LOCAL GOVERNMENT CAPITAL ASSET MANAGEMENT GUIDELINE
MUNICIPAL FINANCE MANAGEMENT ACTLOCALGOVERNMENTCAPITAL ASSETMANAGEMENTGUIDELINENational Treasury
ISBN: 978-0-621-38093-4To obtain additional copies of this document please contact:The LibrarianNational TreasuryPrivate Bag X115Pretoria0001South AfricaTel: 27 12 315 5850Fax: 27 12 315 5957This document is also available on the Internet at: www.treasury.gov.zaComments on this document should be submitted to: mfma@treasury.gov.za
FOREWORDThe Local Government: Municipal Finance Management Act (MFMA) is the keycomponent of the broader legislative framework governing municipalities, and aims tostrengthen financial management and support municipalities in moving towards aneven more sustainable future. The MFMA has been phased in gradually since 2004to take into account the diverse capacities of municipalities and allow time to buildstaff capacity and introduce new systems and procedures.The rapidly increasing demand for municipal services and the National initiatives foraccelerated infrastructure development and maintenance at the local level haveincreased, and will continue for some time to increase, the scale and value ofmunicipal assets. These assets will require a higher level of expertise and knowledgeof asset management and management systems to ensure that the capacitynecessary to deliver the required services at the desired standards and efficientlevels of costs is achieved. Legislation governing municipalities must ensureimproved asset management from an operational and, more importantly, from afinancial perspective.Whilst it is estimated that municipalities are custodians of hundreds of billions ofRand in public assets, the true total value of municipal infrastructure assets is stillbeing determined. We must therefore acknowledge the magnitude of the challengefacing municipalities in providing and managing public assets in a sustainablemanner. As municipalities embrace the challenge to address infrastructure backlogsand the expansion of capital works, they must also maintain or renew existing assets.Maintenance is critical as it will always cost more – much more - to replace an assetwhich is not properly maintained. Asset management includes maintaining andrenewing existing assets as well as providing access to new assets and services in asustainable and affordable manner.Sustainable asset management requires a municipality to take a holistic approach byunderstanding the future cost and service consequences of its assets and matchingthese against revenues – problems arise when only current costs and revenues arematched. For example, every Rand spent in one year on a new asset contributes, on
average, 10 cents to every subsequent maintenance, operations and renewalbudgets. This money has to be raised from municipal revenue.The lack of reliable data on municipal assets and their values presents a majorchallenge for asset managers to justify scarce resources to maintain and renewassets. Current available research points to the lack of adequate municipal assetregisters as a common cause for audit qualifications. Although some municipalitieshave initiated projects to develop asset registers, the information is still generallyunreliable and does not fully comply with the accounting standards, and are thussubject to audit queries and qualification. In addition there have been inconsistenciesin the approach taken during early implementation resulting in extremely high costsbeing incurred in establishing asset registers and systems.This guideline has been developed to provide practical assistance to allmunicipalities and municipal entities on the process of managing public assets andforms part of a comprehensive support programme provided by the NationalTreasury to assist municipalities with financial reforms.It focuses on capturing essential information to assist councillors and planners withbroader strategic asset management decisions and to assist engineers, financemanagers and officials working with assets and their management with operationaldecisions. It is also aimed at assisting municipalities and entities to comply with theaccounting standards and reporting requirements.The guideline also recognises the need to bring together the technical operationsmanagers and finance practitioners through an integrated and holistic approach toasset management. This ensures that operational asset managers understand thefinancial implications of their responsibilities and the accounting rules that must beapplied, and in turn ensures that finance practitioners, who manage the assetregisters, fully understand operational needs and enable them to provide informationsystems that support all aspects of asset management.The guideline aims to firstly assist all municipalities in establishing accurate andcomplete asset registers based on the existing policies and accounting standards.
The future asset management and financial challenges – including those relating tocurrent value accounting, periodic asset revaluations, alternative depreciationmethods, full cost recovery as basis for setting tariffs and fees, capital investmentplanning and identification of costs of capital and return on investments inmunicipalities are all important aspects that must be reviewed as we incrementallyimplement the reforms. This guide provides pointers to such issues, however, it maynot be dealt with conclusively, and as these will be the subject of further researchover the coming years.The guideline is the culmination of a joint project of the National Treasury and keystakeholders, including municipalities and sector departments. It is aligned with theneeds of sector department and provides a valuable reference point to address allasset management related matters in municipalities.Questions and suggestions on improvements and necessary additions to the guideshould be forwarded to National Treasury, through the MFMA help facility, by emailto: mfma@treasury.gov.za showing in the subject field “Asset ManagementGuideline” to enable a question/suggestion to be routed to the most appropriateofficial.The guide and any other relevant documents will be posted on the following websites foreasy reference www.treasury.gov.za/legislation/mfma and http://oag.treasury.gov.za.Municipalities are strongly encouraged to utilise this guide to plan for and implementthe asset management function, which includes asset registers and relatedmanagement systems.National Treasury
MFMA — Local Government Capital Asset Management GuidelineCONTENTSTANGIBLE CAPITAL ASSETSAcronyms . 1Sections. 111INTRODUCTION .111.1Purpose .111.2Scope .111.3Statutory framework .131.4Structure .132COORDINATION: ASSET MANAGEMENT IMPLEMENTATION.152.1Coordination between national departments .152.1.12.2National coordination for municipal asset management . 15Coordination for successful implementation within the municipality .162.2.1Critical success factors . 162.2.2Typical asset management steering committee (AMSC) . 172.2.3Leadership required to implement asset management . 203ASSET MANAGEMENT .213.1Effective asset management .213.2Asset strategy .223.2.13.3Asset management plans . 22Asset life cycle .233.3.1Asset life-cycle costs. 253.3.2Planning and budgeting phase . 273.3.3Acquisition phase . 323.3.4Operation and maintenance phase. 373.3.5Disposal phase . 434GOVERNANCE AND INTERNAL CONTROLS .474.1System of delegation and accountability .484.1.1Systems of delegation required . 484.1.2Principles of delegation . 484.1.3Asset management policies . 514.2Safeguarding and maintaining .56i
MFMA — Local Government Capital Asset Management Guideline4.2.1Responsibilities of each asset manager . 564.2.2Internal controls over asset registers . 574.3Planning and budgeting .634.4Monitoring and reporting .645ASSET REGISTERS .655.1Creation of the asset register .655.1.1Information to be Included in an Asset Register . 675.2Condition assessment .715.3System linkages and interfaces .745.4Table of useful lives .776ACCOUNTING FOR CAPITAL ASSETS .856.1Recognition of capital assets .856.1.1Definition and recognition criteria for assets . 886.1.2Management of minor assets (assets below the capitalisation threshold) . 926.1.3Valuation at initial recognition . 936.2Elements of cost .976.3Component approach .986.4Additional guidance on determining cost for initial recognition .1006.4.1Depreciated replacement cost . 1006.5Determination of useful life .1016.6Depreciation .1026.6.1Depreciation methods . 1026.6.2Accounting transactions for depreciation . 1046.7Subsequent costs .1056.7.1Rehabilitation/Enhancements/Renewals of capital assets . 1086.8Capitalising complex projects .1116.9Measurement after recognition .1136.10Subsequent review of assets .1156.10.1Review of depreciation method . 1166.10.2Review of residual value and useful life . 1166.10.3Impairment Review . 1186.11Accounting treatment on disposal .1206.12Capital spares .1216.13Capital work in progress .123Bibliography. iii
MFMA — Local Government Capital Asset Management GuidelineTANGIBLECAPITALASSETS
MFMA — Local Government Capital Asset Management GuidelineAcronymsAMSCAsset Management Steering CommitteeAMTAsset Management TeamASBAccounting Standards BoardBOOTBuild-own-operate-transferCFOChief Finance OfficerCRCCurrent Replacement CostDMEDepartment of Minerals and EnergyDPLGDepartment of Provincial and Local GovernmentDPWDepartment of Public WorksDRCDepreciated Replacement CostDWAFDepartment of Water and Forestry AffairsEDIHElectrical Distribution Industry Holdings Pty LtdEULExpected Useful LifeGAAPGenerally Accepted Accounting PracticeGAMAPGenerally Accepted Municipal Accounting PracticesGIAMAGovernment Immovable Asset Management ActGISGeographical Information SystemGPSGlobal Positioning SystemGRAPGenerally Recognised Accounting PracticesIASInternational Accounting StandardsIDPIntegrated Development PlanIFRSInternational Financial Reporting StandardsIIMMInternational Infrastructure Management ManualIMESAInstitute of Municipal Engineering of Southern AfricaIPSASInternational Public Sector Accounting StandardsLGCAMGLocal Government Capital Asset Management GuidelineMFMAMunicipal Finance Management Act, No. 56 of 2003MPRAMunicipal Property Rates Act, No. 6 of 2004MSAMunicipal Systems Act, No. 32 0f 2000NDOTNational Department of TransportNERSANational Energy Regulator of South AfricaNIMSNational Infrastructure Maintenance StrategyNTNational TreasuryOAGOffice of the Accountant-GeneralPFMAPublic Finance Management Act, No. 1 of 19991
MFMA — Local Government Capital Asset Management GuidelinePPEProperty, Plant & EquipmentPPPPublic Private PartnershipsREDSRegional Electricity DistributorsRULRemaining Useful LifeSALGASouth African Local Government AssociationSDBIPService Delivery and Budget Implementation Plan2
MFMA — Local Government Capital Asset Management GuidelineDefinitionsEvery effort has been made to use definitions established through legislation,standards of accounting and other guidance on asset management, hencereference has been made to sources. Where definitions do not exist, terminologyhas been defined for the purposes of this guideline.Accounting Standards Board means the board established in terms of section87 of the Public Finance Management Act (PFMA). The section refers to thefunction of the board, which is to establish standards of Generally RecognisedAccounting Practice (GRAP) as required by the Constitution of the Republic ofSouth Africa. (PFMA section 1)An active market is a market in which all the following conditions exist:(a) the items traded within the market are homogeneous;(b) willing buyers and sellers can normally be found at any time; and(c) prices are available to the public. (GRAP 102)Asset Custodian is a person in any position or level in the organisation entrustedwith the safeguarding and use as well as the condition monitoring of a specificasset.Asset Life-Cycle is the cycle of activities that an asset goes through - includingplanning, design, initial acquisition and/or construction, cycles of operation andmaintenance and capital renewal, and finally disposal.Asset Management is a broad function and includes a structured process ofdecision-making, planning and control over the acquisition, use, safeguarding anddisposal of assets to maximise their service delivery potential and benefits, and tominimise their related risks and costs over their entire life.Asset Manager is any official who has been delegated responsibility andaccountability for the control, usage, physical and financial management of themunicipality’s assets in accordance with the entity’s standards, policies,procedures and relevant guidelines.3
MFMA — Local Government Capital Asset Management GuidelineAsset Register is a record of information on each asset that supports theeffective financial and technical management of the assets, and meets statutoryrequirements.The asset register should also facilitate proper financial reporting and is ultimatelythe responsibility of the Chief Financial Officer (CFO).Assets are resources controlled by an entity as a result of past events and fromwhich future economic benefits or service potential are expected to flow to theentity. (GRAP 1)Capital Assets are all assets with a life cycle of greater than one year and abovethe capitalisation threshold (where applicable). For example, this would includeproperty, plant and equipment (infrastructure network, furniture, motor vehicles,computer equipment, etc.), intangible assets, and investment property.Capitalisation Threshold is the value above which assets are treated as capitalassets and entered into an asset register from which reporting in the financialstatements (specifically the Statement of Financial Position) is extracted.Carrying Amount is the amount at which an asset is recognised after deductingany accumulated depreciation and accumulated impairment losses. (GRAP 17)Class of Property, Plant and Equipment means a grouping of assets of asimilar nature or function in an entity’s operations that is shown as a single itemfor the purpose of disclosure in the financial statements. (GRAP 17) (This definitionof class applies to all capital assets.)Class of assets is also sometimes referred to as the asset hierarchy.Component is a part of an asset with a significantly different useful life andsignificant cost in relation to the rest of the main asset. Component accountingrequires that each such part should be separately accounted for and is treatedseparately for depreciation, recognition and derecognition purposes. It is alsoreferred to as separately depreciable parts.4
MFMA — Local Government Capital Asset Management GuidelineCost is the amount of cash or cash equivalents paid or the fair value of the otherconsideration given to acquire an asset at the time of its acquisition orconstruction or, where applicable, the amount attributed to that asset whenconstruction or, where applicable, the amount attributed to that asset wheninitially recognised in accordance with the specific requirements of otherStandards of Generally Recognised Accounting Practices (GRAP). (GRAP 17)Current Replacement Cost is the cost of replacing an existing asset with amodern asset of equivalent capacity. (DPLG Guidelines)Depreciable Amount is the cost of an asset, or other amount substituted forcost, less its residual value. (GRAP 17)Depreciated Replacement Cost is a measure of the current value of an assetbased on its current replacement cost less an allowance for deterioratio
IFRS International Financial Reporting Standards IIMM International Infrastructure Management Manual IMESA Institute of Municipal Engineering of Southern Africa IPSAS International Public Sector Accounting Standards LGCAMG Local Government Capital Asset Management Guideline MFMA Municipal Finance Management Act, No. 56 of 2003
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