Options for Infrastructure Reporting

Abstract

The article proposes a more effective system for reporting on infrastructure held by public sector agencies, having regard to the information needs of users of public sector reports, and with specific reference to concerns about inter-generational equity. It initially reviews options for accounting and reporting on the condition and value of infrastructure, and on proposed routine, overdue or deferred maintenance expenditure. A distinction is drawn between major cyclical or seasonal maintenance expenditure necessary to maintain or restore infrastructure, and projected expenditure to replace or upgrade facilities to meet higher standards of functionality or service quality. The options identified here entail combinations of asset valuations, balance sheet depictions and associated disclosures. They also encompass supplementary disclosures concerning such matters as physical condition, asset management plans, and contractual commitments to perform maintenance or other works. Most embody assumptions about the future use of infrastructure.An assessment of those options suggests that the optimal mode of reporting would not involve 'recognition' of deferred maintenance as a liability, as a contra asset or as a component of equity (the treatments frequently advocated). Rather, it would involve a package of supplementary financial and non-financial disclosures-with the latter incorporating a combination of descriptive information and condition ratings for assets of differing economic lives, and statements of assumptions about future asset use. Possibly these disclosures could be augmented by disclosures of proposed or projected cash flows on future maintenance and upgrading work.

Discussion of Lev, Radhakrishnan and Zhang

“…Some advocate greater disclosure of the investment needed to upgrade or remediate physical assets-particularly in the public sector, where governments have a responsibility to manage legacy infrastructure (see Walker et al, 2000) but the same concerns may also arise in certain industries which operate railways or pipelines or tollroads or engage in electricity generation and distribution. Similarly, existing disclosure rules do not provide comprehensive information about financial commitments that are not recognized as liabilities (see Walker, 2008).…”

How Well Does Accrual Accounting Fit the Public Sector?

“…Accountability within the public sector must embrace a much broader discourse than the narrow and generally agreed upon financial emphasis which dominates within the arena of commerce. (See Mulgan (2000) for a comparison of accountability in the public and private sectors; Walker 2002 for a general discussion of the need for a range of performance indicators within the public sector; Walker et al (1999Walker et al ( , 2000 for options on reporting on government infrastructure; Carnegie and Wolnizer (1996) for proposals to enable enhanced systems of accountability within public museums).…”

Intergenerational Equity: Treatment of Infrastructure in New Zealand Local Government Financial Planning

“…Pallot () and Walker et al. () specifically highlight the potential for intergenerational equity to be affected through non‐transparent accounting manipulations relating to infrastructure. Inequity exists when one generation funds the construction of assets through loan repayments, pays to maintain the assets, and funds future replacements through depreciation (Pallot, ; McCrae and Aiken, ).…”

“…There are several areas of debate: valuation of infrastructure assets; issues of recognition and treatment of depreciation; issues of recognising and treating deferred maintenance; and problems in financing infrastructure assets. Pallot (1997) and Walker et al (2000) specifically highlight the potential for intergenerational equity to be affected through non-transparent accounting manipulations relating to infrastructure. Inequity exists when one generation funds the construction of assets through loan repayments, pays to maintain the assets, and funds future replacements through depreciation (Pallot, 1997;McCrae and Aiken, 2000).…”