshould therefore be treated separately for

depreciation and impairment

Note: Level 3 assets andcomponents are explicitlyidentified for depreciationwhen the ConventionalMethod is used.


34

5.4.4 The disaggregation required for asset valuation depends on the accountingapproach used for depreciation. Section 8 describes the depreciationapproaches suitable for highway infrastructure assets and recommends theapproaches to be used for each asset type. The choice of the depreciationmethod influences asset disaggregation as follows:

1. Asset types such as lighting, street furniture, traffic management systems,and off-highway drainage that are assessed individually or at componentlevel for depreciation, using the Conventional Method (Section 8.2),require Levels 1, 2 and 3 of the classification to be explicitly defined andused within asset valuation.

2. Asset Types such as roads, segregated footpaths and cycle routes, andstructures that are assessed at group or type level for depreciation, usingRenewals Accounting (Section 8.3), require Levels 1 and 2 to be explicitlydefined and used within asset valuation. Whilst the Level 3 componentsare not explicitly identified for depreciation they are likely to be needed inthe development of the Asset Management Plan that supports RenewalsAccounting.

5.4.5 An asset classification that is appropriate for asset valuation is shown in Table5.1. The table is not exhaustive and should be taken as a general framework. Ifthese asset types and groups do not provide adequate coverage then anauthority may extend this scheme to make it appropriate for its network. Wherepossible the asset disaggreagtion should align with that used for AssetManagement.


35

* These assets are only included in highway infrastructure asset valuation where theyare maintained as part of the highway infrastructure asset, e.g. surfaced PROW.

Level 1Asset Type

Level 2Asset Group

Level 3: Components that Level 2implicitly covers in valuation

Road • Flexible pavements

• Flexible composite pavements

• Rigid concrete pavements

• Rigid composite pavements

• Pavement layers (formation,roadbase, binder course, surfacecourse)

• Other surface types e.g. paved

• Hard strip/shoulder

• Footway/cycleway attached to road

• Central reservation, roundabout,lay-by etc.

• Markings

• Kerbs

• Earthworks (embankments & cuttings)

• Vegetation

• Drainage

• Safety fences

• Boundary fences and hedges

• Verges

Segregatedfootpathsand cycleroutes*

• Footpath (including PROW)

• Bridleways (including PROW)

• Off road cycle routes

• Pedestrian areas

• Binder course and surface course

• Formation

Structures • Bridges (includes subways)

• Culverts (span < 1.5m)

• Retaining walls

• Sign/signal gantries andcantilever road signs

Other assets included in this group:

• Tunnels

• Structural earthworks, e.g.strengthened/reinforced soils

• Fords and causeways

• Cattle grids

All elements identified on the CSSinspection pro forma [Ref. 14 and 15].

Should include all componentsconsidered in the maintenance andmanagement of these assets.

Smaller water carrying structures areconsidered as road drainage.

Highwaylighting andhigh mastlighting

• Lighting columns

• Lighting unit attached to wall

• High mast lighting

• Column and foundations

• Bracket

• Luminaire (or other fixtures,e.g. CCTV)

• Control gear, switching and internalwiring cabling (may depend onownership)


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Table 5.1 Classification of Highway Assets

5.5 ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

5.5.1 The asset groups (Level 2) shown in Table 5.1 may be used as the basis forderiving standardised Unit Rates (Section 6). However, in some cases thesegroups may not provide the required degree of refinement. Further refinementcan be achieved by identifying sub-groups within a group or by the use ofadjustment factors to account for certain cost-influencing factors. Guidance onthe choice between the two options is given below. Sections 12 to 17recommend asset sub-groups and adjustment factors for each asset type.

Asset Sub-Groups

5.5.2 An asset sub-group is an identifiable set of assets, within an asset group,that are influenced by the same key cost driver(s) in a similar way. It maytherefore be appropriate to derive a separate Unit Rate for the sub-group.Examples of asset sub-groups are:

1. The flexible pavement asset group may be divided into sub-groups: urbansingle, urban dual, rural single, rural dual and rural single track.

Level 1Asset Type

Level 2Asset Group

Level 3: Components that Level 2implicitly covers in valuation

Streetfurniture

• Town/city centre street/road

• Suburban/village street/road

• Rural road

• Bus Shelters

• Seating

• Bins

• Bollards

• Marker Posts

• Street name plates

• Tree protection etc.

Trafficmanagementsystems

• Traffic signals

• Pedestrian signals

• Signal, column and foundation

• Control equipment and cables

• Bulbs

• Illuminated traffic signs

• Non-illuminated traffic signs

• Illuminated pedestrian signs

• Non-illuminated pedestrian signs

• Sign, column and foundation

• Control equipment and cables

• Traffic calming • Speed bumps

• Speed cameras

• Communication systems • All components

Off-highwaydrainage

• Sustainable Urban DrainageSystems (SUDS)

• Soakaways

• Pumping stations

All components

Land • Freehold land

• Rights land

Features on the land are not taken intoaccount in the valuation


37

2. The bridges asset group may be divided into sub-groups, e.g. roadbridge, subway and footbridge.

5.5.3 The asset inventory should enable the asset sub-groups to be readily identifiedbased on the data held against each asset.

Adjustment Factors

5.5.4 The Unit Rate for an individual asset may in some cases differ significantly fromthe standardised Unit Rate determined for the group or sub-group. This is likelyto occur when a key cost driver only influences one asset or a small number ofassets in the group/sub-group. The same key cost driver may also influence asmall number of assets in other groups/sub-groups. In such cases anadjustment factor should be derived and this can be applied to the appropriateassets when calculating the GRC.

5.5.5 Adjustment factors should take account of significant key cost drivers that arenot already covered by the group or sub-group attributes. Criteria that may beconsidered as appropriate for adjustment factors include:

1. Location – different factors may be applied for assets in rural and urbanareas, or in relation to location generally.

2. Size – the replacement cost may vary according to overall size for certainasset types reflecting economy of scale in construction.

3. Access – the replacement cost for assets with difficult access may behigher, for example bridges over a motorway, railway line, canal or river.

4. Earthworks – the volume of earthworks required and the groundconditions, e.g. embankments, cuttings, marshy or rocky groundconditions.

5.5.6 The adjustment factors are applied to the calculated Gross Replacement Costas shown in Section 7.

5.5.7 Where adjustment factors are used the asset inventory should hold relevantattributes against individual assets to enable appropriate factors to be applied.

5.6 ASSET VALUATION DATA

5.6.1 The specific data requirements depend on the characteristics of the assetgroup, or sub-group, and the associated format of the Unit Rate, GrossReplacement Cost, depreciation and impairment models. The general datarequired for different steps within asset valuation are summarised below:

1. Determination of Unit Rates (Section 6) – the Unit Rates are based onthe outturn costs from a representative sample of recently completed(re)construction schemes for each asset group or sub-group. The schemedetails and dimensions, and the quantities of individual assets withineach scheme, are required.

2. Calculation of Gross Replacement Cost (Section 7) – the GRC iscalculated for individual assets within each group and sub-group. Thedata held against each asset should include dimensions and the


38

characteristics necessary to identify the appropriate group, sub-groupand adjustment factors.

3. Calculation of Depreciation and Impairment (Sections 8 and 9) –requires data on the condition/performance of the asset, the cost ofmaintenance work required to restore to as new condition, and, whereappropriate, asset/component service lives. The cost of maintenancework should be taken from the AMP where appropriate.

5.6.2 The categories of data shown in Table 5.2 should be held against each assetfor the purpose of asset valuation. The list is not exhaustive and authorities areadvised to assess the completeness of the list for specific asset types, groupsand sub-groups, against the full asset valuation procedure described in thefollowing sections.

Table 5.2 Asset Valuation data for each asset

5.6.3 All of the data shown in Table 5.2 is required for good Asset Management andauthorities are already likely to hold much of this data or are in the process ofcompiling it. However, as a matter of course, authorities should review theirexisting data against the list and identify any gaps in relation to the datarequired for asset valuation. The review should assess completeness andaccuracy of the data, and the suitability of the data format and storagemedium. Where necessary, a prioritised programme for data cleansing andcollection should be put in place before implementing the asset valuationregime. This programme should meet the timeframe identified in Section 1.7and where possible be part of the data collection programme for AssetManagement.

Inventory Data1 Asset type, group (and sub-group if appropriate)2 Attributes relevant to adjustment factors3 Attributes relevant to Unit Rates (replacement)4 Dimensions relevant to GRC calculations5 Date of installation (where appropriate)6 Remaining life or replacement date (where appropriate)Additional Supporting Data1 Current condition and performance2 Required maintenance work3 Attributes relevant to maintenance unit rates


39

Section 6Unit Rates

6.1 GENERAL

6.1.1 The Unit Rates are those relevant to the replacement of a highway asset,e.g. road replacement, bridge replacement and lighting column replacement.The Unit Rates are not derived for each individual asset; instead standardisedUnit Rates are derived for asset groups/sub-groups (Section 5). The Unit Ratesare then used with appropriate dimensional data for individual assets tocalculate the Gross Replacement Cost (Section 7).

6.1.2 The Unit Rates should be derived using outturn or tender costs from arepresentative sample of recently completed highway (re)construction schemes.The Unit Rates should relate to an appropriate unit of measurement and shouldbe indexed to represent present day prices. Adjustment factors should bederived to take account of Unit Rate variations within an asset group orsub-group.

6.2 SELECTION OF SCHEMES

6.2.1 Highway (re)construction schemes normally include a range of works and thesemay include several of the asset types, groups and sub-groups described inSection 5. Ideally the scheme information should enable the individual assetsand their associated quantities to be identified and allow outturn costs to becarefully screened, classified and apportioned to the relevant asset(s). Thisallows the quantities and costs to be linked to an asset group/sub-group forthe derivation of Unit Rates. Careful screening of the costs is required becauseonly those costs that are directly attributable to bringing the assets intoworking condition are admissible for deriving Unit Rates (Section 4.4).

6.2.2 The number of assets in each asset group or sub-group will differ considerablywithin and between authorities. The quantity of (re)construction data availablefor deriving Unit Rates is likely to vary with the group/sub-group size. Wherepossible, authorities should adopt the following recommendations for derivingUnit Rates:

• Group or sub-group with less than 50 assets – the Unit Rates should bebased on (re)construction costs from not less than three representativeassets.

• Group or sub-group with 50 to 100 assets – the Unit Rates should bebased on (re)construction costs from not less than five representativeassets.

UNIT RATES

Selectschemes

(Section 6.2)

Establish unit ofmeasurement(Section 6.3)

DeriveUnit Rates

(Section 6.4)

Deriveadjustment

factors(Section 6.5)

40

• Group or sub-group with 100 to 200 assets – the Unit Rates should bebased on (re)construction costs from not less than 10 representativeassets.

• Group or sub-group with > 200 assets – the Unit Rates should be basedon (re)construction costs from not less than 20 representative assets.

6.2.3 Authorities should consider working with other authorities who have similarhighway networks in order to meet the above minimum requirements and toutilise larger sample sizes that will produce more robust Unit Rates. It isrecommended that authorities seek to form regional working groups, possiblysplit between urban, semi-urban, and rural areas, for this purpose. If regionalworking groups are unable to provide a sufficient number of schemes thenestimates based on engineering judgement or from bills of quantities may beused.

6.2.4 The following criteria should be considered when identifying sample schemes:

1. Scheme Date – the scheme should have been completed in the last10 years.

2. Scheme Type – the scheme should include one or more of the followingtypes of work: construction (new build), re-construction, partial re-construction or major improvement.

3. Scheme Size – the size of the scheme, in terms of value and number ofassets, should be typical of highway construction schemes carried out bythe authority.

4. Scheme Information – appropriate cost (outturn and/or tender), quantitiesand other relevant data should be available for the scheme.

Scheme Date

Scheme Type

6.2.6 The scheme types considered appropriate for deriving Unit Rates include:

1. Construction (New Build) – where a new asset is constructed, i.e. ahighway did not previously exist on the site, e.g. road bypass. New buildcosts should be appropriately factored to represent a replacement on thelive network.

2. Re-construction – where the existing highway asset is replaced by anew asset that serves the same purpose and provides the sameperformance as the original, e.g. lighting column replacement, bridgereplacement.

6.2.5 It is recommended that only schemes completed in the last 10 years are usedto derive Unit Rates because the construction techniques and procurementpractices used should be reasonably representative of current practices, i.e.they represent Modern Equivalent Assets (Section 4.7). The selected schemesshould preferably be post 1999 to align with the Rethinking Constructioninitiative [Ref. 16]. The scheme costs should be indexed to represent presentday prices (Section 4.6).

Section 6 – Unit Rates

41

3. Partial Re-construction – where the existing highway asset is partiallyreplaced, e.g. a new pavement structure is laid on the existing foundationand embankment. The use of these costs depends on the form of theGRC model:

a. If the GRC model uses separate Unit Rates for constituent parts ofthe asset then, if appropriate, the partial re-construction costs maybe used to derive these Unit Rates directly.

b. If the GRC model uses a composite Unit Rate for the whole assetthen the costs for replacement of other parts of the asset should beestimated, or derived from other schemes, and combined with thepartial re-construction scheme costs to derive a suitable Unit Rate.

4. Improvement – where the existing highway asset is replaced or modifiedto provide improved performance compared to the original, e.g. roadwidening, interchange upgrade, street scene improvements. Improvementdata should be applied in the same manner as the partial re-constructiondata.

6.2.7 The cost data from the above schemes should be used, and combined whereappropriate, in a manner that is representative of the common practice used forrenewing or replacing the assets in a group/sub-group, in whole or in parts, tomaintain the highway network at a specified Level of Service. The Unit Ratesderived from these schemes should implicitly include all the admissible costelements normally incurred by the authority (Section 4.4).

Scheme Information

6.2.8 The scheme information required to determine Unit Rates typically includes:

1. The general information required to identify individual assets within thescheme and assign them to the respective asset group or sub-group.

2. The scheme outturn costs or, if unavailable, the scheme tender costs.The costs should be apportioned to the respective assets within thescheme. Some or all of the cost elements described in Section 4.4 maybe incurred in completing a scheme and the relative proportions of thedifferent cost elements will vary from one scheme to another. Only thosecosts admissible for asset valuation should be used. If a representativesample of highway schemes is used then they should provide anappropriate mix of the cost elements in the Unit Rates.

3. The scheme construction date (month and year) to allow indexation of thecosts to the valuation date using appropriate indices (Section 4.6).

4. The quantity of work performed for each asset group, e.g. 10,000m2 ofsingle carriageway road, three span bridge of 125m2 deck area each, 35lighting columns of height 12m (Section 6.3).

6.3 UNIT OF MEASUREMENT

6.3.1 The Unit Rates should be derived based on an appropriate unit ofmeasurement. The unit of measurement depends on the asset type/group andthe format of the Gross Replacement Cost model.


42

6.3.2 The recommended units of measurement for different asset types/groups areshown in Table 6.1. Specific guidance for each asset type is provided inSections 12 to 17.

Table 6.1 Recommended Units for Measuring Asset Quantities

6.4 DERIVING UNIT RATES

6.4.1 The Unit Rate for an asset group or sub-group should be evaluated as thesummation of the indexed outturn or tender costs (Section 4.6) divided by thesummation of the relevant quantities, where the costs and quantities arecompiled from the representative sample of (re)construction schemes (Section6.2). When deriving Unit Rates the following approach is suggested:

1. Compile scheme costs and quantities and apportion them to individualassets.

Level 1Asset Type

Level 2Asset Group

Unit of Measurement

Road • All pavements • Area (m2)

Segregated footpaths andcycle routes

• All segregated footpathsand cycle routes

• Area (m2)

Structures • Bridges (includes subways) • Deck area (m2)

• Culverts • Internal surface area (m2)

• Retaining walls • Retained area (m2)

• Sign/signal gantries • Span length (m)

• Tunnels • Length (m)

• Structural earthworks • Length (m)

• Fords and causeways • Length (m)

• Cattle grids • Number or length (m)

Highway lighting and highmasts

• Lighting columns • Number

• Lighting unit attachedto wall

• Number

• High masts (>20m) • Number

Street furniture • All street types • Number

Traffic management systems • All traffic managementsystems

• Number

Off-highway drainage • All off-highway drainage • Length and/or number

Land • All land • Area (hectares)


43

2. Review the gross costs for an individual asset and, where possible,exclude those costs that are not representative of the group or sub-group. These costs should be used to calculate the adjustment factors(Section 6.5).

3. Calculate the Unit Rate for the asset group/sub-group as follows:

Where n = number of assets used to derive Unit Rate

i = asset i of n

Quantity may be in m2, number, etc. (Section 6.3)

Gross Cost = gross admissible outturn cost for asset i

6.4.2 The above procedure should be repeated for each asset group and sub-group.

6.5 DERIVING ADJUSTMENT FACTORS

6.5.1 Section 5.5 provides guidance on when to use asset sub-groups and when touse adjustment factors. An adjustment factor may be derived using either ofthe equations shown below. Equation 3a evaluates the adjustment factorrelative to the influence of a key cost driver on an individual asset, whileEquation 3b evaluates the adjustment factor relative to the Unit Rate of therespective asset group or sub-group.

Where GCINC = gross cost of the asset including the influence of a key cost driver

GCEXC = gross cost of the asset excluding the influence of a key cost driver

Quantity = corresponding quantity of the asset

Unit Rate = the rate derived for the asset group or sub-group (Section 6.4).

The adjustment factor should be applied to individual assets at the time ofcalculating the Gross Replacement Cost (Section 7).

adjustment factor (ADF) =EXC

INC

GC

GC

Equation 3a

adjustment factor (ADF) =RateUnit

Quantity

GCINC

001

/**+

)

Equation 3b

Unit Rate for asset group/sub-group =

(

(

&

&n

i

i

1i

n

1i

AssetofQuantity

AssetofcostGross

Equation 2


44

6.5.2 If scheme costs are not recorded in a manner to allow easy identification of theinfluence of different key cost drivers then engineering judgement and/oradvice from a Quantity Surveyor may be used to apportion the costs.


45

Section 7Gross Replacement Cost

7.1 GENERAL

7.1.1 The objective of the Gross Replacement Cost (GRC) is to provide a true andfair estimate of the current cost of replacing an asset using a standardisedprocedure. The replacement asset should have a Potential Performancebroadly similar to the existing asset, but take account of up-to-date technology,i.e. a Modern Equivalent Asset (Section 4.7), except for assets classified asheritage assets (Section 4.11).

7.1.2 A GRC model should be developed for each asset type, group or sub-group asappropriate. The GRC models are then applied to individual assets andaggregated to evaluate the total GRC for the highway infrastructure using abottom up approach.

7.2 GROSS REPLACEMENT COST MODEL

7.2.1 The format of the GRC model should be carefully selected for each asset type,or group/sub-group where appropriate, based on an understanding of the keycost drivers (Section 5.3) which influence the replacement cost for the asset.

Develop GrossReplacement Cost

model(Section 7.2)

Calculate GrossReplacement Cost

(Section 7.3)

GROSS REPLACEMENT COST

46

7.2.2 Individual assets within an asset group or sub-group are broadly similar interms of their functionality, composition and the key cost drivers that influencethem. In general, it may therefore be adequate to base the GRC model on oneor two key dimensional parameters of the asset or its constituent components,which have the dominant influence on the overall cost of the asset. Forexample, the road asset contains a range of constituent components (Table5.1) but the GRC may be modelled in terms of the road area, pavement typeand associated Unit Rate.

7.2.3 Given the above, the GRC model typically includes appropriate dimensionaldata, the Unit Rate for the asset group or sub-group and relevant adjustmentfactors e.g.

7.2.4 Where the replacement cost cannot be accurately modelled in terms of one ortwo key dimensions, it may be appropriate to divide an asset into majorcomponent parts and develop a GRC model for each part. The replacementcosts of individual parts can then be aggregated to produce the overall GRCfor the asset. For example, the GRC for a bridge could be evaluated as asummation of the GRCs for deck, sub-structure and foundation.

7.2.5 Guidance on the development of a GRC model for each asset type is providedin Sections 12 to 17.

7.3 CALCULATING GROSS REPLACEMENT COST

7.3.1 The GRC reported in an authority’s Balance Sheet may consist of one entry forthe whole highway infrastructure class, or possibly one entry for each assettype (Section 5.4). These GRCs are built up from the GRC of each individualasset, or where appropriate the component parts.

7.3.2 In order to calculate the GRC, it is necessary to hold relevant dimensional dataagainst each individual asset in the asset inventory (Section 5.6) andadditionally relevant attributes to enable the choice of appropriate Unit Ratesand adjustment factors.

7.3.3 The GRC calculation should become a largely automated procedure once theGRC models are implemented into a computerised Asset Management Systemor Asset Valuation System.

7.4 SENSITIVITY ANALYSIS AND VERIFICATION

Sensitivity Analysis

7.4.1 Where possible, the sensitivity of Unit Rates and GRC models should beanalysed. The analysis should investigate the influence of key cost drivers andthe required refinement of the GRC. Sensitivity analysis should also be carriedout to assess other parts of the asset valuation procedure, for example, assetservice life and degree of refinement used for Level 3 components (Table 5.1).

GRC = f(asset dimensions, group/sub-group Unit Rate, relevant adjustmentfactors)

Equation 4

Section 7 – Gross Replacement Cost

47

Verification

7.4.2 The accuracy of derived Unit Rates and the output from GRC models shouldbe verified against an independent sample of data. Authorities should definethe degree of accuracy expected in the verification process. The followingtolerances are suggested:

1. Calculated value of no more than 50% of the independent sample fallsoutside ±10% of the actual value.

2. Calculated value of no more than 10% of the independent sample fallsoutside ±25% of the actual value.


48

Section 8Depreciation

8.1 GENERAL

Definition

8.1.1 Depreciation is defined as the systematic consumption of the economicbenefits embodied in an asset over its service life arising from use, ageing,deterioration or obsolescence (although it is recognised that obsolescence maynot be relevant for some highway asset types). Two different approaches canbe used to depreciate highway infrastructure assets, the Conventional Methodand Renewals Accounting.

8.1.2 The Conventional Method is used to depreciate individual assets orcomponents over their service life, normally using straight line depreciation.

8.1.3 Renewals Accounting is used to depreciate groups of assets, e.g. theinfrastructure network. The depreciation charge under Renewals Accounting isdefined as the level of annual expenditure required to maintain theinfrastructure network at a specified Level of Service, where the Level ofService is assessed through Performance Measures.

Objective

8.1.4 The objective of depreciation is to reflect the amount of economic benefitsconsumed in a period, i.e. in one financial year, and to allocate the depreciableamount of an asset over its service life using a systematic approach.

8.1.5 Depreciation should be charged even if the asset has risen in value or been re-valued.

Methodology

8.1.6 It is recommended that the two depreciation methods defined above areapplied to highway infrastructure assets as follows:

• Conventional Method (Section 8.2) – applied to highway lighting, streetfurniture, off-highway drainage, traffic management systems and land.

DEPRECIATION

AdoptConventional

Method(Section 8.2)

Classify assets &components

(Paragraph 8.2.2)

Determineservice lives &depreciation

(Paragraph 8.2.4)



Determine AMPfunding

requirements(Paragraph 8.3.4)

Determine actualexpenditure

(Paragraph 8.3.9)



Adopt RenewalsAccounting(Section 8.3)

49

• Renewals Accounting (Section 8.3) – applied to roads, segregatedfootpaths and cycle routes, and structures.

8.1.7 The following sections explain why the asset types were classified as aboveand describe the two depreciation methods.

8.2 CONVENTIONAL METHOD

8.2.1 The Conventional Method should be used for asset types which do not qualifyfor the use of the Renewals Accounting method, or if appropriate PerformanceMeasures are not available to monitor their performance at the asset type orgroup level. This method is most appropriate where individualassets/components have readily identifiable service lives and are routinelyreplaced at the end of their life, for example lighting columns. In this approacheach individual asset, or its components, is treated separately for calculatingdepreciation.

Classify Assets and Components

8.2.2 The asset, or components of the asset, should be classified into one of threetypes – finite life, indefinite life and variable life, where these are defined as:

1. Finite Life – an asset/component that has a definable finite service lifeand needs to be replaced at the end of its life, e.g. lighting column. Finitelife assets/components are depreciated over their service life on asystematic basis. Straight line depreciation is recommended; see thesection on Service Lives and Depreciation below.

2. Indefinite Life – an asset/component that has a remaining service life ofgreater than 50 years, an example may be a pumping station building. Nodepreciation charge is made, on the grounds that it would be immaterial,but the asset/component is regularly checked for impairment usingappropriate condition and performance data [Ref. 8]. Section 9 providesguidance on calculating impairment.

3. Variable Life – an asset/component that in some cases may need to bereplaced or upgraded based on economic and/or functionalconsiderations, e.g. speed bumps. It is recommended that a variable lifeasset/component is treated as a finite life asset/component if itsremaining life is assessed to be less than 50 years, and as an indefinitelife asset/component if its remaining life is assessed to be greater than50 years. The remaining life could be estimated either by engineeringjudgement or, preferably, through a whole life cost analysis.

8.2.3 The level of refinement used to divide an asset into its components should bechosen on grounds of materiality and should broadly align with that appropriatefor Asset Management. A greater level of refinement should not be used solelyfor asset valuation purposes.

Service Lives & Depreciation Profile

8.2.4 Finite life assets/components require realistic service lives to be establishedand appropriate depreciation profiles applied. The service lives of finite lifeassets should be based on one, or more, of the following:

1. historical data from the authority or similar authorities;


50

2. technical reports and manufacturer’s data; or

3. engineering judgement.

8.2.6 It is recognised that straight line depreciation may not be an accuraterepresentation of the consumption of economic benefits for some asset types,in these circumstances authorities may use alternative profiles provided theymeet the requirements of FRS 15 [8]. In doing so it is important to be awarethat the rate of depreciation should reflect the consumption of economicbenefits or loss in Level of Service, and not the rate of physical deterioration.Some highway assets have faster rates of deterioration towards the end of theirservice life. FRS 15 [8] states that the method chosen should result in adepreciation charge throughout the asset’s life and not just towards the end ofits service life. Also, where the pattern of consumption of an asset’s economicbenefits are uncertain a straight line method of deprecation should be adopted.

Figure 8.1 – Straight Line Depreciation of Finite Life Asset

8.2.7 Based on the straight line depreciation profile shown in Figure 8.1 the DRC, ata given time in the asset’s life, is evaluated as:

Where DRCt = Depreciated Replacement Cost at time t (£)

SL = asset or component service life (years)

A = current age of the asset or component (years)

01/

*+) %

'&SL

ASLGRCDRCt but not less than 0

Equation 5

GrossReplacementCost, GRC

TIME

DRC

ZeroResidual

ValueEnd of

Service Life(replacement)

Time ofinstallation orreplacement

Service Life (yrs), SL

Age (yrs), A

8.2.5 It is recommended that depreciation of finite life assets is calculated using thestraight line method shown in Figure 8.1.

Section 8 – Depreciation

51

8.2.8 If the asset has a residual value, RV, this should be taken into account in thedepreciation profile, see Figure 8.2, and the DRC at a given time should beevaluated as:

Figure 8.2 – Straight Line Depreciation and Residual Value

8.2.9 The remaining service life of an asset should be periodically reviewed, as aminimum at each benchmark valuation (Section 2.3), but also when newinformation becomes available that suggests a different service life is moreappropriate. The remaining service life should be revised if the review, or newinformation, identifies any significant difference compared to the previousestimate. The remaining service life may have changed as a result ofdeterioration in condition, or the need to replace or upgrade the asset foreconomic or other reasons. The depreciation profile should be amended usingone of the following approaches to reflect the revised service life:

1. An amended rate of depreciation over the revised remaining service life,see Figure 8.3 for an accelerated rate of depreciation. (NB: a reduced rateof depreciation would be applied if the revised service life was greaterthan the previous estimate).

2. A one-off impairment charge applied at the time of the new information,see Figure 8.3. Section 9 describes how to calculate impairment.Depreciation in the subsequent period can continue at the originaldepreciation rate until the end of revised service life.

GRC

TIME

DRC

0

End ofService Life

Time ofinstallation

Service Life (yrs), SL

Age (yrs), A

ResidualValue, RV


52

Figure 8.3 – Treatment of reduction in remaining service life

Depreciation Charge

8.2.10 The in-year and accumulated depreciation charge for an individual finite lifeasset or component after t years in service are evaluated as shown below.

Where DRCt-1 = the DRC at the start of the current financial year

DRCt = the DRC at the end of the current financial year

8.2.11 The total in-year depreciation charge for the finite life assets is the summationof the individual in-year depreciations.

8.3 RENEWALS ACCOUNTING

8.3.1 Renewals Accounting may be used to estimate depreciation in the followingcircumstances:

1. The infrastructure asset is a system or network that, as a whole, isintended to be maintained at a specified Level of Service by thecontinuing replacement and refurbishment of its components; and

2. The level of annual expenditure required to maintain the Level of Serviceof the infrastructure asset is calculated from an Asset Management Planthat is certified by a person who is appropriately qualified; and

In-year depreciation charge = DRCt-1 - DRCt

Equation 7a

Accumulated deprecation charge after t years = " #(&

%%t

iii DRCDRC

1

1

Equation 7b

GRC

TIME

DRC

0

End of initialservice life

Time ofinstallation

Newinformation

End of revisedservice life

Initial Service Life

Initial rate of depreciation

Impairment

Accelerated depreciation

Revised Service Life


53

3. The system or network is in a mature or steady state (although RenewalsAccounting can still be used if the network is in an improving,deteriorating or marginal state, provided the depreciation charge iscorrectly applied and the Levels of Service are appropriately monitoredthrough Performance Measures).

8.3.2 Under Renewals Accounting the level of annual expenditure required tomaintain the Level of Service of the highway infrastructure, as identified in theHighway Asset Management Plan (AMP), is treated as the depreciation charge.The estimated annual expenditure from the AMP is deducted from the currentvalue of the asset while the actual expenditure is capitalised as incurred.Therefore, provided the expenditure estimated in the AMP is spent as planned,there will be no change in the Net Book Value.

8.3.3 Renewals Accounting requires all definable major assets or components withidentifiable finite lives to be treated separately for depreciation using theConventional Method. Special Structures (Section 4.10) are excluded fromRenewals Accounting because the Conventional Method is regarded to bemore representative of the specific management plans normally developed forthese structures.

AMP Funding Requirements

8.3.4 To support Renewals Accounting the AMP should identify the work volumesand associated funding at asset type and asset group level and clearlydistinguish between:

1. The level of funding required to maintain the current Level of Service;and

2. The level of funding required for improving the Level of Service to meetspecified targets in the AMP.

8.3.5 The above distinction is required because the in-year depreciation chargeunder Renewals Accounting is calculated as the estimated annual expenditurerequired for maintaining the current Level of Service of the asset type/group,as assessed through Performance Measures.

8.3.6 An AMP provides the work volumes and phasing that an authority plans toundertake in order to maintain, or improve, the highway infrastructure andmany of the work items may not be linked to a specific year. The annual AMPfunding requirements, and hence the depreciation charge, should therefore beestimated as:

Where the Total AMP Funding Required refers to the funding required tomaintain the current Level of Service and the AMP Time Period is the numberof years the AMP covers, normally 5 or 10 years.

Annual AMP Funding Requirement = PeriodTimeAMP

RequiredFunding AMPTotal

Depreciation Charge = Annual AMP Funding Requirement

Equation 8


54

8.3.7 All work types that are required to maintain the Level of Service of the network,should be identified in the AMP, e.g. reactive, programmed and routine. Theroads and structures Codes of Practice [Ref. 2 & 3] should be consulted for theappropriate classification of work types.

8.3.8 Good Asset Management practice requires an authority to assess the servicelives, replacement cycles, inspection and maintenance needs of all assets,normally at the group and/or component level shown in Table 5.1. RenewalsAccounting is therefore based on a similar level of detail and knowledge to theConventional Method, although under Renewals Accounting such data is notexplicitly required for valuation purposes.

Actual Expenditure

8.3.9 The actual annual expenditure is capitalised (as part of the cost of the asset) asincurred. Actual expenditure should be tracked and recorded at a level thatsupports Asset Management. This level of detail should be adequate forRenewals Accounting, however authorities should ensure that the expenditureconsidered is admissible for asset valuation (Section 4.4).

Depreciation Charge

8.3.10 The net change in asset value (Net Book Value) under Renewals Accountingcan be calculated as:

8.3.11 Provided the Levels of Service are maintained, as assessed through thePerformance Measures, then if the actual annual expenditure is equal to thedepreciation charge there will be no change in asset value (Net Book Value).However, if the actual annual expenditure is less than the depreciation chargethen the asset value, Net Book Value, decreases. Additional expenditureincurred in improving the Level of Service above the current Level of Serviceshould be treated as an enhancement of the asset base and will result in anincrease in the DRC, and may also result in an increase to the GRC. AppendixC provides an example of applying depreciation under Renewals Accounting.

8.3.12 Renewals Accounting also requires appropriate Performance Measures (e.g.BVPIs and PIs) that are based on competent and reliable inspection of theassets to demonstrate that the highway network as a whole is maintained at aspecified Level of Service. If the Level of Service, as assessed through thePerformance Measures, of the infrastructure asset drops in any year/period it istreated as impairment (Section 9) of the asset base.

Change in Asset Value = Depreciation Charge based on AMP requirement

– Actual annual expenditure on maintenance

Equation 9


55

8.4 RECOMMENDED APPROACH

Modified Renewals Accounting

8.4.3 Modified Renewals Accounting is specific to some infrastructure organisationsand is an exception to the standard interpretation of Renewals Accounting.This method is recognised by the Treasury Resource Accounting Manual[Ref. 10], however it is not recognised by SORP [Ref. 7] or FRS 15 [Ref. 8].

8.4.4 In this approach the “infrastructure asset” is treated as a system or networkthat as a whole is intended to be maintained at a specified Level of Service bythe continuing maintenance, replacement and refurbishment of its components.The Level of Service of highway assets can be assessed through appropriatePerformance Measures.

8.4.5 Following initial valuation, the Level of Service and DRC of the asset isestablished. If the Level of Service is maintained (within defined limits) in steadystate over a year, the actual maintenance and renewal expenditure is treatedas a proxy for depreciation but is not deducted from the asset value. If theLevel of Service drops in a year, it is recognised as an impairment of the assetbase (Section 9). The Level of Service is assessed through PerformanceMeasures.

8.4.1 The Renewals Accounting method is proposed for estimating depreciation forroads, segregated footpaths and cycle routes, and structures, as these assetsare typically maintained in perpetuity and meet the three requirements inparagraph 8.3.1. However, it is recognised that some authorities are in theprocess of developing AMPs and may therefore require an interim solution toestimate depreciation. Modified Renewals Accounting provides an alternativeapproach for estimating depreciation and should be used as an interimsolution pending the development of AMPs (see below).

8.4.2 Lighting assets, street furniture and traffic management systems typicallyhave finite lives and are replaced at the end of their service life. These assetsshould be treated separately and depreciated using the Conventional Method.Off-highway drainage assets should also be treated using the ConventionalMethod as they do not form an integral part of the highway, and appropriatePerformance Measures are currently not available to monitor theirperformance at a group level.


56

Section 9Impairment

9.1 GENERAL

Definition

9.1.1 Impairment is a reduction in Net Asset Value due to a sudden or unforeseendecrease in the condition and/or performance of an asset compared to thepreviously assessed level that has not already been accounted for throughdepreciation. Examples of impairment include damage of highway assets dueto natural phenomenon such as flooding or landslide.

Objective

9.1.2 When the Level of Service of an asset drops below the previously assessedlevel (outside defined limits), impairment should be recognised and the assetvalue reduced accordingly. The Level of Service may be assessed individuallyor at the asset type or group level through appropriate Performance Measuresor performance/condition surveys.

9.1.3 Impairment is considered as a consumption of the asset and is taken as a cost.

9.1.4 When the Level of Service (or performance) of an asset rises above thepreviously assessed level (as a result of maintenance works) it should berecognised as impairment reversal, revaluation gain or fixed asset formation,depending on the reason, and the expenditure treated according to establishedcapitalisation principles [Ref. 7].

Methodology

9.1.5 The approach used for assessing for impairment should align with theapproach adopted for applying depreciation, i.e.:

1. Conventional Method – impairment is assessed on individual assets.This method is applied for lighting assets, street furniture and trafficmanagement systems.

2. Renewals Accounting – the highway infrastructure is treated as a singleasset and Performance Measures are used to assess impairment at theasset type or asset group level. This method is applied for roads,segregated footpaths and cycle routes, and structures assets.

Assess forImpairment(Section 9.2)

CalculateImpairment(Section 9.3)

IMPAIRMENT

57

9.1.6 Although the impairment is assessed at different levels between the twomethods, impairment is calculated using a bottom-up approach on individualassets in both the methods. The two methods are therefore discussedconcurrently in the following.

9.2 ASSESSING FOR IMPAIRMENT

Frequency of Assessment

9.2.1 Provided highway assets are adequately maintained and depreciated in anappropriate manner (Section 8), then they are unlikely to become materiallyimpaired unless events or changes in circumstances cause a sudden andunforeseen reduction in the performance.

9.2.2 Finite life assets/components which are treated using the Conventional Methodare depreciated on a systematic basis through their service life. The servicelives of these assets should be assessed, and revised if necessary, at the timeof each benchmark valuation or when new information becomes availablewhich suggests a revision of service lives. A reduction in the remaining servicelife of an asset/component could be treated using accelerated depreciation asdiscussed in paragraph 8.2.9, or alternatively impairment is calculated asdiscussed in paragraph 9.3.3.

9.2.3 Indefinite life assets/components treated using the Conventional Methodshould be assessed for impairment as part of a benchmark valuation or whenthere are indications of impairment (discussed below).

9.2.4 Assets treated using the Renewals Accounting method should be assessed forimpairment annually at the asset type or asset group level using appropriatePerformance Measures.

9.2.5 When impairment occurs, the adjustment in asset value and recognition ofimpairment should take place immediately.

Indications of Impairment

9.2.6 Appropriate indications of impairment should be established for each assettype and asset group, and consistently used to monitor for impairment.

9.2.7 Sections 12 to 17 provide suggestions on appropriate Performance Measuresthat can be used to monitor for impairment. Some examples include:

1. An appropriate pavement BVPI may be used as a proxy for the entireroad asset at the asset group level.

2. The Condition PI (also know as the Bridge Condition Indicator) may beused for highway structures at the asset group level.

3. Data from a condition survey on an individual lighting column may besuitable for assessing for impairment.

9.2.8 Impairment should be recognised when the asset condition and/orperformance exceeds acceptable limits (see paragraph 9.2.12).


58

9.2.9 When assessing for impairment, it is important to distinguish between theCurrent Performance provided by an asset, the Potential Performance the assetcan be expected to provide in an as-new condition and the RequiredPerformance placed on the asset. Depending on the situation the impairmentshould be considered as below:

1. If the Current Performance provided by an asset is below its PotentialPerformance (and this has not been previously recognised throughdepreciation or impairment), then the asset value should be impaired.

2. If the Required Performance is greater than the Potential Performance ofan existing asset (i.e. the asset is functionally obsolete), this is notconsidered as an impairment of the asset. Instead, the requiredenhancement is identified in the AMP and the GRC and DRC areamended accordingly after the enhancement takes place (see examplesin Appendix A).

9.2.10 The above two cases do not consider the possibility of the PotentialPerformance being greater than the Required Performance. Whilst a validconsideration for many non-highway assets, e.g. plant and machinery, this isnot considered to be relevant for the majority of highway assets.

9.2.11 Appendix A provides examples for roads, structures and street lighting anddiscusses the relationship between the Required Performance and PotentialPerformance. The examples include scenarios where impairment should andshould not be recognised.

Acceptable Limits

9.2.12 It is likely that Performance Measures will show some fluctuation each year butthese could be ignored on grounds of materiality if they do not exceed definedlimits. It is proposed that impairment is recognised based on the followinglimits:

1. In-year change should not exceed 2.5 points on a scale of 0 to 100.

2. Five year change should not exceed 5 points on a scale of 0 to 100.

9.2.13 These limits represent a provisional suggestion and have not been tested. Thesuitability of these limits should be tested using sensitivity studies to identifylimits that provide a materially correct valuation for each asset type. Anysensitivity studies should be fully documented.

9.3 CALCULATING IMPAIRMENT

9.3.1 The approach used for calculating impairment should be established andconsistently applied. After an approach is established, if it is identified that achange in the approach would provide a fairer valuation, then this should beapplied at the next benchmark valuation and described in the Valuation Report.

9.3.2 The approach recommended below is based on the typical maintenance andmanagement practices used for different highway assets. The approach isdescribed under the following headings:

1. Finite Life Assets and Components (under the Conventional Method).

Section 9 – Impairment

59

2. All other assets and components (indefinite life assets under theConventional Method and all assets treated using the RenewalsAccounting Method) – sub-divided into two categories:

a. Condition Based Maintenance – where condition or performancedata can be used to estimate the consumption of the asset and themaintenance expenditure required to restore it to the as newcondition.

b. Time Based Maintenance – where the asset consumption is moreappropriately reflected by the age of the asset than condition, forexample, a bridge bearing is replaced at the end of its service life.

Finite Life Assets and Components

9.3.3 A reduction in remaining service life of a finite life asset/component, based onnew information, is normally treated under the Conventional Approach usingaccelerated depreciation as described in paragraph 8.2.9. However, if anauthority wishes to recognise the full decrease in asset value at the time thenew information becomes available, then impairment should be applied (alsodiscussed in paragraph 8.2.9). Impairment should be calculated using theequation below.

Where SLI = the initial service life of the asset (yrs)

SLR = the revised service life of the asset (yrs)

All other Asset Types and Components

9.3.4 The impairment, for individual assets or asset types/groups, should beestimated as the full cost of the work (maintenance, repair, renewal etc.)required to restore the asset(s) to the previously assessed level ofcondition/performance, see Figure 9.1:

1. At time t1 the asset(s) has a Depreciated Replacement Cost, DRC(t1).

2. Between time t1 and t2 there was no change in asset value, i.e. the NetBook Value remained the same.

3. At time t2 the Performance Measures identified impairment; this wasrecognised to give the revised DRC (t2).

001

/**+

) %'&

I

RI

SLSLSL

GRCImpairment

Equation 10


60

Figure 9.1 – Calculating Impairment

9.3.5 The impairment is the difference between DRC(t1) and DRC(t2) as shown inFigure 9.1. It would generally be difficult to evaluate directly the work requiredto bring the asset(s) back to their condition/performance at the time t1. Instead,it is more convenient to calculate the cost of the work required to restore anasset to the as new condition. The impairment should be calculated using thefull cost of restoration at time t2 minus the cost of restoration at time t1as below.

9.3.6 Impairment should be calculated on individual assets, although this may besimplified in some cases by grouping together assets in similar condition withsimilar maintenance needs and applying generic maintenance unit rates.

Condition Based Maintenance

9.3.7 The value of the maintenance work is evaluated directly based on the conditionor performance data for the individual assets or components. The effortinvolved in this task can be greatly reduced if rule sets are defined that linkgeneric maintenance types and average maintenance costs to typical defecttypes and/or condition ratings/indices.

9.3.8 Examples of condition based assets/components include pavement,earthworks, footways, bridge beams/abutments/foundations, retaining walls,culverts etc.

Time Based Maintenance

9.3.9 The economic consumption of some assets/components (e.g. bridge bearings)is more appropriately reflected by age than condition or performance. In thiscase the DRC(t) at time t and impairment between periods t1 and t2 arecalculated as below:

Impairment = (cost to restore at time t2) – (cost to restore at time t1)

Equation 11

GRC

Impairment

TIME

DRC(t1)

DRC(t2)

t1 t2

Cost to restoreat time t1

Cost to restoreat time t2


61

where SL = estimated service life

9.3.10 The calculation may be simplified by categorising assets/components intobands based on their age and evaluating the proportion of the assets in eachband. Figure 9.2 shows how assets/components may be assigned to five agebands, where:

1. Network A – age of assets/components are spread evenly across thebands.

2. Network B – greater proportion of assets/components are of older age.

3. Network C – greater proportion of assets/components are of younger age.

Figure 9.2 – Grouping of assets by age bands

9.3.11 The DRC for the whole asset group can be evaluated as shown in the equationbelow based on the proportion of assets in each age band.

20% 20% 20% 20% 20%

30%26%

20%

14%10%

30%26%

20%

14%10%

0–5 yrs 5–10 yrs

Asset Age Bands

10–15 yrs 15–20 yrs 20–25 yrs

NetworkA

NetworkB

NetworkC

DRC(t) = −

×SL

tSLGRC

Equation 12(a)

Impairment (t1, t2) = −

×SL

ttGRC 12

Equation 12(b)

( )][

( )][


62

Where SL = estimated average service life

RLi = average remaining life for the band i

pBi = proportion of assets in band i

k = number of age bands

Simplified Approach

9.3.12 As a simplification of the aforementioned condition and time-basedmaintenance approaches (paragraphs 9.3.7 and 9.3.9 respectively) theimpairment for some asset types may be calculated using a standardisedrelationship between a Performance Measure and a Restoration Cost Factor asillustrated in Figure 9.3. In this case the Restoration Cost is evaluated as

Figure 9.3 – Performance Measure and Restoration Cost Factor

9.3.13 Relationships between Performance Measure and Restoration Cost Factor arenot provided in this guidance document and should be developed byauthorities, should they wish to use this approach for someassets/components.

PerformanceMeasure

Restoration Cost Factor

Best

Worst

0 1.0

Restoration Cost = GRC & Restoration Cost Factor

Equation 14

" #(%

&&%k

iBi i

pRLSLGRCDRC

1

Equation 13


63

Section 10Depreciated Replacement Cost

10.1 GENERAL

10.1.1 The Depreciated Replacement Cost (DRC) is the Gross Replacement Cost(GRC) appropriately reduced to reflect the current age, condition andperformance of the asset. In this Guidance Document DRC is also referred toas the Net Book Value, Net Asset Value and Asset Value. The DRC can bedefined as:

10.1.2 It is normal for the DRC of highway infrastructure assets to be less than theGRC. This is due to systematic consumption of finite life assets and theinevitable ageing and deterioration of other assets that causes their currentcondition to be below the as new condition. If an asset valuation regime is inplace from the time of original construction, or installation, of the asset then theaccumulated depreciation and impairment are built up over time through therecognition of annual (in-year) depreciation and impairment. However, such aregime has hitherto not been required for Local Highway Authorities. Therefore,on the introduction of asset valuation authorities need to establish the initialDRC (Net Book Value), and in subsequent years calculate the in-yeardepreciation and impairment.

10.2 CONDITION AND PERFORMANCE

10.2.1 To calculate the initial DRC it is necessary to know the current condition andperformance of highway infrastructure assets. The condition and performancedata are used to assess the cost of work required to restore the assets to thefull performance or as new condition (Section 10.3).

10.2.2 Knowledge of the current condition and performance of highway assets is anessential requirement of Asset Management [Ref. 1]. The condition andperformance data compiled for Asset Management should be adequate forcalculating the DRC, but it is essential that the data covers all the asset typesincluded in asset valuation.

DRC = GRC – Accumulated Depreciation and Impairment

Equation 15

Determinecondition &performance(Section 10.2)

Calculateinitial DRC

(Section 10.3)

Calculate annualadjustments

to DRC(Section 10.4)

DEPRECIATED REPLACEMENT COST

64

10.3 CALCULATE INITIAL DRC

10.3.1 The approaches described for assessing depreciation and impairment shouldbe used to evaluate the DRC on the introduction of the asset valuation regime.The initial DRC should be evaluated as follows:

1. Finite life assets/components (identified from the Conventional Method) –the straight line depreciation method (Figure 8.2 in Section 8.2) should beused to evaluate the current DRC of each individual asset, e.g. lightingcolumns.

2. All other assets/components (indefinite life assets treated using theConventional Method and all assets treated using the RenewalsAccounting Method) – these should be divided into two types to evaluatethe DRC:

a. Condition based maintenance (paragraph 9.3.7) – where conditionor performance data can be used to estimate the consumption ofthe asset and the maintenance expenditure required to restore it toas new condition, e.g. pavement and the majority of structuresassets/components. The DRC is then equal to the GRC minus thecost of the condition based maintenance.

b. Time based maintenance (paragraph 9.3.9) – where the assetconsumption is more appropriately reflected by the age of the assetthan condition, e.g. bridge bearings and expansion joints. The DRCis based on the ratio of the remaining life (RL) to service life (SL), i.e.DRC = (RL/SL) x GRC. This approach is the same as that used torecognise the initial DRC for finite life components, howeversubsequent depreciation and impairment of “time basedmaintenance” elements is recognised through the AMP underRenewals Accounting.

10.3.2 A worked example on the calculation of the initial DRC, on a hypotheticalnetwork, is provided in Appendix B.

10.3.3 On the introduction of asset valuation an authority should establish how thechange from historical cost, as required by the SORP [Ref. 7], to DRC shouldbe treated in the Statement of Accounts.

Section 10 – Depreciated Replacement Cost

65

10.4 ANNUAL ADJUSTMENTS TO DRC

10.4.1 After the initial DRC has been evaluated it forms the basis for applyingsubsequent in-year depreciation and impairment as follows:

Where DRCt = represents the closing NBV for the financial year

DRCt-1 = represents the opening NBV for the financial year

in-year = occurs in the financial year

10.4.2 The DRC should be re-evaluated at each benchmark valuation (Section 2.3)rather than continuing with the application of annual adjustments to theoriginal DRC over a longer period.

Conventional Method (for individual assets)

DRCt = DRCt-1 + (in-year admissible capitalised expenditure)

- (in-year depreciation) – (in-year impairment)

Equation 16a

Renewals Accounting (for asset type or asset group)

DRCt = DRCt-1 + (in-year expenditure)

– (annual AMP Estimate) – (in-year impairment)

Equation 16b

Modified Renewals Accounting (for asset type or asset group)

DRCt = DRCt-1 – (in year impairment)

Equation 16c


66

Section 11Asset Preservation Measures andValuation Report

11.1 Asset Preservation Measures

11.1.1 The following three measures are provided for monitoring the preservation ofassets over time:

• Accumulated Asset Consumption (AAC) – measures the proportion ofthe gross asset value that has been consumed to date;

• In-year Asset Consumption (IAC) – measures the proportion of assetvalue consumed during the accounting period;

• In-year Asset Renewal (IAR) – measures the proportion of asset valuerestored/renewed during the accounting period.

Accumulated Asset Consumption (AAC)

11.1.3 This should be evaluated as:

11.1.4 The Accumulated Asset Consumption should be monitored over time andpresented in the Valuation Report. In-year change in the measure is unlikely toappear significant on this scale, but the time dependent plot should enable anauthority to assess the trend over time, i.e. is the measure increasing,decreasing or is the asset base being preserved at a constant level (see theexample in Appendix C).

11.1.5 In the future it may be useful to determine the optimum value for theAccumulated Asset Consumption measure based on the optimum amount ofmaintenance, renewal and enhancement work identified in an AssetManagement Plan. This would require quantifying the impact of the workproposed in the AMP on the asset value of the highway infrastructure asset.

11.1.6 The actual Accumulated Asset Consumption and the optimum value implied byan AMP can then be plotted on a graph, as shown in Figure 11.1, to illustratethe gap. Also, it can be argued that the value of work required to bridge thisgap is the current maintenance backlog.

Accumulated Asset Consumption = 100GRC

DRC1 &-

.

,*+

)$ expressed as a %

Equation 17

11.1.2 Authorities are recommended to calculate these three measures annually andinclude them in the Valuation Report.

67

Figure 11.1 – Accumulated Asset Consumption Measure

In-year Asset Consumption (IAC)

11.1.7 The In-year Asset Consumption measure should be evaluated as:

In-year Asset Renewal (IAR)

11.1.8 The In-year Asset Renewal should be evaluated as:

11.1.9 The IAC and IAR measures should be presented on the same time dependentplot. If the IAR is less than the IAC this indicates a shortfall in maintenanceexpenditure, depreciation in asset value and an increasing maintenancebacklog. For example, Figure 11.2 schematically shows the difference betweenthe two measures to be gradually increasing because maintenance is underfunded.

In-year Asset Renewal = ×100DRC

eExpenditurRenewalandeMaintenancyear-In

Equation 19

( ) ][

In-year Asset Consumption = ×100DRC

Impairment&onDepreciatiyear-In

Equation 18

( ) ][

Time

Measure(%)

Optimum Accumulated Asset Consumption value

Possible AACprofiles


68

Equation 18

Equation 19

Figure 11.2 – In-year Asset Consumption and Renewal Measures

11.2 VALUATION REPORT

11.2.2 The Valuation Report should include, as a minimum:

1. A summary of the valuation procedure and principles (with appropriatereferences to this Guidance Document and the SORP).

2. Assumptions made in producing the asset values and an indication of theaccuracy or confidence in the valuation numbers.

3. The number/quantity of highway assets included in asset valuation,subdivided by type, group and sub-group, and presented in a tabular orgraphical format. Explanation should be provided for any highway assetsexcluded.

4. A summary of in-year movements to the asset stock – additions anddeletions.

5. A summary of the standardised Unit Rates and service lives used in assetvaluation.

6. A summary of current Levels of Service and the associated PerformanceMeasures by asset type and group. This may include a description ofcurrent and desired Levels of Service [Ref. 1].

7. The GRC, DRC, depreciation and impairment values by asset type andgroup, presented in a tabular format. Including identification andexplanation of any significant changes compared to the previousvaluation.

8. Asset Preservation Measures including graphical plots of trends withtime, and where possible, a comparison of these against other similarauthorities.

11.2.1 The Valuation Report should be a stand alone document that presents theresults of valuation with supporting information. The Valuation Report shouldact as the key supporting document to the highway infrastructure assetvalues reported in the Balance Sheet. It is recommended that the ValuationReport is produced annually.

Time

Measure

In-year AssetConsumption

(IAC)

In-year AssetRenewal (IAR)

Increasing due to short fall in funding,therefore increasing backlog

Annual expenditure below needs

Section 11 – Asset Preservation Measures and Valuation Report

69

Section 12Roads

12.1 GENERAL

12.1.1 This section provides specific guidance on the valuation, depreciation andimpairment of roads and their associated assets/components. Referenceshould also be made to the asset valuation examples for roads in Appendix A,B and C.

12.2 ASSET COMPOSITION

12.2.1 The road asset consists of the following components (see Table 5.1):

• Pavement (formation, road base, binder course, surface course)

• Hard strip/shoulder

• Footway/cycleway attached to road

• Central reservation, roundabout, lay-by etc.

• Markings

• Kerbs

• Earthworks (embankments and cuttings)

• Vegetation

• Drainage

• Safety fences

• Boundary fences and hedges (if managed as part of the highwayinfrastructure).

12.2.2 The above list is not exhaustive and should be reviewed to identify anyadditional components that make up the road asset and would result in a fairervaluation. If additional components are identified they should be checkedagainst the other asset types (Table 5.1) to ensure they are not coveredelsewhere.

70


12.3.1 The following factors are considered to have a significant influence on thereplacement cost of a road:

1. Pavement type – rigid, flexible or composite.

2. Type of carriageway – single or dual carriageways differ in terms of thecentral reservation, kerbs and safety fences.

3. Road hierarchy – influences the design specifications (construction formand road layout), the materials used and traffic management costs.

4. Number of lanes – this influences the width of the carriageway and maytherefore impact on the Unit Rate per m2 due to economies of scale inconstruction.

5. Location – the composition of the road asset may be different betweenrural and urban areas, and the construction costs incurred are likely tohave a different composition, e.g. site access and traffic management.

6. Traffic Loading – has an influence on the design and materials.

7. Earthworks – the volume of earthworks required and the groundconditions, e.g. embankments, cuttings, marshy or rocky groundconditions.

8. Footway/cycleway – whether or not the road has an attached footwayand/or cycleway.

9. Local Policies – may influence the construction practices, e.g. recycling.

12.3.2 The above list is not comprehensive and authorities are advised to identifyother key cost drivers, relevant to their road asset, that have a significantimpact on replacement cost.

12.4 ASSET GROUPS, ASSET SUB-GROUPS AND ADJUSTMENT FACTORS

12.4.1 Suggested asset groups, sub-groups and adjustment factors are presentedbelow. Also refer to Sections 5.4 and 5.5 for generic guidance and thedistinction between the use of sub-groups and adjustment factors.

Asset Groups

12.4.2 The pavement type is the dominant cost driver for the majority of road assets.It is recommended that the road asset is divided into the following assetgroups based on pavement type:

1. Flexible pavement

2. Flexible composite pavement

3. Rigid concrete pavement

4. Rigid composite pavement

Section 12 – Roads

71

12.4.3 The above four groups may not provide a sufficient degree of refinement forderiving appropriate Unit Rates. If required the above groups should be furtherdivided into asset sub-groups.

Asset Sub-Groups

12.4.4 The key cost drivers should be used to identify the asset sub-groups. It issuggested that the carriageway type and location are used to define thefollowing asset sub-groups within each asset group.

1. Urban single carriageway

2. Urban dual carriageway

3. Rural single carriageway

4. Rural dual carriageway

5. Rural single track

12.4.5 If suitable data is available, and if required, the above list of sub-groups may beextended to take account of other key cost drivers, e.g. road hierarchy. It maybe more appropriate to account for some of the key cost drivers throughadjustment factors.

Adjustment Factors

12.4.6 Section 5.5 provides guidance on when to use sub-groups and adjustmentfactors, and Section 6.5 provides guidance on deriving adjustment factors. Theinfluence of key cost drivers, which are not explicitly covered by groups/sub-groups, on Unit Rates should be assessed and adjustment factors derivedwhere appropriate.


12.5.1 The road asset within a group or sub-group should be relatively homogeneousin terms of its components. It is assumed that any local variations, not explicitlyaccounted for through a group/sub-group or adjustment factor, are likely to beaveraged out over the asset stock. Based on this assumption, it is suggestedthat the GRC of the road asset is estimated using a Unit Rate for each assetgroup/sub-group, the associated dimensions of the carriageway and therelevant adjustment factor as shown below.

Where ADF = adjustment factor

Gross Replacement Cost of Road =

[Carriageway length (m) & Carriageway width (m)] & [Unit Rate (£/m2) & ADF]

Equation 20


72

12.5.2 The asset inventory should hold the carriageway length and width, and otherrequired data (i.e. characteristics, features, attributes), against each road assetto enable appropriate Unit Rate and adjustment factors to be applied and theGRC calculated. Where there are two clearly defined carriageways (i.e. dualcarriageway) then the carriageway width is equal to the sum of the twocarriageway widths.

12.6 UNIT RATES

12.6.1 Given the format of the GRC model above, the Unit Rate should be evaluatedseparately for each asset sub-group in terms of £ per m2 of the carriageway.The Unit Rate is therefore a composite rate which combines the replacementcost of all the relevant components listed under Section 12.2.

12.6.2 The derivation of Unit Rates should follow the general procedure given inSection 6. In selecting the highway schemes for each asset group/sub-group,care should be taken to ensure that the schemes provide a representative mixof the different components, e.g. embankments, cuttings, safety fences andfootways, so the Unit Rates and adjustment factors represent average costsfor all assets within that sub-group. The Unit Rates for roads should beevaluated as:

Where n = number of assets used to derive Unit Rate for this group/sub-group

i = asset i for which cost and dimensional data are known

This equation should also be used to establish appropriate adjustment factors(ADF), see Section 6.5.

12.7 DEPRECIATION, IMPAIRMENT AND DRC

Depreciation

12.7.1 The road asset should be assessed for depreciation using the RenewalsAccounting method, described in Section 8.3 (an example is provided inAppendix C). Authorities who are in the process of developing an AssetManagement Plan may use Modified Renewals Accounting to estimatedepreciation in the interim period.

Impairment

12.7.2 The road asset should be assessed for impairment annually using appropriatePerformance Measures at asset type or group level.

" #

" #(

(

%

%

&

%n

1i

i

n

1i

i

widthlengthy Carriagewa

CostsAdmissible

RateUnit

Equation 21

Section 12 – Roads

73

12.7.3 It is not necessary for the Performance Measures to cover all components ofthe road asset described in Section 12.2. Instead, a balanced set ofPerformance Measures should be used that covers the majority of the roadasset. Performance Measures for roads are available [see Ref. 2] primarily forthe pavement component and since the pavement cost dominates the value ofthe road it may be sufficient to use the pavement condition/performance as aproxy for the entire road asset.

12.7.4 Impairment should be calculated as described in Section 9.3.

Depreciated Replacement Cost

12.7.5 The DRC should be evaluated as described in Section 10.


74

Section 13Segregated Footpaths & Cycle Routes

13.1 GENERAL

13.1.1 This section provides specific guidance on the valuation, depreciation andimpairment of segregated footpaths and cycle routes. Footpath and cycle routeassets are only included in highway infrastructure asset valuation where theyare maintained as part of the highway infrastructure asset, e.g. surfacedPROW.


13.2.1 Footpaths and cycle routes, for the purpose of asset valuation, are consideredto consist of the following components (see Table 5.1):

• Binder course and surface course

• Formation

• Kerbs

13.2.2 The above list may be extended to provide more comprehensive coverage offootpath and cycle route assets if this would result in a fairer asset value. Thelist should only be extended if the available asset inventory (Section 5) andconstruction scheme data (Section 6.2) support a more refined calculation ofUnit Rates, GRC and DRC.


13.3.1 The following factors are considered to have a significant influence on thereplacement cost of segregated footpaths and cycle routes:

1. Usage and footpath hierarchy

2. Construction form

3. Location and associated access

4. Earthworks

75

Mor

guef

ile.c

om

13.3.2 The above list should be reviewed to identify other key cost drivers relevant tothe footpath and cycle route network in an authority.


13.4.1 Suggested asset groups, sub-groups and adjustment factors are presentedbelow. Also refer to Sections 5.4 and 5.5 for generic guidance on thedistinction between the use of sub-groups and adjustment factors.

Asset Groups

13.4.2 It is suggested that footpaths and cycle routes are classified into the followinggroups:

1. Footpath (including surfaced PROW)

2. Bridleway (including surfaced PROW)

3. Off road cycle routes

4. Pedestrian areas

Asset Sub-Groups

13.4.3 If there are considerable differences in the replacement Unit Rates betweenassets in the footpath group, this may be divided into the following sub-groupsbased on the widely recognised categories [Ref. 2]:

1. Category 1a – Prestige Walking Zone

2. Category 1 – Primary Walking Route

3. Category 2 – Secondary Walking Route

4. Category 3 – Link Footway

5. Category 4 – Local Access Footway.

Adjustment Factors

13.4.4 Section 5.5 provides guidance on when to use sub-groups and adjustmentfactors. The influence of key cost drivers which are not explicitly covered bygroups/sub-groups on Unit Rates should be assessed and adjustment factorsderived where appropriate.


13.5.1 The footpath/cycle route assets within a group or sub-group should berelatively homogeneous in terms of its components. It is assumed that anylocal variations not explicitly accounted for within a group/sub-group oradjustment factors, are likely to average out over the asset stock. Based onthis assumption, it is suggested that the GRC is estimated using a Unit Rate foreach asset group/sub-group, the associated dimensions of the footpath/cycleroute and the relevant adjustment factor as shown below.


76

Where ADF = adjustment factor

width = width of paved/surfaced part of the footway/cycle route

13.5.2 The asset inventory should hold the footpath/cycle route length and width, andother required data (i.e. characteristics, features, attributes), against eachfootpath or cycle route asset to enable appropriate Unit Rate and adjustmentfactors to be applied, and the GRC calculated. The “other” data enable theappropriate Unit Rate and adjustment factors to be applied to the asset duringasset valuation.

13.6 UNIT RATES

13.6.1 Given the format of the GRC model above, the Unit Rate should be evaluatedseparately for each asset group or sub-group in terms of £ per m2 of thefootpath/cycle route. The Unit Rate is therefore a composite rate whichcombines the replacement cost of all the relevant components listed underSection 13.2.

13.6.2 The derivation of Unit Rates should follow the general procedure given inSection 6. The Unit Rates for footpath/cycle routes should be evaluated as:

Where n = number of assets used to derive Unit Rate for this group/sub-group

i = asset i for which cost and dimensional data are known

This equation should also be used to establish appropriate adjustment factors(ADF), see Section 6.5.


Depreciation

13.7.1 The footpath/cycle route asset should be assessed for depreciation using theRenewals Accounting method, described in Section 8.3. Authorities who are inthe process of developing an Asset Management Plan may use ModifiedRenewals Accounting to estimate depreciation in the interim period.

" #

" #&

&

$

$

%$ n

i 1

i

n

1i

i

widthlengthrouteycleFootpath/c

CostsAdmissible

RateUnit

Equation 23

Gross Replacement Cost =

[Footpath/cycle route length (m) % width (m)] % [Unit Rate (£/m2) % ADF]

Equation 22

Section 13 – Segregated Footpaths & Cycle Routes

77

Impairment

13.7.2 Footway/cycle route assets should be assessed for impairment annually usingappropriate Performance Measures at asset type or group level.

13.7.3 It is not necessary for the Performance Measures to cover all components ofthe asset described in Section 13.2. Available footpath condition indicators areconsidered to be appropriate for this purpose. Where appropriate conditionindicators are not available they should be established.





78

Section 14Structures

14.1 GENERAL

14.1.1 This section provides specific guidance on the valuation, depreciation andimpairment of the main structure types and their associatedassets/components, i.e. bridges, culverts, retaining walls and sign/signalgantries. Other structure types listed in Table 5.1, but not explicitly coveredbelow, should be treated using a similar procedure to that described here.Reference should also be made to the examples for structures provided inAppendix A and B.


14.2.1 Highway structures should be categorised into groups as in Table 5.1. Althoughstructures are integral to the network performance they may be treated asdiscrete assets for deriving the GRC as they are normally well delineated fromthe highway network. The main components of each structure are wellidentified for inspection purposes and the inspection pro-forma given in theCSS Guidance Notes [Ref. 14 & 15] should be referred to for this purpose. Inparticular, it should be noted that the surfacing on a bridge deck and approachembankments are components of the road asset and not those of the bridge.


14.3.1 Definitions for the following assets are provided in the Code of Practice forHighway Structures [3].

Bridges

14.3.2 The replacement cost of a bridge is influenced by the type of deck, abutment,intermediate support and foundation.

79

1. Deck – the deck cost is governed by the area of the deck and maximumspan of the bridge. Reinforced Concrete (RC) slab, pre-stressed concretebeam and RC slab, and composite steel/RC slab deck forms are themost commonly used modern construction forms (see Section 4.7 onModern Equivalent Assets); the choice being dictated by span and otherlocation specific factors. The Unit Rates between these constructionforms do not seem to vary significantly.

2. Abutment – the cost of an abutment depends on whether it is a normalfull-height abutment or a bank-seat abutment.

3. Intermediate Support – the cost of an intermediate support depends onwhether it is a pier or a column support, and in the case of the latter, thecost is a function of the number of columns.

4. Foundation – the foundation cost varies significantly for spread footingsand piled foundation and the associated ground conditions. The form ofthe existing asset foundations may be used to inform the choice of theModern Equivalent Asset. If the current form of the foundation isunknown, or if it is not piled or spread footing, then the form of the MEAfoundation should be chosen based on engineering judgement.

Culverts

14.3.3 The Unit Rate of culverts normally does not vary significantly between thedifferent shapes of culverts such as pipe, box or slab, and between differentconstruction forms such as corrugated steel, reinforced concrete or pre-castconcrete. The key parameters influencing costs are span, height, depth ofground cover, and ground conditions.

Retaining Walls

14.3.4 The Unit Rate of retaining wall per metre area is strongly influenced by thestructural form and retained height of the earth. Actual height is morecommonly recorded than retained height. The retained height may beapproximated by adding 0.6m to the actual height.

Sign/Signal Gantries

14.3.5 The cost of gantries varies significantly between cantilever and portal gantries.The cost of portal gantries depends on the span, and to a lesser extent, oncolumn height.


14.4.1 Suggested asset groups, sub-groups and adjustment factors are presentedbelow. Also refer to Sections 5.4 and 5.5 for the generic guidance and thedistinction between sub-groups and adjustment factors.

Asset Groups

14.4.2 Highway structures should be categorised into the following groups (seeTable 5.1):

1. Bridges (including subways)


80

2. Culverts

3. Retaining walls

4. Sign/signal gantries

14.4.3 Other asset groups that may be reported under the structures category includetunnels, structural earthworks, fords and causeways, and cattle grids.

Asset Sub-Groups

14.4.4 It is not considered necessary to sub-divide each group into sub-groups.However, if an authority has a large number of subways (e.g. a MetropolitanBorough) it would be beneficial to treat these as a separate asset group usingthe principles given for culverts. It may also be suitable to identify footbridgesas a separate sub-group.

Adjustment Factors

14.4.5 The need for adjustment factors should be assessed as described in Section5.5. The number of adjustment factors required for bridges depends on thelevel of refinement adopted for the GRC model (Section 14.5). A more refinedmodel is likely to require fewer adjustment factors because variations wouldhave already been taken into account in deriving the Unit Rates.


14.5.1 Based on an understanding of the key cost drivers influencing the replacementcost of each asset group, the Gross Replacement Cost models arerecommended as given in Table 14.1, subject to the proviso in 14.6.

14.5.2 Bridges generally form the largest component of the structures asset value andit may be appropriate to use a more refined approach for asset valuation, giventhe range of shapes and sizes they can take. Two approaches are suggestedfor highway bridges:

1. Basic Approach – the GRC of the bridge is evaluated in terms of acomposite Unit Rate per square metre of the deck area.

2. Refined Approach – the GRC is evaluated as the summation of the GRCof the major constituent parts of the bridge, namely the deck, parapet,supports and foundation. Unit Rates and dimensions specific to eachconstituent part are used to calculate the GRC.

14.5.3 The refined approach may provide a more accurate value of the GRC andshould be used where the necessary information to support this is available.If the required asset data is not available then the basic approach shouldbe used.

14.5.4 Many authorities have a considerable number of listed or heritage structures(Section 4.11). The generic asset valuation procedure applies to heritagestructures, however, the GRC should be calculated on the basis of a like forlike, or nearly as like as is feasible, replacement instead of a MEA. Someadditional guidance is provided in Section 14.8.

Section 14 – Structures

81

14.5.5 There are normally few highway tunnels managed by Local Highway Authoritiesand hence these should be treated as Special Structures (Section 14.9) andvalued individually based on the replacement cost of major component parts.There is no need to derive standardised replacement Unit Rates for theseassets.

Table 14.1 Gross Replacement Cost Models and Unit Rates for Structures

Where

Deck Area = (Overall Width) x (centreline to centreline of end supports); or

Deck Area = (Overall Width) x (distance between end support faces + 0.6m)

Deck Width = Overall width measured from outside edge to outside edge

Model Name GRC Model Unit Rate

Bridge (Basic) CBridge= Deck Area x URBridge x ADF URBridge is expressed in £/m2 oftotal deck area and is likely to bea function of bridge maximumspan. It is a composite Unit Ratefor the whole bridge

Bridge (Refined) CBridge= CDeck+CParapet+CEnd-Sup+CInt-Sup+CPiling+CFooting

Unit Rates derived for eachmajor constituent part of thebridge

Deck CDeck= Deck Area x URDeck x ADF URDeck is expressed in £/m2 oftotal deck area as a function ofbridge maximum span

Parapet CParapet= Length of BridgeURParapet x ADF

URParapet is given in £/m length ofbridge for different containmentlevels

End-Support Total cost of two abutmentsincluding wing walls, backfill, etc:CEnd-Sup= End Support Length x UREnd-Sup x ADF

UREnd-Sup is expressed as £/mlength of support for normal andbank-seat abutments

Int.-Support CInt-Sup= Deck Width NInt-Supx URInt-Sup x ADFNInt-Sup = number of internalsupports

URInt-Sup is given in £/m widthof deck per intermediatesupport, measured alongcentreline of support

Foundation CFooting = Deck Width x URFooting xADFCPiling= Deck Area x URPiling x ADF

URFooting is given in £/m of deckwidthURPiling is given in £/m2 of deckarea

Culvert CCulvert= Culvert Internal SurfaceArea x URCulvert x ADF

URCulvert is given in £/m2 ofinternal surface area of culvert

Retaining Wall CRet.Wall= Retained Height x Lengthx URRet.Wall x ADF

URRet.Wall is given in £/m2 ofretained area

Gantry CGantry= Gantry Length x URGantry xADF

URGantry is given in £/m length ofgantry or £ per cantilever


82

Retained Height = as recorded or (actual height + 0.6m)

Gantry Length = centreline to centreline of end supports

Culvert Internal Surface Area = base, sides and soffit (as appropriate)

ADF = adjustment factor

14.6 UNIT RATES

14.6.1 The format of the Unit Rates for the main structure groups are summarised inTable 14.1 and guidance on their derivation is given in the following.

Bridges

14.6.2 The replacement cost of a bridge may be evaluated using the basic or refinedapproach. The basic approach uses a composite Unit Rate (£/m2 of the deckarea) for the bridge, that includes all components of the bridge. The basicapproach should be used when adequate data is not available from(re)construction schemes (Section 6.2) to derive a Unit Rate for eachconstituent part. Under the basic approach the Unit Rate should preferably bederived as a function of maximum span length while adjustment factors shouldbe used to account for other cost drivers.

14.6.3 The refined approach uses a summation of the cost of deck, parapets, endsupports, intermediate supports and foundation as explained below.

1. Bridge Deck costs including finishes but excluding parapets can beexpressed as £/m2 of total deck area where the rate is related to themaximum span length.

2. Parapet costs can be given as £/metre length of bridge.

3. Substructure – End Supports: abutments including wing-walls; total costof two abutments can be expressed as £/metre length of abutment.Where information is available a separate Unit Rate may be derived forbank seat abutments.

4. Substructure – Intermediate Support: £/m length of support for piers and£/column for column supports. If information on support type and numberof columns is not available, then a single Unit Rate expressed as £/mwidth of deck per intermediate support may be derived.

5. Foundation Costs – Unit Rate for spread footings can be expressed as£/m width of deck for each support. The total piling cost can beexpressed as £/m2 of deck area as a function of depth of piling. Wheredetailed information on foundation type and depth are not available foreach bridge, a single rate, expressed as £/m2 of deck area, can bederived as a simplification assuming piled foundation.

Culverts

14.6.4 The Unit Rate for culverts could be expressed as £/m2 of internal surface areaof the culvert for all construction forms.


83

Retaining Walls

14.6.5 The Unit Rate of retaining walls including finishes can be expressed as £/m2 ofretained area. Where information on retained height is not available, the actualheight of the wall plus 0.6m may be used as a simplification. Where thedifferences in Unit Rates are significant, retaining walls may be divided into twoMEA sub-groups: (i) Reinforced Concrete Inverted-T, and (ii) Embedded Pile.

Sign Gantries

14.6.6 The Unit Rate of portal gantries can be expressed as £/m length of the gantrywhere the rate is a function of the maximum span. The Unit Rate for cantilevergantries can be expressed as £/gantry.

Additional Cost Elements

14.6.7 The Unit Rates for each asset group should preferably be derived from recentlycompleted reconstruction schemes (Section 6.2) and should include alladmissible costs.

14.6.8 Where the number of schemes is limited, the Unit Rate for each group could bederived from “new-build” schemes. These Unit Rates should include the directplant, material, and labour costs with allowances made for site preliminariesand project management and supervision costs. The Unit Rates should then bemultiplied by the cost factors given in Table 14.2, where appropriate, to fullyreflect the additional costs involved in replacing an existing structure on the livenetwork as opposed to building a new structure off line.

Table 14.2 Additional Cost Factors on “New-Build” Unit Rates


Depreciation

14.7.1 Structures should be treated for depreciation using the Renewals Accountingmethod, described in Section 8.3. Authorities who are in the process ofdeveloping an Asset Management Plan may use Modified RenewalsAccounting to estimate depreciation in the interim period. Section 8.3 providesguidance on the application of Renewals Accounting for depreciation.

Impairment

14.7.2 Structures should be assessed for impairment annually using appropriatePerformance Measures at asset type or group level.

Cost Element Range of additional costs Cost Factor

Demolition Cost of Existing Asset 5% – 15% 1.1

Temporary Works Costs, e.g. diversions andtemporary bridging (if relevant)

10% – 50% 1.3

Traffic Management Costs 5% – 35% 1.2

Possession Costs (if relevant) 5% – 15% 1.1


84

14.7.3 It is not necessary for the Performance Measures to cover all aspects of theasset described in Section 14.1. A condition indicator [Ref. 17, 18 and 19] maybe sufficient for this purpose, although other indicators should be considered,e.g. Reliability and Availability [Ref. 17]. Authorities are recommended to usecurrently available Performance Measures [Ref. 17] for this purpose.




14.8 HERITAGE STRUCTURES

14.8.1 The asset value of heritage structures (Section 4.11) should be calculated usingthe same procedure described for other structure types except that the GRC isnot based on a Modern Equivalent Asset (Section 4.7). Instead, the GRC of aheritage structure is calculated based on a like for like replacement, or a nearlyas like as is feasible. This should be interpreted as the replacement structureproviding the same look and feel as the original, but modern techniques maybe used to optimise the “like for like” replacement where possible. Forexample, cast iron elements could be replaced with steel elements that lookthe same but represent a more cost efficient and structurally effective solutionthan installing a new cast iron element.

14.8.2 Some structures may be deemed important to the character and environmentof an area but they may not be listed structures. In these cases thereplacement, while looking the same, may be able to deviate more from theoriginal compared to a listed structure. For example, the replacement could usea non-structural façade that replicates the look and feel of the original andmasks a MEA underneath. In this case the GRC should be for the MEA plus thecost of the façade.

14.9 SPECIAL STRUCTURES

14.9.1 Guidance on special structures is provided in Section 4.10. In undertakingasset valuation of special structures the following should be considered:

1. The form of the MEA – is this the same as the existing asset or is a newstructural form more appropriate? If a MEA is not acceptable as areplacement then the special structure should be treated as a heritageasset.

2. The need to derive Unit Rates – if the structure is unique then it may notbe necessary to derive Unit Rates. Instead the actual cost data may beused, being appropriately amended by adjustment factors and indexation.


85

Section 15Highway Lighting and HighMast Lighting

15.1 GENERAL

15.1.1 This section provides specific guidance on the valuation, depreciation andimpairment of highway lighting and high mast lighting assets. Reference shouldalso be made to the examples for lighting provided in Appendix A and B.


15.2.1 Highway lighting assets are taken to consist of the following key components(as shown in Table 5.1):

1. Column and foundation

2. Bracket

3. Luminaire (and initial lamp)

4. Control gear, switching and internal wiring.

15.2.2 A comprehensive inventory is recommended by the Code of Practice forHighway Lighting [Ref. 4] for Asset Management purposes. However, the abovecomponents are considered to be adequate for calculating the GrossReplacement Cost (GRC), depreciation and impairment.

15.2.3 The cost of the initial lamp is included with the luminaire in the above list.Subsequent lamp changes are excluded from the above list becauseexpenditure is likely to be Operational rather than Capital and therefore may notbe admissible (Section 4.5) for asset valuation under the Conventional Method.If an authority considers lamp depreciation and expenditure as admissible, theyshould assess the practicality and benefits of dealing with this in assetvaluation. Lamps normally have short service lives and lower up-keep costsrelative to the remainder of the lighting column unit and therefore could betreated in a simplified way.

86

Mor

guef

ile.c

om

15.2.4 Energy consumption costs are not included for asset valuation.


15.3.1 The following factors are considered to have a significant influence on the costof replacing a lighting unit:

1. Service connections (private cabling or Distribution Network Operator(DNO) supply) – these should be included for lighting columns as theseare integral to the function and are not the same as STATS diversions(paragraph 4.4.6). Although the service connection is not a physicalcomponent, such as those listed in Section 15.2, some authorities maywish to identify it as such if it represents a significant and identifiable cost.

2. Column type, e.g. cross sectional characteristics, material (steel,aluminium, FRP etc, provided it reflects the MEA), manufacturer anddecorative features.

3. Column height – suitable categories should be established.

4. Foundation type, e.g. planted root, bolted flange plate.

5. Bracket type, e.g. column top, projection and projection length.

6. Number of brackets.

7. Luminaire type and/or manufacturer.

8. Type of control gear, switching and internal wiring – and whether or notthe authority is responsible for their maintenance.

9. Local Policy – in relation to lighting levels and types, e.g. white light.

15.3.2 The inventory list in the Code of Practice for Highway Lighting [Ref. 4] shouldbe consulted to identify additional key cost drivers that may be appropriate.


15.4.1 Suggested asset groups, sub-groups and adjustment factors are presentedbelow. Also refer to Sections 5.4 and 5.5 for generic guidance and thedistinction between the use of sub-groups and adjustment factors.

Asset Groups

15.4.2 It is recommended that highway lighting is divided into the following assetgroups:

1. Highway lighting columns – planted root

2. Highway lighting columns – bolted flange plate

3. Highway lighting unit attached to wall

4. High mast (>20m).

Section 15 – Highway Lighting and High Mast Lighting

87

15.4.3 Groups 1 and 2 above may be combined if the foundation type does not makea significant difference to the Unit Rate.

Asset Sub-Group

15.4.4 Based on the key cost drivers identified in Section 15.3, together with other keycost drivers identified by the authority, appropriate sub-groups should beidentified. It is suggested that sub-groups for lighting columns are identifiedbased on total height, for example:

1. Less than 6m.

2. 6m to less than 8m




6. 20m and above are classified as high mast lighting.

15.4.5 Authorities are recommended to review their lighting data and identify anappropriate degree of refinement for asset valuation sub-groups.

Adjustment Factors

15.4.6 It is recommended that the influence of column type, bracket type and numberof brackets on the Unit Rate is investigated (Section 7.4). If they have asignificant impact then appropriate adjustment factors should be derived(Section 6.5).

15.5 GROSS REPLACEMENT COST

15.5.1 The Gross Replacement Cost (GRC) for individual lighting units may beevaluated using a composite Unit Rate or a Unit Rate for each component, forexample:

Where UR = Unit Rate determined for that lighting unit or lightingcomponent

ADF = adjustment factor applied to Unit Rates

LU = Lighting Unit

Col = Column and foundation

GRC of Individual Lighting Unit = URLU % ADF-LU

Equation 24a

GRC of Individual Lighting Unit =

(URCol)%ADF-Col + &[(URF-Brac)%ADF-Brac] + &[(URLum)%ADF-Lum] + &[(URCon)%ADF-Con]

Equation 24b


88

Brac = Bracket

Lum = Luminaire

Con = Control gear and cabling

15.5.2 The summation symbols (Σ) are included where there may be more than onecomponent per lighting unit.

15.5.3 The sum of the GRC of the components should be equal to the GRC of theasset as shown in Figure 15.1. The proportions shown in Figure 15.1 should bederived from replacement cost data where available. The proportions aretherefore produced when Equation 24b is used but not when Equation 24a isused. The proportions may need to be established using limited cost dataand/or engineering judgement when Equation 24a is used.

Figure 15.1 – GRC and Component Replacement Cost

15.6 UNIT RATES

15.6.1 The Unit Rates, for each asset group or sub-group, should be determined froma representative sample of lighting unit construction, replacement and partialreplacement schemes (Section 6.4). All admissible costs incurred during thereplacement (including removal and disposal of the previous unit orcomponent) should be included (Section 4.4). The Unit Rate should beevaluated as:

n

CostsAdmissible

RateUnit

n

1i

&$$

Equation 25

GrossReplacement

Cost

Luminaire – x1% of GRC

Bracket – x2% of GRC

Control – x3% of GRC

Column – x4% of GRC

Where the percentages for x1, x2, x3 and x4 should be calculated from availablepartial replacement cost data or, in lieu of this data, based on engineering judgement.

Note: some authorities may wish to include Service Connection as a separate proportion of the GRC if this is considered to be a significant and identifiable cost.


89

Where n = number of assets/components used to derive the Unit Rate

i = asset i for which the admissible costs are known

15.6.2 The above equation may be used to derive a composite Unit Rate for thereplacement of the whole lighting unit, or a separate Unit Rate for eachcomponent of the lighting unit. The former approach may be more suitable forthe majority of authorities, particularly if replacement cost data is captured atlighting unit or scheme level. If information on individual components(paragraph 15.2.1) is available, then it may be appropriate to derive Unit Ratesfor each component type.


Depreciation

15.7.1 Lighting units should be depreciated using the Conventional Method asdescribed in Section 8.2. Authorities should determine the following for eachasset group or sub-group:

1. The proportion of the replacement cost contributed by each component(as shown in Figure 15.1); and

2. The service life of each component type.

15.7.2 The value of each component is depreciated, using the straight line methodshown in Figure 8.1 in Section 8.2, over its service life. It is recognised that thecondition deterioration profile for lighting columns may not be straight line,however financial depreciation and condition deterioration are differentconcepts, and the former represents how the economic benefits are consumedover the service life (also see paragraph 8.2.6). Service lives should beestimated from engineering judgement, manufacturer’s data or preferably,from historical replacement cycles (Section 8.2).

15.7.3 The service life and replacement costs should be monitored and, as aminimum, updated at each benchmark valuation (Section 2.3) or when newinformation becomes available. If significant changes occur to service livesbetween valuation periods, then the depreciation should be amendedaccordingly, i.e. a new service life is reflected in a revised rate of depreciation,see Figure 8.3 in Section 8.2, or impairment is applied (see below).

15.7.4 Guidance on the relationship between the CSS lighting column ConditionIndicator and remaining service life is provided in Ref. 20. This may be usedto assign remaining service lives to individual lighting columns.

Impairment

15.7.5 Lighting assets should be assessed for impairment using appropriatePerformance Measures, for example the CSS Condition Indicator [Ref. 20].If appropriate Performance Measures, or condition data, is not available thenauthorities should seek to establish the processes. Lighting assets shouldonly be assessed for impairment when there are indications of impairment(Section 9.2).


90





91

Section 16Land Associated with the Highway

16.1 GENERAL

16.1.1 The following approach is proposed for the treatment of land associated withthe highway infrastructure. Land associated with the highway may be reportedin the accounts with the highway infrastructure or with land in general. TheValuation Report should identify which approach an authority has adopted.

16.1.2 Land is a component in the DRC valuation although in itself land can usually bevalued by reference to comparable open market transactions. It is howeverrecognised that when valuing a specialised property the land element isincluded within the overall DRC approach.

16.1.3 An authority should be satisfied that Depreciated Replacement Cost (DRC) isthe appropriate approach for valuing land associated with the highway.

16.1.4 The land should include the entire land holding associated with the highway,and in identifying the extent of the land to be included in the valuation,consideration should be given to the following:

1. Land that may be suitable for disposal without affecting the use orstability of the highway, in which case that land should be treated assurplus to requirements and reported separately at its market value.

2. Land that may be currently unused but is being kept for possible futureuse, or has been expressly acquired for a future road scheme, may beincluded as part of the highway asset.

3. Land that may be surplus to requirements but, due to its physicallocation, could not be sold, such as land surrounded by motorwayswhere that land could not incorporate the necessary access and exitroads, due to its size or shape.


16.2.1 The land asset should only comprise the land associated with the highway.Features on the land are not taken into account in the valuation of land.


16.3.1 The value placed on the land may present difficulties since, by definition, thehighway has no open market. Conversely, if it were not for the highway, thesurrounding uses may well be substantially different, e.g. the highway givingeither a positive impact (due to access) or a negative impact (due to noise, lossof outlook).

16.3.2 It is considered that although the valuation must always be of the actual land,it is appropriate to assess that value by reference to the cost of acquiring anotional replacement site in the same locality that would be equally suitable.Thus there is a requirement to look at values of land in the locality.

92

16.4 ASSET GROUPS AND SUB-GROUPS

16.4.1 Land should be classified as freehold or rights. Rights land may be furthersubdivided into “time based rights” and “rights in perpetuity” (i.e. freehold). Inaddition, a straightforward, but suitable, approach would be to distinguishbetween rural and urban land by region.

16.5 VALUATION

16.5.1 From a practical point of view, it is suggested that the authority considers astandard approach to land valuation. It is not considered necessary toundertake a detailed assessment of every individual portion of the highwaynetwork; this is likely to take an unjustified amount of time.

16.5.2 Where a road is currently being, or has recently been, constructed there shouldbe relevant land acquisition costs available and these can be utilised as theland value. It must be realised, however, that the total compensation paid willhave included injurious affection – the compensation to cover the effect of thenew road on the remainder of the property owned by the vendor, as well asother costs incurred, and so the valuation will need to establish the agreedelement of the land value.

16.5.3 It is recognised that a new road opening can result in claims for compensationunder the Land Compensation Act 1973. It is suggested that the value impactof any such claims should be ignored for the DRC valuation – or else that figurewould alter year on year, based on the value of the surrounding housing, andnot relate to the cost of the asset itself.

16.6 DEPRECIATION AND IMPAIRMENT

16.6.1 Unless expressly notified to the contrary it should be assumed that landassociated with the road is held freehold with a clean title, and so the landvalue is not required to be written down (depreciated or impaired). If for anyreason (such as a time limited concession being in place) the authority doesnot have the freehold for the land, then it may be appropriate to discount theland value accordingly, reflecting the period of ownership remaining, i.e. theland is depreciated over the concession (rights) period.

16.6.2 The Conventional Method should be used to depreciate land (Section 8.2)where appropriate, although by its nature freehold land would be assessed asindefinite life (paragraph 8.2.2) and therefore no depreciation would be chargedon the grounds of immateriality, however the land would be reviewed forimpairment.

Section 16 – Land Associated with the Highway

93

Section 17Other Highway Assets

17.1 STREET FURNITURE

General

17.1.1 Street furniture can constitute a significant asset for some authorities and, insuch cases, should be included as a separate asset category in assetvaluation. Street furniture should be valued according to the generic guidanceprovided and depreciated using the Conventional Method (Section 8.2). Somestreet furniture assets are similar to highway lighting therefore the guidance inSection 15 should be considered as appropriate.

17.1.2 Authorities may not wish to identify street furniture as a separate asset type ifthe inventory data is not readily available. In this case the street furniture maybe included as a constituent component of the road or footpath asset type, i.e.they are included within the composite Unit Rate derived for the road orfootpath asset.

94

Asset Composition

17.1.3 The asset composition should include the following assets if they are managedas part of the highway network: bus shelter, seating, bins, bollards, markerposts, street name plates and tree protection. The list is not comprehensiveand authorities may add additional street furniture components relevant to theirnetwork.

Asset Groups

17.1.4 The following asset groups may be sufficient to evaluate GRC for streetfurniture:

1. Town/city centre street/road

2. Suburban/village street/road; and

3. Rural road.

17.1.5 It is not necessary to build up the GRC from the individual street furniture units,instead a composite GRC, relevant to the above street classifications may beconsidered adequate. If authorities hold a detailed inventory of street furniturethen they may wish to establish a more refined approach for evaluatingthe GRC.

Depreciation, Impairment and DRC

17.1.6 Depreciation should be applied using the Conventional Method (Section 8.2),therefore each asset should be depreciated separately. However, assets maybe grouped together for depreciation if this is more representative of theinventory data.

17.1.7 Street furniture should be treated for impairment using condition/performancesurvey data as described in Section 9. Condition survey data (or relatedcondition indicators) may be appropriate for identifying impairment. Wherecondition data is not available, authorities should seek to establish appropriatecondition measures.


17.2 TRAFFIC MANAGEMENT SYSTEMS

17.2.1 Many of the assets listed in Table 5.1 under Traffic Management Systems aresimilar in nature to highway lighting (Section 15) and should be treated similarlyfor asset valuation.

17.3 OFF-HIGHWAY DRAINAGE

17.3.1 An authority should establish if this asset type is relevant to the valuation oftheir highway network. Off-highway drainage should be valued in accordancewith the generic guidance provided and the Conventional Method should beused for calculating depreciation and impairment.

Section 17 – Other Highway Assets

95

Section 18Implementation and Recommendations

18.1 IMPLEMENTATION PLAN

18.1.1 The following implementation plan is suggested for highway infrastructureasset valuation:

1. Year 1 – Interim asset valuation which may include the following activities:

a. Set up regional working groups to collaborate on asset valuation.

b. Assess how current asset inventory/data and systems align with theneeds of asset valuation. Integrate asset valuation needs with thoseidentified from the Asset Management gap analysis [Ref. 1].

c. Identify asset groups, sub-groups and adjustment factors.

d. Compile scheme data, determine Unit Rates and develop GRCmodels.

e. Trial the asset valuation procedure on a sample of highway assets.

2. Year 2 – undertake a benchmark valuation and this should include thefollowing activities:

a. Refine the asset valuation procedure based on experience fromYear 1.

b. Check the Asset Management System (or Asset Valuation System)

c. Extend the procedure to cover all highway assets.

d. Calculate the GRC and initial DRC for the end of this financial year.This should be used as the opening Net Book Value for Year 3.

3. Year 3 – calculate in-year movements including, where appropriate,depreciation, impairment, indexation, additions (disposals), AssetPreservation Measures, etc. A Valuation Report should be producedfor the end of year 3.

18.1.2 Authorities should work together on the development and implementation ofhighway infrastructure asset valuation for the purpose of pooling data andsharing experience and learning. This can be achieved by setting up RegionalWorking Groups involving rural, semi-urban and urban areas.

96

18.2 ASSET VALUATION SYSTEMS

18.2.1 Asset Valuation can become an involved and complex procedure, requiringconsiderable resource inputs, if appropriate IT systems are not in place.Authorities should seek to automate the asset valuation procedure through anappropriate software system that draws the basic data from a complete andaccurate asset inventory.

18.2.2 Authorities should identify how their current system(s) should be configured todeal with highway infrastructure asset valuation, considering options such as:

1. Perform asset valuation within the engineering Asset ManagementSystem (AMS), passing the key results to the Finance System.

2. Perform asset valuation within the Finance System, drawing theappropriate base asset data from the engineering AMS.

3. A separate Asset Valuation System which interfaces with the AMS andthe Finance system.

18.2.3 Option 1 above may be the most suitable approach for many authoritiesbecause they already hold the base asset data in the engineering AMS formanagement purposes. The asset valuation capability may be added to anexisting AMS by:

1. Developing bespoke functionality within the existing system.

2. Purchasing a commercial “bolt-on” for the existing system.

3. Receiving an upgrade of the current AMS if commercial providers updatetheir systems to provide asset valuation functionality.

18.2.4 If an authority is currently in the process of procuring an AMS, or upgradingtheir existing system, they should consider the needs of asset valuation.

18.3 RESOURCE REQUIREMENTS

18.3.1 The following resource needs should be determined for the implementation andrunning of asset valuation:

1. Hardware and software needs.

2. Data collection, entry, storage and upkeep.

3. Staff training.

Section 18 – Implementation and Recommendations

97

Mor

guef

ile.c

om

4. Staff time required to develop Unit Rates, GRC, DRC, depreciation andimpairment, attend Regional Working Groups and prepare the ValuationReport.

18.3.2 Some of the above resource needs may align with those identified in the AssetManagement gap analysis [Ref. 1]. Authorities should seek to coordinate thevarious initiatives and avoid duplicating the effort.

18.4 RECOMMENDATIONS

18.4.1 The key recommendations, and associated sections, from the GuidanceDocument are summarised in Table 18.1.

Table 18.1 Key Recommendations

No. Asset Type Section

1 Undertake a benchmark valuation at a minimum interval of five years andapply annual adjustments. Re-evaluate the DRC at each benchmarkvaluation.

2.3 & 10.4

2 Adopt the principles, basis and rules set down in the Guidance Document 4.1

3 Use Depreciated Replacement Cost as the basis for valuation 4.3

4 Use the Baxter Indices for indexation of costs (unless an authoritycurrently uses a different index which is suitable).

4. 6

5 Classify the asset base and align the asset valuation inventory with theAsset Management inventory

5.2

6 Use schemes completed within the last 10 years to derive replacementUnit Rates

6.2

7 Apply straight line depreciation to finite life assets 8.2

8 Use Renewals Accounting for depreciation and impairment of roads,segregated footpaths and cycle routes, and structures

8.4

9 Use the Conventional Method for depreciation of lighting, trafficmanagement systems, street furniture, off-highway drainage and landassets

8.4

10 Produce an annual Valuation Report 11.2

11 Calculate the three asset preservation measures annually and include inthe Valuation Report

11.1

12 Form Regional Asset Valuation Working Groups 18.1


98

Section 19References

1. Framework for Highway Asset Management, CSS, April 2004.

2. Well Maintained Roads, Code of Practice for Highway Maintenance, UK RoadsBoard, TSO, 2005.

3. Management of Highway Structures, A Code of Practice, UK Bridges Board,TSO, 2005.

4. Well-lit Highways, Code of Practice for Highway Lighting Management, UKLighting Board, TSO, 2004.

5. Managing Resources: Analysing Resources Accounts: User Guide, HMTreasury, 2001.

6. Managing Resources: Implementing resource based financial management,HM Treasury, September 2002.

7. Code of Practice on Local Authority Accounting in the United Kingdom 2004,A Statement of Recommended Practice, CIPFA/LASAAC.

8. Financial Reporting Standard (FRS) 15 – Tangible Fixed Assets, AccountingStandards Board, ISBN 1 85712 079 5, 1999.

9. Financial Reporting Standard (FRS) 11 – Impairment of Fixed Assets andGoodwill, Accounting Standards Board, ISBN 1 85712 068 X, 1998.

10. HM Treasury: Resource Accounting Manual, www.resource-accounting.gov.uk

11. Financial Reporting Exposure Draft (FRED) 29 – Property, Plant and EquipmentBorrowing Costs, September 2002.

12. International Accounting Standard (IAS) 16 – Property, Plant and Equipment,December 2003.

13. Price Adjustment Formulae for Construction Contracts: Monthly Bulletin ofIndices, Department of Trade and Industry (DTI), TSO, ISSN 0964 4575.

14. Bridge Condition Indicators: Volume 2: Guidance Note on Bridge InspectionReporting, CSS Bridges Group, April 2002.

15. Addendum to Bridge Condition Indicators: Volume 2: Guidance Note on BridgeInspection Reporting, CSS Bridges Group, August 2004.

16. Rethinking Construction: The Report of the Construction Task Force (EganReport), ODPM, 1998.

17. Guidance Document for Performance Measurement of Highway Structures,Draft Working Document, Version 1.3, February 2005.

99

18. Bridge Condition Indicators: Volume 3: Guidance Note on Evaluation of BridgeCondition Indicators, CSS Bridges Group, April 2002.

19. Addendum to Bridge Condition Indicators: Volume 3: Guidance Note onEvaluation of Bridge Condition Indicators, CSS Bridges Group, August 2004.

20. Lighting Columns: Review of Risk Assessment Strategy and Production of aCondition Indicator, TRL Report on behalf of the CSS, UPR/ISS/029/05.


100

Appendix AAsset Valuation ExplanatoryExamples

Purpose of Examples

The purpose of these examples is to explain some of the typical situations that mayarise during valuation, and how these should be addressed.

Example 1 – Two Lane Road

The existing asset is a two lane Classified B road with appropriate formation andstructural layers. The GRC is based on a MEA which represents the current constructiontechniques for this class of road and the appropriate cross sectional profile (i.e.formation and structural layers).

For simplicity it is assumed that condition is assessed through only one condition index.This section of road has a score 50 (on a scale of 0 to 100) for the condition indicator.Therefore, the DRC is calculated as (Section 10):

DRC = GRC – Cost of work to restore the condition score to 100

Alternative Consideration 1.1 – The road has been built up over time and the actualmake-up of the formation and structural layers is unknown. The MEA is taken as thetypical construction techniques that would be used now to provide the sameperformance (or Level of Service) for a Class B road.

Alternative Consideration 1.2 – Traffic surveys indicate that the road does not providethe required traffic capacity, i.e. it needs to be widened. This has no influence on theasset value calculation. This is identified as an enhancement in the Asset ManagementPlan. When the enhancement is carried out, then the GRC and DRC of the asset areamended accordingly.

Example 2 – Highway Bridge

The existing asset is a masonry arch bridge. The bridge is 120 years old but is notclassified as a Heritage Asset (Section 4.11). The GRC is based on the replacementcost of a MEA which is taken as a reinforced concrete/steel composite bridge withappropriate foundations.

The bridge has a Condition Indicator score of 75 out of 100. Therefore, the DRC iscalculated as (Section 10):

DRC = GRC – Cost of work to restore the Condition Indicator to 100

Alternative Consideration 2.1 – In the assessment programme the bridge was found tohave a Potential Performance (load carrying capacity) of 10 tonne. However, data wouldnot be available on the construction cost of a bridge with 10 tonne capacity becausemodern bridges are designed for 40 tonne trucks, therefore the following approach maybe used (also see paragraph 4.7.4):

101

1. If the increase in cost of constructing a bridge with 40 tonne capacity is within10% of constructing a bridge with 10 tonne capacity then the MEA describedas above should be used to evaluate the GRC.

2. If the increase in cost is more than 10%, then the MEA described above shouldbe used for calculating the GRC, but this value should be factored down toaccount for the difference in costs between constructing a 10 tonne and 40tonne bridge.

Alternative Consideration 2.2 – In the assessment programme the bridge was found tohave a full Potential Performance (load carrying capacity) of 40 tonne. However, thebridge is currently only providing 10 tonne capacity due to poor condition. In this casethe 40 tonne MEA is used to calculate the GRC, and the cost of work required torestore the Potential Performance (40 tonne capacity) is deducted from the GRC whenevaluating the initial DRC (Section 10).

Alternative Consideration 2.3 – The Potential Performance is 10 tonne but the authorityhas decided it wants 40 tonne capacity. The GRC is evaluated as described inAlternative Consideration 2.1 above. The shortfall in structural capacity below thedefined Required Performance has no influence on the asset value. If the enhancementis carried out, then the GRC and DRC of the asset are calculated accordingly.

Example 3 – Street Lighting

The existing asset is a steel lighting column with a luminaire that provides the requiredlighting levels. The GRC is based on the replacement cost of a MEA which is assumedto be a steel lighting column (to the latest specification) with a luminaire of the sameoutput as the current luminaire (but to modern specification).

For simplicity, the whole unit is assumed to have a service life of 40 years and it iscurrently 20 years old. It is in the condition expected for its age and is providing theexpected performance. Applying straight line depreciation the DRC is evaluated as(Section 8.2):

DRC = GRC x [(40years-20years)/40years] = GRC x 0.5

Alternative Consideration 3.1 – The Required Performance has been redefined by theauthority and the Potential Performance of the existing asset is unable to meet thisstandard. This has no influence on the asset value calculation. This is identified as anenhancement in the Asset Management Plan. When the enhancement is carried out theGRC and DRC of the asset are calculated accordingly.

Alternative Consideration 3.2 – The current condition or performance is worse than thatpredicted by the condition profiles. The residual service life is revised down to reflectthe current condition/performance. In this case the depreciation and/or impairment arecalculated as described in paragraph 8.2.9.


102

Appendix BDepreciated Replacement CostExample

Hypothetical Network

A hypothetical network shown in Figure B1 below is considered for this workedexample. The example shows how the network assets should be grouped and theGross Replacement Cost and initial Depreciated Replacement Cost calculated. Onlyroads, bridges and lighting columns are considered. The calculations are for illustrationonly and therefore do not represent the values and level of accuracy that would be usedin practice.

Figure B1 – Hypothetical Network

37.5km12.5km

25km

12.5km

100km

Single carriageway

Double carriageway

Bridge

Urban area

EmbankmentRiver

KEY

100k

m

Em

bankment

Dual carriageway

Single carriageway

103

Network Data, Unit Rates and GRC

Roads

The network statistics and data are summarised in the table below. Urban roads havefootways attached and the Unit Rate has been factored by an adjustment factor toreflect this. Also, the Unit Rate for the 75km of dual rural carriageway with embankmenthas been adjusted to reflect this.

Table B1 Roads Data

NB: the width is the carriageway; attached footways are accounted for by different UnitRates.

Bridges

The road type has a limited influence on the bridges Unit Rate for this network. Allbridges are one span, of length 20m, and the overall deck width for single carriagewayis 10m, and 20m for dual carriageway bridges.

In addition to the bridges shown on the network it is assumed there is also a bridge forevery 25km of network.

Table B2 Bridges Data

ID Asset type/group NumberDeckArea

Unit Rateper m2 GRC

1 Road over river (urban) 5 1400m2 £1000 £1,400,000

2 Road over river (rural) 6 1800m2 £850 £1,530,000

3 Road over road (rural) 4 1600m2 £950 £1,520,000

4 Other (urban) 20 6000m2 £900 £5,400,000

5 Other (rural) 32 10000m2 £750 £7,500,000

Total = 20800m2 – £17,350,000

ID Asset type/group Width LengthUnit Rate

per m2 GRC

1Dual urban carriageway (inc. footway)

18.6m 241.4km £120 £538,804,800

2 Dual rural carriageway 18.6m 366.4km £100 £681,504,000

3Dual rural carriageway (with embankment)

18.6m 75km £180 £251,100,000

4Single urban carriageway (incl. footway)

9.3m 250km £130 £302,250,000

5 Single rural carriageway 9.3m 350km £110 £358,050,000

Total = 1282.8km – £2,131,708,800


104

Lighting

There are lighting columns on all urban routes at 25m spacing; there are no lightingcolumns on rural routes. The lighting columns have been divided into two groups basedon overall height.

Table B3 Lighting Data

Network Gross Replacement Cost

The Gross Replacement Cost of the network is therefore:

Network GRC = GRCRoads + GRCBridges + GRCLighting

Network GRC = £2,131,708,800 + £17,350,000 + £24,484,000

Network GRC = £2,173,542,800

Initial Depreciated Replacement Cost

The initial DRC is evaluated as described in Section 10. The DRC is evaluated using theprinciples of depreciation and impairment, described in Sections 8 and 9 respectively,applied to the relevant assets/components. The assets/components should be dividedinto two broad categories:

1. Condition based maintenance (paragraph 9.3.7) – the maintenance required on anasset group, or individual asset/component, can be estimated from conditiondata. This approach is applied to Indefinite Life assets treated under theConventional Method and to the majority of assets treated using RenewalsAccounting.

2. Time based maintenance (paragraph 9.3.9) – asset consumption is more readilydefined by asset age than condition or performance. This approach is applied toFinite Life assets from the Conventional Method and to relevantassets/components from Renewals Accounting, e.g. bridge bearings.

The roads, bridges and lighting assets/components are classified in this manner belowto evaluate the initial DRC.

Roads

The road asset is made up of the Level 3 assets and components shown in Table 5.1(Section 5.4). The DRC should therefore be based on the GRC minus the cost ofmaintenance required to restore these assets to as new condition.

ID Asset type/groupRoad

LengthNo. of

columnsUnit Rateper unit

GRC

1Dual carriageway (urban) –12m high

241.4km 9656 £1500 £14,484,000

2Single carriageway (urban) –6m high

250km 10,000 £1000 £10,000,000

Total = 19,656 – £24,484,000

Appendix B – Depreciated Replacement Cost Example

105

All the significant maintenance needs on the road asset relate to “condition basedmaintenance”. Therefore, the calculation can be streamlined by excluding asset orcomponent types that only contribute a small proportion of the maintenance needs.This approach is considered to provide a suitable degree of accuracy for evaluating theinitial DRC for roads.

The DRC is therefore evaluated as GRC minus the summation of maintenance workrequired on the different assets or components. This may be evaluated based on anaverage maintenance rate linked to a condition band, for example see the conditionbands shown in Table B4 (NB: the relationship between condition bands andmaintenance costs shown in Table B4 is hypothetical and for illustrative purposes only,and therefore should not be used for asset valuation. However, authorities may wish toderive such relationships for asset valuation purposes).

Table B4 Example Condition Bands for carriageway

The value of the maintenance work can therefore be evaluated by identifying thequantity of the carriageway that falls into each condition category. A more refinedapproach is to base the calculation on the condition, maintenance work needed and theassociated costs of each individual asset/component, e.g. each section of carriageway.Authorities should adopt the approach that best reflects their asset data.

The major maintenance needs on the hypothetical network are as shown in Table B5.The maintenance needs of the carriageway are likely to dominate the road maintenanceneeds in most cases.

Table B5 Cost of “condition based maintenance” on roads

Asset or component Value of maintenance work

Carriageway and footway £250,000,000

Drainage £30,000,000

Earthworks £10,000,000

Safety fences £10,000,000

Verges £10,000,000

Total Value of Maintenance = £310,000,000

Condition Band(e.g. a BVPI)

Average value of maintenanceper m2 of carriageway

0 – 20 £0

20 – 40 £10

40 – 60 £25

60 – 80 £75

80 – 100 £150


106

The DRC of the road asset is therefore evaluated as:

DRCRoads = GRCRoads – (Condition based maintenance)

DRCRoads = £2,131,708,800 – £310,000,000

DRCRoads = £1,821,708,800

Bridges

The total volume of work required to restore the bridges to as new condition isevaluated from the current inspection and assessment data. The value of the workshould be calculated using the general approach described in Section 10, i.e.distinguish between “condition based maintenance” and “time based maintenance”.

The major highway bridge elements that require “time based maintenance” areexpansion joints and bearings (and possibly painting). The maintenance on all othercomponents can be treated as condition based. The total cost of “condition basedmaintenance” on bridges for the hypothetical network is taken to be £2.5million.

The DRC of “time based maintenance” elements should be evaluated as described inSection 10.3, i.e. establish remaining service life directly from installation date andservice life data. This may be applied to individual assets or asset groups; the latterapproach is used here.

If the asset ages are spread evenly across the service life then the DRC is equal to(GRC x 0.5). However, for this example the age profile is not spread evenly across theasset service life, therefore a more refined approach is required where the assets aregrouped into age bands. For simplicity, the expansion joints and bearings are assumedto have the same service life (30 years) however the age profile is spread as shown inTable B6.

Table B6 Age of bearings and expansion joints

The DRC of each age band is then evaluated as (paragraph 9.3.11):

DRC = band)ageinassetofn(Proportio××SL

RLGRC

Equation B1

[ ( )]

Age BandAverage Remaining

Life (years)Proportion of elements

in age band

1 25 0.10

2 20 0.14

3 15 0.20

4 10 0.26

5 5 0.30


107

Where SL = assumed service life

RL = remaining life

The GRC of the “time based maintenance” elements is estimated to be 10% of the totalGRC of the bridges in this example = £17,350,000 x 0.1 = £1,735,000. The DRC of“time based maintenance” elements is therefore evaluated as shown in Table B7.

Table B7 DRC of “time based maintenance” on bridges

The DRC of the structure assets is:

DRCBridges = GRC – (Condition Based Maintenance) – GRCTime + DRCTime

DRCBridges = £17,350,000 – £2,500,000 – £1,735,000 + £717,133

DRCBridges = £13,832,133

Where GRCTime = GRC for time based elements

DRCTime = DRC for time based elements

Lighting

The DRC of the lighting assets is evaluated using the “time based maintenance”approach for the whole asset. It is assumed that all parts of a lighting unit are replacedafter 25 years. However, the ages of lighting columns in the stock are not spread evenly.The age profile of the lighting units is shown in Table B8.

AgeBand

AverageRemaining Life

Proportion ofelements in

band(RL)/SL DRC

1 25 0.10 0.83 £144,583

2 20 0.14 0.67 £161,933

3 15 0.20 0.50 £173,500

4 10 0.26 0.33 £150,367

5 5 0.30 0.17 £86,750

DRC of “time based maintenance” elements = £717,133


108

Table B8 DRC of “time based maintenance” on lighting

The DRC of lighting is therefore calculated directly and gives:

DRCLighting = £9,793,600

Network DRC

The DRC for the hypothetical network is then evaluated as:

DRCNetwork = DRCRoads + DRCBridges + DRCLighting

DRCNetwork = £1,821,708,800 + £13,832,133 + £9,793,600

DRCNetwork = £1,845,334,533

Accumulated Asset Consumption

The Accumulated Asset Consumption (AAC), from Section 11.1, for the network is:

AAC = [1- (DRC/GRC)] x 100

AAC = 15.1%.

AgeBand

AverageRemaining Life

Proportion ofelements in

band(RL)/SL DRC

1 20 0.10 0.8 £1,958,720

2 15 0.20 0.6 £2,938,080

3 10 0.30 0.4 £2,938,080

4 5 0.40 0.2 £1,958,720

DRC of lighting = £9,793,600


109

Appendix CRenewals Accounting Example

Purpose of Example

The purpose of this example is to explain how the cost estimates from an AssetManagement Plan (AMP) and the actual in year expenditure should be used to apply thedepreciation charge under Renewals Accounting (Section 8.3).

Hypothetical Network

The hypothetical network from Appendix B will be used in this example. For simplicitythis example only presents Renewals Accounting in relation to the road asset fromAppendix B; the relevant details from Appendix B are shown in Table C1.

Table C1 Network Information

The AMP identifies the following for the road asset:

1. Approximately £50million should be spent each year to maintain the ConditionScore of the road asset at 20.

2. An additional spend of £15million per year (for a five year period) would improvethe Condition Score to 15.

Scenario 1 – Maintain Condition

Under this scenario the authority provides the annual £50million to sustain the conditionof the road asset. The adjustment made to the Net Book Value (NBV) in one financialyear is as shown in Table C2 (NB: NBV = DRC).

Table C2 NBV Annual Adjustments

Under this scenario the estimated cost of maintenance is spent each year, therefore theNBV is maintained at £1,821,708,800. The Condition Indicator is monitored to checkthat it does not exceed the acceptable limits (paragraph 9.2.12).

First Financial Year Debit Credit

Renewals Accounting Depreciation Charge £50,000,000

Actual Maintenance Expenditure (cash) £50,000,000

NBV brought forward (opening book value) £1,821,708,800

NBV carried forward (closing book value)= £1,821,708,800 – £50,000,000 + £50,000,000

£1,821,708,800

Asset Type GRC DRC (or NBV) AACCondition Indicator

Score (or BVPI)

Roads £2,131,708,800 £1,821,708,800 14.5%20

(on a scale of 0 to 100)

110

Scenario 2 – Improving Condition

Under this scenario the authority spends £65million per annum to improve the conditionof the road asset from 20 to 15. The adjustment made to the NBV in one financial yearis as shown in Table C3.

Table C3 NBV Annual Adjustment

Assuming the £65million funding continues for a five year period then the values in thefifth year would be as shown in Table C4.


Therefore, the Accumulated Asset Consumption (AAC), described in Section 11.1 andshown in Table C1, has decreased from 14.5% to 11.0%.

The five year change in the Condition Score should be approximately 5 points, i.e. from20 to 15 as identified in the AMP. Therefore, based on the guidelines proposed inparagraph 9.2.12, it was not necessary to calculate impairment (or the impairmentreversal) during the five year period (i.e. between benchmark valuations). Instead,adding £15million per annum to the NBV is assumed to be a robust estimation of thechanging volume of maintenance work required on the road network, and hence thechange in DRC (see Section 10).

Scenario 3 – Falling Condition

Under this scenario the authority is unable to spend £50million per year due to financialconstraints. Instead, £25million per annum is provided to carry out maintenance on theroad asset. The adjustment made to the Net Book Value (NBV) in one financial year isas shown in Table C5.

Fifth Financial Year Debit Credit





£1,896,708,800






£1,836,708,800

Appendix C – Renewals Accounting Example

111

Table C5 NBV Annual Adjustments

Assuming the £25million funding continues for a five year period then the values in thefifth year would be as shown in Table C6.


Therefore, the Accumulated Asset Consumption (AAC), described in Section 11.1 andshown in Table C1, has increased from 14.5% to 20.4%.

The change in the Condition Score may exceed the guidelines proposed in paragraph9.2.12 and it may therefore be necessary to calculate impairment during the five yearperiod (i.e. between benchmark valuations) rather than relying on the annual deductionsbased on the difference between AMP requirements and actual expenditure.

Fifth Financial Year Debit Credit





£1,696,708,800






£1,796,708,800


112

Acknowledgements

Steering Group

Matthew Lugg (Chair) Cambridgeshire County Council

David Baker (Project Manager) Transport for London

Alan Armson Hertfordshire Highways

Robert Biggs Derbyshire County Council

Paul Fearon St Helens Council

Chris Walker East Sussex County Council

Alex Ramage Scottish Executive

Kieran Rix HM Treasury

Ian Holmes Department for Transport

Technical Advisors

Dr Garry Sterritt Atkins

Dr Navil Shetty Atkins

Lila Tachtsi Atkins

Alan Taggart Atkins

Dr Roger Cole Atkins

Malcolm Dennett PKF

Disclaimer

The CSS/TAG Asset Management Working Group, the Steering Group and the TechnicalAdvisors who produced this guidance document have endeavoured to ensure theaccuracy of the contents. However, the guidance, recommendations and informationgiven should always be reviewed by those using them in the light of the facts of theirparticular case and specialist advice be obtained as necessary. No liability for loss ordamage that may be suffered by any person or organisation as a result of the use ofany of the information contained here, or as the result of any errors or emissions in theinformation contained here, is accepted by the CSS/TAG Asset Management WorkingGroup, the Steering Group, the Technical Advisors, and any agents or publishersworking on their behalf.

Printed in United Kingdom for The Stationery OfficeN180408. C20 7/05 65536

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