Unfunded Depreciation

Funding of depreciation relates to the level of non-cash items funded by the Operating Surplus/Deficit. Unfunded Depreciation is the result of an Operating Deficit, effectively causing the transfer of capital to operating.

Operating Deficit

  • Depreciation partially funded
  • Assets given away to the user/customer (to the value of the loss)

Operating Surplus

  • Depreciation fully funded
  • Total asset consumption converted to cash
  • The user/customer pays for the asset consumption

As mentioned above Unfunded Depreciation is a result, it is not a decision or a management strategy. What an entity does with the funded depreciation, or portion thereof, is up to Management, e.g. the organisation may decided to

  • Transfer funds back to Operating
    • Appropriate if Council wishes to remove a service or reduce the level of service for future generations
    • Erosion of Capital Base
    • Short term approach, which may impact on future users
  • Buy new / additional assets
    • Appropriate if strategic plan alters the focus from one service, facility or activity to another
    • i.e. sell road network capacity to fund an additional swimming pool
    • Generally will result in additional operating expenditure for future users
  • Renew existing assets
    • Appropriate if Council believes the existing capital base is correct
    • Appropriate if strategic plan alters the focus from one service, facility or activity to another
    • Apply funds to existing assets as needed, i.e. across services, facilities or activities
  • Transfer funds to Reserve
    • Appropriate if current renewal program’s requirements is less than the funded depreciation
    • Appropriate if in any year in the Long Term Plans, the renewal program’s requirements is greater than the funded depreciation
    • Council has created this reserve and its current practice limits the use of Funded Depreciation to Renewals

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