Service Value and Componentized Accounting of Infrastructure Assets

Pekka Leviäkangas, Farzad Pargar*, Konsta Sirvio, Behrouz Khabbaz Beheshti, Peter E.D. Love

*Corresponding author for this work

    Research output: Contribution to journalArticleScientificpeer-review

    4 Citations (Scopus)

    Abstract

    Asset management is a strategic tool for maintaining the value of an asset at a level that is satisfactory for users, asset owners, and taxpayers. This paper introduces the concept of service value. The concept is applied following the recommendations of the Organisation for Economic Co-operation and Development (OECD): service value equals the value of economic benefits generated by an asset. It is shown how alternative value accounting methods result in different asset values. The present value method, as recommended by accounting practitioners and in line with the concept of service value, is more appropriate for asset management purposes than the perpetual inventory method (PIM), despite the fact that the latter is more widely used. The impact of correct asset and service value accounting extends well beyond project and investment program management levels to the national accounting system of fixed capital. Incorrect asset management accounting may lead to serious under- or overestimation of investments and repair debt.
    Original languageEnglish
    Article number04019025
    Number of pages12
    JournalJournal of Infrastructure Systems
    Volume25
    Issue number3
    Early online date2 Jul 2019
    DOIs
    Publication statusPublished - Sept 2019
    MoE publication typeA1 Journal article-refereed

    Funding

    In deterministic models, asset condition is predicted as a precise value on the basis of mathematical functions of observed or measured variables, such as subgrade strength, axle load applications, pavement layer thicknesses and properties, and environmental factors and their interactions (Robinson et al. 1998). In deterministic models, it is typical to present deterioration in the form of a declining curve in which the units are asset value in monetary terms, a technical indicator, or a composite condition index. In probabilistic models, the changing of an asset or asset component to another condition class (getting worse, in deterioration modeling) is based on either heuristic or empirical probabilities. On a chronological scale, subsequent probabilistic events form a Markov chain. Both methods can be used side by side. The choice of model is partly contextual, depending on the available data, the object of application, and the preferences of the analyst. However, if data are available, probabilistic empirical models give more accurate predictions (Sirvio 2017). The OECD manual for measuring capital (OECD 2009) recommends “the use of geometric patterns of depreciation because they tend to be empirically supported, conceptually correct and easy to implement.” In a straight-line depreciation case, the annual depreciation (deterioration) is 1=t, where t is the expected service life. When we assume that the service value of an asset is an accumulated stock of expected benefits that are consumed or depreciated year by year as the asset is being used, we need to deduct the consumed value from the stock. The rate of return of the stock determines the amount of stock to be consumed. The OECD (2009) guidelines refer to “storage of wealth.” This is identical to the concept specified by CPA (2013), that “future economic benefits are synonymous to service potential.” We use a generic model incorporating the following variables. This model was applied to a study initiated by VTT Technical Research Centre of Finland Ltd. and funded by the Finnish Transport Agency (Leviäkangas et al. 2017). The variables are:  t = service life of an asset in years; without maintenance the asset will be totally consumed by year t;  n= 0; 1; 2; : : : ;t; indicating the year between 0 and final year t;  i = selected time value of money; interest rate; the rate refers to the annual rate of return generated by an asset;  I0, In = investment made in year 0 and improvements and additional investments in year n;  B = total future net benefits, generated by an asset over its entire service life; and  SV = service value of an asset (expressed as a percentage 0% :: : 100%).

    Keywords

    • Accounting
    • Asset
    • Benefit
    • Infrastructure
    • Service value

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