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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