Use of CCA in the Public Sector: Lessons From Australia’s Experience With Public Utilities

Abstract

The background to the widespread adoption by Australian public trading enterprises of a deprival value variant of current cost accounting reflects successive efforts to establish demanding rate of return targets, or to legitimise price increases, or to monitor the financial performance of PTEs on a national basis. The experience of three public utilities in implementing CCA is reviewed. This experience suggests that CCA valuation of infrastructure (using deprival or optimized deprival values) is unable to deliver financial data to permit valid cross‐sectional and longitudinal comparisons of performance. Issues raised during the 1970s and 1980s debates about CCA were either ignored or overlooked.

The quality and conservatism of the accounting earnings of local governments

“…Even so, the economic benefits of applying existing GAAP to these entities continues to be debated (e.g. Barton, 1999Barton, , 2005Walker et al, 1999Walker et al, , 2000. Resistance in the US to GASB-led initiatives to expand GAAP disclosure requirements for government entities is based on the costs of implementing and monitoring the expanded disclosures and questions about whether sufficient demand exists for this information (Barton, 1999;Copley et al, 1997;Jones and Puglisi, 1997;Rowles et al, 1998).…”

Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison

“…38 For a detailed discussion of regulatory risk, see Pedell (2006). See Walker et al (2000) for the operational difficulties associated with such an optimisation approach, which are vividly illustrated by case studies of Australian public utilities. In addition, Johnstone's (2003) critique of DORC partly draws on the problems associated with the optimisation issue.…”

“…However, one must take seriously the reservations about the use of current-cost accounting for the purposes of financial accounting. Walker et al (2000) criticise the use of current-cost accounting for measuring accounting profitability and performance because it can create strong incentives for revaluations. More specifically, they address the problems associated with an optimisation approach; however, this is not a necessary feature of replacement-cost depreciation schemes.…”

Measurement: A Way Forward

“…Table 2 summarizes the discount rates recommended under different standards. Walker et al (2000) demonstrate their impact in practice. Arguably, face amounts are understandable, reliable, but often less than relevant when claims are not due for settlement for extended periods.…”

“…Whereas the U.S.A.'s FASB could only note that some inventories are valued at 'current cost', Australia is accustomed to firms revaluing assets upwards to estimates of resale prices or 'directors' valuations'. Australia also has a decade or more experience in the wholesale application of current replacement prices (or derivatives, such as 'deprival' or 'MEERA' values) to the valuation of infrastructure assets in the public sector, particularly for public utilities (see Walker et al, 2000), but also for general government agencies.…”