CHAPTER 11 Capital Assets - OAG

ACCOUNTING MANUAL

FOR DEPARTMENTS

CHAPTER 11

Capital Assets

Chapter 11: Capital Assets

Issued September 2021 Page 2

Chapter Content

1 Overview ........................................................................................................................ 4

2 Key Learning Objectives ................................................................................................ 4

3 Scope ............................................................................................................................. 5

4 Identifying, Classifying and Recording Capital Assets .................................................... 7

4.1 Control of a capital asset ....................................................................................... 7

4.2 Tangible assets ..................................................................................................... 9

4.3 Intangible assets ................................................................................................. 10

4.3.1 Identifiability of an intangible asset .......................................................... 10

4.3.2 Without physical substance ..................................................................... 11

4.4 Types of a capital assets ..................................................................................... 12

4.4.1 Loose tools, spare parts and servicing equipment ................................... 13

4.4.2 Safety equipment ..................................................................................... 14

4.4.3 Library materials ...................................................................................... 14

4.4.4 Investment property ................................................................................. 14

4.4.5 Biological assets ...................................................................................... 16

4.4.6 Heritage assets ........................................................................................ 19

4.4.7 Infrastructure assets ................................................................................ 20

4.4.8 Specialised millitary equipment ................................................................ 22

4.4.9 Internally generated intangible assets ...................................................... 22

4.4.10 Website costs .......................................................................................... 25

4.4.11 Immovable assets .................................................................................... 25

4.5 Recording of Capital Assets ................................................................................ 25

4.5.1 General .................................................................................................... 25

4.5.2 Asset register ........................................................................................... 26

4.5.3 Asset components ................................................................................... 26

5 Measurement of Capital Assets .................................................................................... 27

5.1 Initial measurement of capital assets .................................................................. 27

5.1.1 Movable assets ........................................................................................ 28

5.2 Elements of cost ................................................................................................. 29

5.3 Warranty costs .................................................................................................... 30

5.4 Assets transferred ............................................................................................... 31

5.4.1 Transfer between departments and/or other entities ................................ 31

5.5 Fair value ............................................................................................................ 32

5.5.1 Fair value of biological assets and agricultural produce ........................... 36



5.6 Subsequent Measurement of Capital Assets ....................................................... 37

5.6.1 Subsequent costs .................................................................................... 37

6 Accounting for Immovable Assets ................................................................................ 38

6.1 Cost of constructed assets .................................................................................. 39

6.1.1 Capital work-in-progress (CWIP) ............................................................. 39

6.1.2 Ready for use capital assets .................................................................... 42

6.1.3 CWIP project termination ......................................................................... 43

6.1.4 Possible write-off or impairment ............................................................... 44

6.1.5 Continuing a project previously terminated .............................................. 45

6.1.6 Reporting ................................................................................................. 46

6.2 Leasehold / capital improvements on the existing property ................................. 46

6.3 Specific considerations for Immovable Assets ..................................................... 47

6.3.1 Interim and Deemed values ..................................................................... 47

6.3.2 Structures and Land ................................................................................ 48

7 Removal of Capital Assets ........................................................................................... 50

8 Disclosure of Capital Assets ......................................................................................... 51

9 Summary of Key Principles .......................................................................................... 52

9.1 Definition and identification ................................................................................. 52

9.2 Recording and measurement .............................................................................. 52

9.3 Disclosure ........................................................................................................... 53

ANNEXURE A: Application of the Fair Value Model ..................................................... 54

ANNEXURE B: AFS Notes on Capital Assets .............................................................. 71

ANNEXURE C: Comprehensive Examples .................................................................. 74



1 Overview

The purpose of this Chapter is to provide guidance on how to identify and report on capital assets.

The Office of the Accountant-General has compiled a Modified Cash Standard (MCS) and this manual serves as an application guide to the MCS which should be used by departments in the preparation of their financial statements.

Any reference to a “Chapter” in this document refers to the relevant chapter in the MCS and / or the corresponding chapter of the Accounting Manual.

Explanation of images used in the manual:

2 Key Learning Objectives

• Understanding the definition for and different types of capital assets;

• Understand the capital asset transactions and what needs to be disclosed and recorded;

Definition

Take note

Management process and decision making

Example



3 Scope

[MCS Chapter 11.02 to 11.08]

Chapter 11 on Capital Assets in the MCS, and consequently this guide does not apply to:

• The accounting requirements in respect of the primary financial information for expenditure on capital assets (i.e. the expenditure relating to the acquisition / maintenance etc.). This is dealt with in Chapter 8 on Expenditure. A department must however consider the provisions of this Chapter in order to correctly classify the type of asset acquired;

• The recording of a capital asset subject to a finance lease. This is discussed in more detail in Chapter 13 on Leases. A department must however apply the provisions of this Chapter on expiry of the lease if the department takes control over the leased asset.

• Intangible assets arising from powers and rights conferred to a department by legislation, the Constitution, or by equivalent means;

Departments may execute a regulatory right over certain activities, for example fishing, mining or industries such as telecommunications and energy. These regulatory rights and the power to transfer, license, rent or execute such rights are excluded from the scope of this chapter as these powers and rights are conferred to the department by legislation, the Constitution or other equivalent means. These rights once issued, are usually an intangible asset of those individuals or entities that acquired each right, provided that the acquirer can demonstrate that the definition and criteria for recording an intangible asset are met.

Similarly, a department’s right to levy taxes is granted in terms of statute and are thus excluded from the scope of this Chapter and not required to be valued for the purposes of recording in the financial statements.

• Inventories, these are discussed in more detail in Chapter 12 on Inventories;

• Agricultural produce after the point of harvest, this is discussed in more detail in Chapter 12 on Inventories;

Accounting treatment of current finance leased assets

Departments are at present not required to include assets acquired through finance leases in their asset registers until the finance lease period has expired.

These assets must however be reflected in the finance lease register maintained by the department.

Accounting treatment of expired finance leased assets

Where a finance lease agreement has expired and the department continues to use the asset, and ownership of the asset transfers to the department, the asset must be recorded at its fair value at the date of expiry of the lease in the department’s asset register.

Supply chain regulations should be followed to extend or to enter into a new lease agreement.



• Capital assets acquired / relinquished through transfer of functions are accounted for in accordance with Chapter 19 on Transfer of Functions.

• Capital assets acquired by an agent (on behalf of a principal) are accounted for in accordance with Chapter 16 on Accounting by Principals and Agents.

Capital assets versus Inventory classification

Some departments acquire or construct capital assets for distribution (movable and immovable assets) as part of their normal operations. These capital assets should be classified as inventory only if they meet the definition of inventory as outlined in Chapter 12 on Inventories.

However, immovable assets constructed or purchased for distribution which ordinarily meet the definition of inventories are still to be classified and reported on as capital assets in line with the requirements of the MCS chapter 11 until the inventory is effective. The actual distribution of these capital assets to the beneficiaries should comply with the requirements of PFMA section 42.

PFMA Section 42 requirements

1) When assets or liabilities of a department are transferred to another department or other institution in terms of legislation or following a reorganisation of functions, the accounting officer for the transferring department must—

a) draw up an inventory of such assets and liabilities; and

b) provide the accounting officer for the receiving department or other institution with substantiating records, including personnel records of staff to be transferred.

2) Both the accounting officer for the transferring department and the accounting officer for the receiving department or other institution must sign the inventory when the transfer takes place.

3) The accounting officer for the transferring department must file a copy of the signed inventory with the relevant treasury and the Auditor-General within 14 days of the transfer.

The general interpretation is as follows:

a) Other institutions refer to public entities, municipalities, constitutional institutions and other private entities (such as individuals and non-profit organisations).

b) Inventory in this case refers to the list of assets and liabilities to be transferred.

c) The transfer is deemed to be completed on the day both accounting officers have signed it off. Generally, its on this date the transferring department removes the affected assets from the asset register and the receiving department records the newly acquired assets through the transfer from another department in the asset register and this ensures the following:

i. The affected assets are always reported on by one department (There is no period in which these assets are not reported on by either the transferring department or the receiving department.

ii. The affected assets are not reported on by both departments at the same time which would result in double counting.



• Assets should be accounted for by the Principal as and when required in terms of this Chapter.

4 Identifying, Classifying and Recording Capital Assets

Before a department records a capital asset, it considers whether it has a capital asset and the nature thereof.

4.1 Control of a capital asset

[MCS Chapter 11.10 – 11.16]

The definition of an asset, as discussed in Chapter 2 on Concepts and Principles as well as in Chapter 11 on Capital Assets, has three components which must all be satisfied in order for an item to be recognised / recorded as ‘a capital asset' for accounting purposes.

These components are: control; past transactions or events; service potential or economic benefits.

Identify Classify Record

Example: Assets acquired by an agent

Department A acts as an agent on behalf of Department P to acquire furniture.

This furniture purchased by Department A will not be accounted for by Department A as capital assets, but rather disclosure thereof will be made in the agent-principal transactions note to the financial statements.

Department P will record and report on the furniture as capital assets in its financial statements.

Assets are resources controlled by a department as a result of past events and from which future economic benefits or service potential are expected to flow to the department.

• Does the item meet the definition of an asset? MCS Chapter 11 paragraph .10

• Is it probable that future economic benefits or service potential associated with the item will flow to the department? MCS Chapter 11 paragraph .21(a)

• Is the cost or fair value determinable? MCS Chapter 11 paragraph .21(b)

In the case of immovable assets, also consider the requirements in MCS Chapter 11 Appendix A

In the case of intangible assets also consider the requirements in MCS Chapter 11 paragraph .19.

Consider requirements of MCS Chapter 11 paragraphs .23 - .58

Consider requirements of MCS Chapter 11 paragraphs .59 - .86



The department should have the power and capacity to control the service potential or future economic benefits of the asset;

The most obvious means of demonstrating control of an asset is by way of legal ownership. With regard to motor vehicles, the “Certificate of Registration in Respect of Motor Vehicle” serves as the title deed, specifying the registered owner of the vehicle on the National Traffic Information System (NATIS).

Other types of documentation demonstrating legal ownership include and are not limited to the following:

• warranties or guarantees;

• certificates of authenticity;

• valuation certificates;

• copyrights;

• trademarks;

• licenses or permits

• invoices (proof of payment);

The key principle is that of control or power of direction over the utilisation of the economic benefits or service potential of the asset rather than mere 'physical' control.

The capacity of a department to control benefits may be the result of legal rights, but benefits may satisfy the definition of an asset even when there is no legal right.

The service potential or future economic benefits arose from past transactions or events;

Capital assets are recorded from the point when some event or transaction transfers control over the asset to the department. It is essential that the past event giving rise to control be identified, since transactions or events expected to occur in future will not necessarily give rise to assets.

Control exists where a department has the power to obtain or direct the future economic benefits or service potential from the underlying resource and to restrict the access of others to those benefits throughout the major portion of the lifecycle of the asset.

Example: Existence of control

An ambulance used by a state-owned hospital meets the definition of control because (a) the ambulance contributes to the achievement of the department’s overall objectives and thus embodies service potential; and (b) the department can restrict access to the ambulance – only qualified officials of the department can operate the ambulance.

Example: Indicators of past transactions or events are:

• When the department pays for the asset;

• When it takes possession of the asset; or

• When enters into a contract to develop / construct the asset; or



The asset should have future service potential or economic benefit for the department

Assets that are used to generate net cash inflows are usually described as embodying “future economic benefits”. Assets that are used to deliver goods and services in accordance with a department’s mandate, but do not directly generate net cash inflows are often described as embodying ‘service potential’.

The concept of ‘commercial return’ for assessing whether an asset should be recorded is not always applicable to public sector entities, as they provide public services and redistribute wealth for a variety of social and economic purposes. Therefore, in applying the asset definition to the public sector environment, the focus is mostly on service potential rather than future economic benefits.

Service potential is the capacity of an asset, singularly or in combination with other assets, to contribute directly or indirectly to the achievement of an objective of a department. This objective may include provision of services to other institutions or the public at large for which the department receives no or little economic return.

4.2 Tangible assets

[MCS Chapter 11.17]

Tangible assets are assets that one can touch, hold or feel that a department uses in the production or supply of goods and or services. Typical examples of tangible capital assets are facilities, equipment and vehicles. Since they are tangible items, they also have the risk of being destroyed by fire, wind/rain, or other disasters or accidents.

These assets form the majority of assets used by departments in the day to day administration of their functions and amounts to huge numbers and billions of rand. Tangible assets can further be separated based on whether they are movable (vehicles, furniture and computer equipment) or immovable (land,

• Legislation is enacted that mandates a department to administer the asset.

Future economic benefit or service potential embodied in an asset is the potential to contribute directly, or indirectly, to the flow of cash and cash equivalents to the department or to the rendering of services by the department.

Example: Service potential

Provincial department of public works (DPW) builds office accommodation as part of its service delivery mandate. The objective is not to make a profit in rendering this service as would be the case for a landlord with a profit motive. Instead, by providing and maintaining the office accommodation for use by other departments it ensures that the service potential of the asset is utilised as well as the objectives/ mandate of the department realised.

Tangible assets are non-monetary assets having physical substance that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes or for the development, construction, maintenance or repair of other capital assets; and

• are expected to be used during more than one reporting period.



school buildings and office buildings). Recording capital assets and reporting thereon has a material impact on financial statements due to the continued investment in new assets on an annual basis and the value involved.

4.3 Intangible assets

[MCS Chapter 11.17 – 11.18]

Not all intangible items meet the definition of an intangible asset for the purposes of financial reporting as they are not identifiable. The fact that software is contained on a CD or the right to use included in an agreement on paper, does not mean that the asset has physical substance because there is a physical item to touch. The asset is the knowledge or know-how which cannot be seen or touched. If an item within the scope of this section does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally will be expensed through the statement of financial performance as part of goods and services rather than capital assets.

4.3.1 Identifiability of an intangible asset

[MCS Chapter 11.19 – 11.20 and 11.58]

An asset meets the identifiability criterion in the definition of an intangible asset when it:

• is separable, i.e. is capable of being separated or divided from the department and sold, transferred, licenced, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the department intends to do so; or

• arises from binding arrangements (including rights from contracts) regardless of whether those rights are transferable or separable from the department or from other rights and obligations.

For the purpose of this section, a binding arrangement describes an arrangement that confers similar rights and obligations on the parties to it as if it were in the form of a contract.

The treatment of the licence fee is closely linked to the period it will entitle the department to the use of the software. If the licence fee payable is for benefits for more than 12 months, it becomes a capital expenditure (intangible asset) in its own right, however, if the department is paying the annual licence fee for the next few years in order to take advantage of a discount, the licence fee still remains current expenditure since contractually it is payable yearly for annual benefits.

An intangible asset is an identifiable non-monetary asset without physical substance.

Termed software licenses versus perpetual software licenses

Departments either acquire a termed license or a perpetual license in terms of which:

(a) A termed license – a department will acquire the “right to use” the software a period specified in the license agreement;

(b) A perpetual license – a department acquires the “right to use” the software in perpetuity.

Where a department acquires a termed-license it must assess the term of use and whether the term exceeds 12 months. Where the term of use is greater than 12 months the software shall be classified as a capital intangible asset.

Perpetual software licenses are classified as capital intangible assets when acquired. Although these licences can be used in perpetuity, in practice they often need to be



Other types of intangible assets include the following:

• Rights under licensing agreements for films, videos, plays and manuscripts in entities such as broadcasting, tourism, arts and culture;

• Patents and copyrights held by government entities in fields such as tourism, research, education, health, agriculture, archives;

• Databases and database management software created and maintained by government entities, such as those containing information on the demographic statistics of the population, land ownership, private sector entity ownership and registers of securities and charges;

• Airport landing rights;

• Licenses to operate radio or television stations;

• Import / export licenses; and

• Right to control the extraction of mineral resources.

4.3.2 Without physical substance

[MCS Chapter 11.57]

Intangible Physical substance Why is it still seen as “without physical substance”?

Licenses (software licenses, etc.)

Licence document / agreement

The department pays for the right of use of, e.g. software. Thus, a department does not pay for the tangible item being the piece of paper on which the license agreement is printed, but rather for the right to use the knowledge imbedded in the software (you can’t touch a right of use).

Application software CD The value of application software is not driven by the CD that it is loaded on, but rather by the knowledge that it embodies. Thus, the physical substance is deemed to be incidental.

Electronic books or books for learners with eye impairment

CD The department buys 20 CD’s for the library. These CD’s can be borrowed and listened to, similar to books being borrowed for reading purposes.

Should a CD be damaged in any way, it will be

replaced by a new CD which must be bought, In this

instance the ‘asset’ is the tangible CD as there is no

right to the information contained on the CD other than

to listen to it.

Although the cost of the CD in question is greater than

that of an ‘empty’ one, the price paid is not for the

‘right’ to the information contained thereon but for the

work to copy the material onto a CD format. This is the

same with a book. If a department purchases a book

full of information, that department does not ‘own’ the

information but a physical representation of the

replaced at a future date. The department would assess the actual useful life of these licenses with reference to industry practices.



Intangible Physical substance Why is it still seen as “without physical substance”?

information for use or application of the information.

The information cannot be utilised for future benefit or

copied or sold without specific authorisation.

Educational Material CD In a case where the department purchases a CD from the creator of educational material with the rights to copy, distribute and place the educational material in the library, The ‘asset’ would be the ‘right to copy’. A right to the information on the CD and the ‘asset’ will be intangible. In this instance the CD is the incidental physical embodiment of the right.

Patents Patent registration document

The value of a patent is not driven by the piece of paper that indicates its registration but rather by the knowledge that it embodies. Thus, the physical substance is deemed to be incidental.

4.4 Types of a capital assets

[MCS Chapter 11.03, 11.59 and 11.60]

Examples of capital assets in the public sector:

• investment properties;

• biological assets;

• specialised military equipment;

• heritage assets;

• infrastructure assets;

• intangible assets; and

• other immovable and movable capital assets

Capital assets are split into major capital assets and minor capital assets for administrative convenience. Currently, minor capital assets include those items costing less than R5 000. To align this practice to the budget process they are budgeted for as “current” expenditure. Costs incurred for research purposes are also classified as “current expenses” without considering the threshold.

Exclusion list

PFMA section 38(1)(d) states “The accounting officer for a department, trading entity or constitutional institution is responsible for the management, including the safe-guarding and the maintenance of the assets, and for the management of the liabilities, of the department, trading entity or constitutional institution.”

Keeping the above quoted legislation in mind, if the department has capital assets by definition but within the legal framework(s), after considering all the relevant existing legislation, chooses to have the exclusion list of capital assets:

a) The criteria for coming up with that exclusion list must be clearly documented and included in the departmental asset management policy

b) The criteria to be consistently applied and be accompanied by the enforceable alternative control procedures and



4.4.1 Loose tools, spare parts and servicing equipment

[MCS Chapter 11.23 – 11. 25]

Spare parts and servicing equipment are usually accounted for as inventory or consumables. However, certain spare parts and stand-by equipment qualify as capital assets when a department expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with a specific capital asset, they are accounted for as capital assets. Examples of spare parts and servicing equipment are propellers and engines of aircrafts and vessels.

Some loose tools can be used for more than one year. Such tools can be small and relatively inexpensive and can be treated as inventory, consumables or minor capital assets. Examples of loose tools:

• saws (manual or electronic);

• spades;

• axes and hammers;

• screwdrivers;

• spanners or wrenches; and

• hand-held drills and grinders;

c) Those excluded capital assets still need to be controlled and managed.

The classification of these capital assets does not change but the capital assets meeting the acceptable set criteria are merely excluded from recording in the asset register.

Treatment of toolbox as either minor or major capital asset

Some flexibility is however needed. Depending on the nature and significance of such tools, they may be treated as major capital assets and their acquisition and disposal recorded as such.

An example is where toolboxes are used. The toolbox including all tools can be treated as one unit and as a major capital asset since the value of all the tools in the box could be significant and collectively exceed the capitalisation threshold.

Example: Loose tools

Scenario 1

Department B purchases a medical toolkit which includes scalpels, forceps and tongs for R10 000. The equipment can be treated as one unit.

The toolkit is a major capital asset and will be recorded in the major asset register as a unit since the toolkit can be allocated to a specific custodian who can be held responsible for the content therein.

Scenario 2

A forceps included in the toolkit as per scenario 1 is lost and the Department purchases a new forceps for R300 to replace the lost one

The purchase of individual items within the toolbox is treated as maintenance (Current Expenditure – Goods & Services), the R300 would therefore be expensed. The total



4.4.2 Safety equipment

[MCS Chapter 11.26]

Safety equipment acquired to meet environmental regulations, qualify as capital assets if they enable related assets to generate future economic benefits or service potential in excess of what these benefits would have been if this safety equipment was not acquired.

4.4.3 Library materials

[MCS Chapter 11.27]

Library materials under the control of the department that meet the definition of a capital asset must be accounted for by the department using the principles contained in this chapter, no matter how it was acquired. When testing for control the mandate and ultimate accountability must be considered not just the physical possession or location of the material itself.

4.4.4 Investment property

[MCS Chapter 11.28 – 11.33]

value of the toolkit does not change significantly by the replacement of an individual item so the original value remains relevant.

Examples: Safety equipment

New legislation is enacted that requires x number of fire hydrants per floor of every building. The installation of the hydrants is needed to enable the continued use of the building and its future economic or service potential, in compliance with the new safety standards. The cost of the hydrants and the installation thereof will be recorded as a capital asset, major or minor depending on the cost.

An old building still in use has asbestos ceilings which were installed when the building was constructed. As a result of medical conditions that are directly attributed to asbestos the building can no longer be used as is. To enable further use the ceilings must be removed or covered up. A decision is made to cover up the existing ceilings with a new false ceiling made from special material that will protect users of the building from the asbestos particles. The cost of the new technology and installation thereof will be recorded as capital assets.

For detailed guidance on library materials refer to the Accounting for Library Material Guide on the Office of the Accountant-General’s (OAG’s) website.

Investment property is a property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

• use in the production or supply of goods or services, or

• for administrative purposes; or

• sale in the ordinary course of operations.



In determining whether a capital asset should be classified as investment property, a department considers if the main purpose and most significant use of the property is to earn rental or for capital appreciation.

Investment property is disclosed as part of Buildings and other fixed structures in the financial statements. To distinguish between the different types of buildings and other fixed structures the department must request the Basic Accounting System (BAS) reports that contain the details of the asset segment.

Distinction between Investment Property and Other Buildings

Investment property Other buildings

The asset generates its own cash flows (on a commercial basis).

Rental income earned is incidental; the asset is made available for service delivery purposes.

For example, DPW, the mandated custodian of immovable property, in this case, buildings, provides one of those buildings to another government department (Department A) for use and Department A is charged a rental of R20 000 a month. The rent charged in this case is considered as incidental as DPW is doing so in execution of its service delivery mandated

The asset is held for capital appreciation. The asset is held to achieve service delivery objectives rather than to earn rental or for capital appreciation.

For example, all the buildings held by DPW whether occupied by DPW itself or by another department as a result of its service delivery mandate are not held specifically to earn rent or for capital appreciation purposes but rather for service delivery purposes

Includes property that is being constructed or developed for future use as investment property.

Includes owner-occupied property such as office buildings and residential buildings occupied by staff members.

[Assets used by employees, irrespective of whether or not the employees pay rent at market rates, are owner occupied – outside the scope of investment property]

Example: Investment property

• land held for long-term capital appreciation rather than for disposal, e.g. through sale or transfer, in the ordinary course of operations.;

• A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases on a commercial basis;

• A property owned by the entity and leased out at a below market rental.

• Property that is being constructed or developed for future use as investment property;

• Land held for a currently undetermined future use.



Includes land held for an undetermined use. Includes assets held for strategic purposes.

There are instances where a portion of a property is held to earn rentals and another portion is used by the department itself for administrative purposes or for delivering goods and services. If the portions of the property can be sold separately then the portion held to earn rental is investment property.

4.4.5 Biological assets

[MCS Chapter 11.34 – 11.38]

Example: Distinguishing between different types of properties

A department has three properties which are used as follows:

• the first property is used as employee accommodation;

• the second property is used as the offices of the department; and

• the third property was specifically developed and constructed to earn rental income and is rented out to another entity for a monthly rental income.

First property

The property is held for employee housing to contribute to the department’s provision of services and therefore is not investment property. The building should be classified as residential buildings. It is not important whether there is alternative accommodation available for the employees or not - [Property housing the employees is specifically excluded from the scope of Investment Property]

Second property

The property is held by the department for administrative purposes and is specifically excluded from the definition of investment property. The building should be classified as non-residential buildings.

Third Property

The property is held exclusively to earn rentals and this property is specifically included in the definition of investment property and should therefore be classified as investment property.

Biological assets are living animals or plants.

Agricultural produce is the harvested product of the department’s biological assets and will be reflected as inventory.

Biological transformation is the process of growth, degeneration, production or procreation that causes qualitative and quantitative changes in a biological asset.

For reporting purposes, we do not differentiate between biological assets held for agricultural purposes and other purposes as long as they all meet the definition of biological assets



The above definitions are explained by way of the examples below:

Biological assets Agricultural produce Products that are the result of processing after harvest

Sheep Wool Yarn, carpet

Trees in a plantation forest Logs Furniture

Plants Cotton Thread, clothing

Dairy cattle Milk Cheese

Pigs Meat Sausages, bacon

Bushes Leaf Tea, cured tobacco

Vines Grapes Wine

Fruit trees Picked fruit Processed fruit

Wildlife (game) Meat Venison

The key feature that differentiates agricultural activities from other related activities is the intended use of the assets.

Departments often encounter difficulties in deciding what type of asset category should be applied to a biological asset owned by a department. In deciding under which asset category a biological asset should be accounted for, a department should consider the intended use of such asset.

If an activity is for recreational purposes, it is specifically excluded from this section.

If the department does not actively manage the activity (being the biological transformation) or the assets do not undergo a biological transformation, it is not an agricultural activity and the assets should be treated as biological capital asset if it meets the definition.

As the MCS does not distinguish between biological assets and agricultural activities all biological assets will be reflected as capital assets where the definition is met.

Slaughtered animals and harvested crops are no longer biological assets, because once a biological asset is slaughtered or harvested it no longer meets the definition of a biological asset and should then be regarded as inventory until it is sold or distributed. Refer to paragraphs below.

Agricultural activity is the management by a department of the biological transformation of biological assets: for sale, into agricultural produce, or into additional biological assets.

For example, the Department of Correctional Services operates farms where crops are planted, tended and harvested for sale to the market or for use in the kitchens at the correctional facilities to feed the inhabitants. The Department is actively managing the process and is therefore involved in agricultural activity.

An important principle in the MCS is that departments should apply this chapter for agricultural produce only up to the point of harvest.

After harvesting the principles of inventory will apply to the produce.



Biological assets exclude any cultures, cells, bacteria and viruses used in laboratories for research purposes or as inputs into vaccines, etc. Items used for research purposes are classified as “current expenses”.

Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.

Example: Biological Assets

Department A farms chickens, the chickens are to be sold or consumed within three months after their acquisition or birth date.

The chickens are biological assets by nature however due to their purpose or use in this case; they will not be treated as a capital asset since they do not meet the definition of capital assets as per MCS paragraph .09 of Chapter 11 on Capital assets as they are not kept for more than a year.

These chickens should be classified as inventories and are accounted for in terms of Chapter 12 on Inventories.


Department A is mandated to manage the animal numbers for conservation purposes such as in National Parks. The department does not manage these animals individually but as a group (the environment).

The department is therefore not expected to tag these animals and record them in the asset register since the department does not have control as defined over each animal. The same applies for plants, bees flying over and so on.

The department is also not expected to account for the randomly visiting animals that belong to the neighbouring farms (Animals belonging to the other institutions)

The activities conducted to manage the environment would be part of performance information.

However, in a case of a Zoo where they do not only manage the numbers but have control over the animals they keep, the animals will be individually classified and recorded as biological assets.


Department B purchases ten heads of dairy cattle for R20 000 each on the 1st of June 2014. At year end (31/03/2015), the fair value of the dairy cattle is R25 000 each.

The cattle will be disclosed at R250 000 at year end if the department’s policy is to show the dairy cattle at fair value, if not it must be reported at cost. Chapter 11 on Capital Assets allows the departments to use either of the two.

The department’s choice of either reporting at fair value or cost regarding biological assets must be clearly indicated in the department’s asset management policy.



4.4.6 Heritage assets

[MCS Chapter 11.39 – 11.41]

Characteristics of heritage assets, include the following:

• Their value in cultural, environmental, educational and historical terms is unlikely to be fully reflected in a financial value based purely on a market price;

• Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by sale;

• They are often irreplaceable and their value may increase over time even if their physical condition deteriorates; and

• It may be difficult to estimate their useful lives, which in some cases could be several hundred years.

Older buildings can be of an age where they may attain heritage status. Prior to any alterations being done the relevant national or provincial agency should be contacted to ascertain whether the structure is considered a heritage asset or not. There may be different conditions attached such as preserving of the façade but the interior could be altered or the entire structure may not be altered. Any conditions should be noted and flagged in the asset register.

It is advised that a department that has biological assets maintains a policy and standard operating procedures that clearly state the nature, management, accounting treatment and other useful information on the management of the department’s biological assets.

Heritage assets are assets that have a cultural, environmental, historical, natural, scientific, technological or artistic significance and are held indefinitely for the benefit of present and future generations.

Example: Heritage assets

• Historical buildings and monuments e.g. Union Buildings;

• Archaeological sites e.g. Sterkfontein Caves;

• Conservation areas and nature reserves e.g. Cradle of mankind; and

• Works of art e.g. paintings.

In summary, some key features of heritage assets that can be used in identifying an asset as a heritage asset:

• The asset is held indefinitely;

• A national or provincial agency has declared the asset to be of historical significance;

• The asset is protected, cared for and preserved for present and future generations;



There are instances where heritage assets can have a dual purpose, for example where an historical building meets the definition of a heritage asset, but it is also used for offices.

These assets that are used for more than one purpose should be classified as a heritage asset when a significant portion of the asset meets the definition of a heritage asset.

4.4.7 Infrastructure assets

[MCS Chapter 11.42 – 11.43]

Some assets are commonly described as “infrastructure assets”. While there is no universally accepted definition of infrastructure assets, these assets usually display some or all of the following characteristics:

• they are part of a system or network;

• they are specialised in nature and do not have alternative uses;

• they are generally immovable; and

• they may be subject to constraints on disposal.

Although ownership of infrastructure assets is not confined to entities in the public sector, significant infrastructure assets are frequently found in the public sector. Infrastructure assets meet the definition for capital assets and must be accounted for in accordance with this chapter.

• The asset’s value increases over time; and

• It may be difficult to determine a monetary value of the asset.

If a department still cannot determine whether the asset is a heritage asset or other tangible asset, it should ascertain the purpose of holding the asset, i.e. is it used to execute the department’s activities or for another purpose.

The department cannot split an asset into more than one classification. For example: a portion of a property cannot be classified as buildings and another portion classified as heritage assets. The full asset is either a heritage asset or it is not a heritage asset.

Determining whether the heritage portion is significant or not is a judgement that should be made by management. This determination does not have to be performed by an expert though the management is not prohibited from contracting one. Departments are encouraged to err on the side of caution and protection (Heritage assets classification) where it is not clear, rather than allowing disposal that might be costly or impossible to reverse in the future. This judgement should be applied consistently over all the assets.

To ensure consistent application of the criteria, it is recommended that management include the judgement criteria as part of their asset management policy. The asset management policy is also expected to indicate the identification and the valuation criteria of these heritage assets. The valuation technique will depend on the type of asset as some will have active markets, such as paintings, or the restoration or reproduction cost can be determined for constructed heritage assets such as buildings and monuments.



Other examples of infrastructure assets

• Road networks;

• Sewer systems;

• Water systems;

• Power supply systems;

• Telecommunication networks;

• Railways; and

• Harbours.

The examples above illustrate that infrastructure systems or networks consist of multiple different assets that work together to achieve a specific service such as a water supply or purification of water. As a result, the asset should be unbundled into its components for management purposes but recorded in the asset register as one-line item. Componentisation is not required by MCS but it is also not prohibited when the system(s) in place are able to cater for it. When the systems allow, the asset management policies of the department should specify how all of the above should be done and to what level components should be individually recorded.

Departments usually have specific mandated portfolios of infrastructure to administer for example roads are the responsibility of the department of transport or roads and public works depending on the mandate. All roads should therefore be recorded by the mandated department in sections for identification and management and its policies should specify how for example intersections are recorded.

Example: Infrastructure assets

Department A procures fingerprint biometrics systems amounting to R1 Million. This system consists of biometric time and attendance readers, s-bus relay boxes and no-touch exit buttons and other items including the cabling specifications.

As much as this infrastructure would most likely be attached to the building, it is not necessarily immovable asset as it could still be detached from the building when the department permanently vacates the building depending on the occupation contract.

Generally, the required items in the infrastructure system work together to achieve a specific intended purpose. For reporting purposes, the department would record the infrastructure asset in the asset register as a one-line item though the management records of the system would list each component for maintenance purposes.

If the department is prohibited from detaching the system from the building on expiry of the lease contract or when the department permanently vacates the building, the total costs as per the asset register on that day will be

• transferred to the books of DPW if the building belongs to DPW via PFMA section 42 if not already transferred on the date the project was completed.

• written off if the building belongs to the private landlord (These costs would have been ordinarily depreciated over the remaining lease period from the date the infrastructure asset was first available for use)



4.4.8 Specialised millitary equipment

[MCS Chapter 11.44]

Specialised military equipment will normally meet the definition for capital assets and should be recorded as such in accordance with this chapter. These assets are only for the use of the Department of Defence.

4.4.9 Internally generated intangible assets

[MCS Chapter 11.45 – 11.48]

It is sometimes difficult to assess whether an internally generated intangible asset qualifies as an intangible asset because of problems in:

• identifying whether and when there is an identifiable asset that will generate expected future economic benefits or service potential; and

• determining the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the department’s day-to-day operations.

To assess whether an internally generated intangible asset meets the criteria for being recorded, a department classifies the generation of the asset into:

• a research phase; and

• a development phase.

Guidance on infrastructure assets is included in the following documents:

• SCOA Classification Circular 3 of 2009 – SCOA Website

• SCOA learners’ toolkit

• MFMA Local Government Capital Asset Management Guide, Annexure C – Although this is a guide for Municipalities which are in an accrual environment, guidance may be of use to departments. – MFMA Website

• COGTA (DPLG) guide on Infrastructure

Example: Specialised military assets

• Weapons;

• Weapons delivery systems;

• Exposure equipment;

• Flying suits;

• Rigging; and

• Ships and marine equipment.

Military hospitals and military airports are not included in this category even if they are used by these departments. These are non-residential buildings.



Although the terms ‘research’ and ‘development’ are defined, the terms ‘research phase’ and ‘development phase’ have a broader meaning for the purpose of this chapter.

If a department cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the department treats the expenditure on that project as if it was incurred in the research phase only. NB: The department must keep in mind at conception of project and institute processes in order to be able to control spending which should be compared to budget and value for money.

Research phase

[MCS Chapter 11.49 – 11.51]

No intangible asset arising from research (or from the research phase of an internal project) must be recorded as a capital asset. Research expenditure is included as part of current expenditure in the financial statements.

In the research phase of an internal project, a department cannot demonstrate that an intangible asset exists that will generate probable future economic benefits or service potential.

Examples of research activities are:

• activities aimed at obtaining new knowledge;

• the search for, evaluation and final selection of, applications or research findings or other knowledge;

• the search for alternatives for materials, devices, products, processes, systems or services; and

• the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

Development phase

[MCS Chapter 11.52 - 11.56]

Recording of costs to the cost of the capital asset commences with the development phase.

An intangible asset arising from development (or from the development phase of an internal project) must be recorded if, and only if, the department can demonstrate all of the following criteria:

a) the technical feasibility of completing the intangible asset so that it will be available for use or sale;

b) its intention to complete the intangible asset and use or sell it;

c) its ability to use or sell the intangible asset;

Research is the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of production or use.



d) how the intangible asset will generate probable future economic benefits or service potential. Among other things, the department can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

In the development phase of an internal project, a department can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits or service potential. This is because the development phase of a project is further advanced than the research phase.

Examples of development activities are:

• the design, construction and testing of pre-production or pre-use prototypes and models;

• the design of tools, jigs, moulds and dies involving new technology;

• the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and

• the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated by, for example, a strategic plan showing the technical, financial and other resources needed and the department’s ability to secure those resources.

Example: Research and development costs – restoration costs incurred

Department R&D received information of the existence of voice recordings of private conversations between Jan Smuts and Winston Churchill during the Second World War that may be of historical significance and subsequently underwent exploration costs to search for the recordings. At the reporting date, 31 March 20x4, nothing was found as yet.

The exploration cost for the period amounted to R500 000.

On 1 April 20x4, department R&D discovered the voice recordings and preliminarily verified the authenticity. No further costs were incurred.

However, the recordings were badly damaged and had to be restored and digitally re-mastered, after which an extensive verification process was followed to guarantee the authenticity. The costs of the verification, restoration and re-mastering amounted to R300 000.

The R500 000 will be treated as research cost under current expenditure.

The R300 000 will be treated as development cost under capital expenditure - heritage assets.



4.4.10 Website costs

[MCS Chapter 11.52 – 56]

A website does not have physical substance. As a result, development costs associated with a website are intangible assets if they meet the definition of an intangible asset and the development phase criteria.

Some websites are developed to comply with a statute or to be used mainly to provide information on the function, services, objective and performance of a department to the public at large. These websites will not meet the development phase criterion regarding generating probable future economic benefits or service potential and as such the costs incurred for the development of these websites should be expensed.

4.4.11 Immovable assets

[MCS Chapter 11.69 – 11.73 and MCS Chapter 11 Appendix A]

Immovable assets are always major assets. However, since some immovable assets were initially recorded in the asset register at a nominal amount they may have been allocated to the minor asset register. It is important to note that separate disclosure in the secondary information is required for immovable assets so recorded.

4.5 Recording of Capital Assets

4.5.1 General

[MCS Chapter 11.59 – 11.60]

For the purposes of recording capital assets, a department should maintain an asset register that will enable it to manage its assets, which includes the maintenance and replacement thereof, as well as to ensure that appropriate safekeeping measures can be put in place. It also assists with compliance with the disclosure requirements in the notes to the financial statements - refer to the Section on Disclosures below which sets out the disclosure required.

Upon initially recording a capital asset, a department must determine whether the capital asset is a minor or major capital asset and record the asset as such.

The threshold value for distinguishing between minor and major capital assets is determined by the Office of the Accountant-General (OAG), which is currently R5 000, meaning any asset costing R5 000 or above should be recorded as a major capital asset.

An immovable asset is a capital asset consisting of land, infrastructure, buildings or a combination of thereof.

Even though minor capital assets are not recorded under expenditure for capital assets, the total rand value and quantities of these assets are separately disclosed under the capital assets notes (refer to the Section on Notes for the disclosures required). The controls over safekeeping, etc. of these assets are the same as for major capital assets. The minimum requirements of the minor capital assets register are the same as those of the major capital assets register.



4.5.2 Asset register

An adequate asset register is integral to effective asset management and provides details of the values (figures) to be disclosed in the financial statements. Information can be contained in different databases but it is important that the information can be identified as belonging to a specific asset throughout. Where there is no identifier to link the information the management of assets will be negatively impacted.

All capital assets owned and controlled (which includes leased assets and minor assets) should be included in a register regardless of the funding source or value thereof. This need not be the same register. For example, during the lease term of a finance lease, the finance lease assets should be in a lease register and with regards to minor assets these should be included in a separate minor capital assets register.

4.5.3 Asset components

[MCS Chapter 11.88]

Components are parts of a capital asset. Such items form part of the main capital asset, but have a useful life and/or value that are different to that of the main asset or is significant in value in relation to the asset as a whole and is therefore managed separately. Components may or may not be functional in their own right. These items are often replaced over the lifetime of the main asset. Generally, where an asset is recorded in its component parts and a component is replaced, it is removed from the asset register and the replacement part recorded in the asset register, thus affecting the overall value of the asset.

Thresholds are not applied at a component level where the asset has been recorded in the asset register on a component level. Examples of components are propellers and engines of aircrafts and vessels as well as ventilation systems of buildings.

However, the departments are currently not required to componentise their capital assets and therefore record capital assets in units. Should a component be replaced at a future date, the transaction is classified as maintenance. The relevant records are however updated with the latest information but without amending the existing value of the asset.

An asset register is a database of information on each asset that supports the effective financial and technical management of the assets, and allows for the meeting of statutory requirements.

The asset register should also facilitate proper financial reporting. The departments are referred to Asset Management Framework for the requirements of the asset register.

Example: Computer equipment

Department A purchases a desktop computer for a new employee. The desktop provided to the new employee comprises of a screen, a keyboard and the CPU. The total cost of the desktop is R8 300 and is made up as follows:

• Screen R2 000

• Keyboard R1 200

• CPU R5 100

The screen, keyboard and the CPU are components of the main asset, the desktop. If any of the parts is not there, the asset is unusable.

How should the department record this acquisition in its asset register?



5 Measurement of Capital Assets

[MCS Chapter 11.59 – 11.93]

During planning, a department evaluates all costs on the date of acquisition and subsequent costs to add to, replace part of, or service/maintain a capital asset it. This provides an estimated lifecycle cost which should inform the decision to acquire a capital asset or not. The principles in the following paragraphs should be applied in determining the cost or fair value of a capital asset on recording thereof and or adjusting its value subsequently.

5.1 Initial measurement of capital assets

[MCS Chapter 11.59 – 11.86]

A capital asset that qualifies for recording as a capital asset is measured at its cost.

The cost is the cash price equivalent, which for the purpose of this chapter, is the actual amount paid for the asset. Payment can be made as either a single payment or a series of payments over a period of time. It is important to note that the capital asset must be recorded in the asset register on the date risks and rewards associated with ownership of the asset are transferred to the department. This is generally the date on which the asset is received by the department. The payment date does not influence the asset register recording date.

Where a capital asset is acquired from a non-government entity for free, the asset is measured at its fair value as at the date of acquisition. In the case of an interdepartmental transfer, the transferring department must fair value the asset if the cost price is not available before transferring the asset in accordance with Section 42 (PFMA) requirements. This ensures that one department is not burdening another department with the requirement to determine a fair value.

Under normal circumstances, the components should be capitalised as part of the main asset in the asset register of the department (The main linked with its components whose total would amount to R8 300. However, the departments are currently not required to componentise their capital assets and therefore will record the computer as a unit with the total cost of R8 300.

Should a component be replaced at a future date, the transaction will be classified as maintenance. The records are however updated with the new serial number but without amending the existing value of the asset.

Alternatively, systems allowing, where the components are recorded separately as part of the computer asset, replacement of a component will impact on the asset register. The old component will be removed and the new component recorded. The overall value of the asset ‘the computer’ will thus change to reflect the ‘new’ component.

Departments are not at present required to componentise their assets in the asset register.

The application of a threshold does not apply at a component level. Components are always capital in nature by virtue of being part of a capital asset even where separately recorded in the asset register; they still form part of the overall asset.

Departments are encouraged to begin the process of componentising, where the system capability exists. Policies can be developed to indicate the level of componentising per asset that should be done, based on the asset management strategy. Guidance on componentising will be issued prior to the requirement thereof.



The exception to this fair value requirement is for movable assets acquired before 1 April 2002 (or another date as approved by the OAG), where the cost is not available or a fair value had not been determined before the implementation of the MCS. These assets can consequently be transferred at a R1 value, if so recorded in the transferring department’s asset register. Where these assets were however carried at cost or fair value by the transferring department they should be transferred at that value including a copy of the fair value methodology applied.

5.1.1 Movable assets

[MCS Chapter 11.61 – 11.68]

Movable assets should be recorded in the asset register at cost. Where the cost cannot be determined accurately, capital assets are measured at their fair value and where fair value cannot be determined, the capital asset is measured at R1. The use of fair value or R1 as initial measurement for initial recording of a capital asset is deemed cost. The department should have documentation explaining the steps taken to determine the deemed cost including sound reasons for not being able to determine the actual cost and or fair value if applicable. This documentation should be retained for record keeping purposes including audit purposes.

Assets acquired before 1 April 2002 (or another day as approved by the OAG), where the cost is not available, may be recorded at R1 with no need to determine a fair value. Where an entity however reliably determined the fair value of such assets before the implementation of the MCS they could continue to carry them in the asset register at the determined value.

The figure below summarises the principles of the MCS for the recording of a movable capital asset:

Example: Importing specialised machine

The department of Health purchases an MRI machine from the United States of America and the machine costs $US100,000. The department pays an advance of $US20,000 on 01 October 20x2 when the exchange rate was R12 to $US 1.

The machine is finally received on 15 March 20x3 when the exchange rate was R13 to $US 1. The department has not yet paid the remaining amount of $US80,000. At 31 March 20x3 the exchange rate is R13.50 to the $US 1.

The department will reflect a prepayment of R240,000 ($US20,000 x R12) on 01 October 20x2.

The machine is received on 15 March 20x3 and the capital asset value at that date is R1,300,000 ($US100,000 x R13.00) and that is the machine value that should be recorded in the asset register. The amount owing at year end to the supplier is R1,080 000 ($US80,000 x R13.50) and this outstanding amount does not influence the machine value in the asset register.

Suppose the outstanding amount is paid in full on 5 May 20x3 when the exchange rate is R14 to the $US 1, thus R1 120 000 ($US 80 000 x R14.00), it will mean that the department paid a total amount of R1 360 000 for the machine (R240 000 paid on 01 October 20x2 plus R1 120 000 paid on 05 May 20x3).

The asset register will however not be changed as the R60,000 relates to the payable and the impact of a change in the exchange rate on the amount due to the supplier.



5.2 Elements of cost

[MCS Chapter 11.74 – 11.78]

The cost of a capital asset comprises:

• its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and

• any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Examples of directly attributable costs are:

• compensation of employees directly involved in the construction or acquisition of the asset to the extent that the department can reliably estimate the amounts to be treated as capital expenditure;

• costs of site preparation e.g. clearing of trees, rocks, old buildings, etc.;

• materials used during actual construction (excluding wastage which would be abnormal amounts of material lost or broken, same principle for excessive labour hours);

• any additional costs agreed to, due to a variation in plan e.g. more requirements or costs due scaling down of the original plan. This type of variation needs to be authorised beforehand and copies of such authorisation kept on a project / asset file;

• initial delivery and handling costs e.g. cost of transport from the supplier to the departmental premises;

• installation and assembly costs e.g. installing and assembling counters for a new reception;

• costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment) e.g. testing a new machine supposed to make cans for food preservation and selling the first samples as scrap metal until the machine specifications are properly set; and

• professional fees e.g. architect to design a building, road engineer to manage building of road, quantity surveyor to check bill of quantities. Council for the Built Environment Act 43 of 2000 clearly indicate who are professionals in built environment.

Movable asset qualifies for

recording as a capital

asset

Movable asset acquired in a

non-exchange transaction

(paragraph .63 & .80)

Movable capital asset

acquired prior to 1 April 2002?

YES

NO

Record movable capital asset at

its fair value on date of

acquisition if determined prior to

implementation of MCS else R1

(deemed cost)


Movable asset acquired in

an exchange transaction

Can the cost be determined

reliably?

(paragraph .65 and .66)

From a non-government

institution?

Record assets at value

received from transferring

department

(paragraph .80)

NO

YES

Record movable capital asset at its

fair value on date of acquisition

(deemed cost)

(paragraph .63)

Record asset at cost

(purchase price equivalent)


YES

Movable capital

asset acquired prior

to 1 April 2002?

NO

Record movable capital asset at

its fair value on date of

acquisition if determined prior to

implementation of MCS else R1

(deemed cost)

(paragraph .66)

YES

Record movable capital

asset at its fair value

on date of acquisition or

R1 where fair value is

not determinable

(deemed cost)

(paragraph .65)

NO



The above costs all have two things in common, they relate to actions after the decision had been taken to acquire a certain capital asset or engage in a specific project and there is a direct link to the eventual capital asset. Authorisation has thus already been given to proceed, no uncertainty remains on whether to acquire or not and the costs incurred are directly related to getting the capital asset in a state required for use by the management.

Recording of costs as part of a capital asset ceases when the capital asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item is not included. For example, the following costs are excluded:

• costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity e.g. It is still in the store;

• training costs incurred to teach employees how to use the new capital asset e.g. New software has been bought for financial reporting and the employees attend a full week session on how to use it;

• initial operating losses, such as those incurred while demand for the item’s outputs build up e.g. the asset is operational so any costs incurred are costs of use; and

• costs of relocating or reorganising part or all of the department ‘s operations e.g. the department moves to new premises, delivery cost of capital assets to the new site will not increase the value of any of the capital assets.

• fluctuations in currency when acquiring a capital asset from an international supplier.

The above costs are costs that do not contribute to the value of the capital asset, these costs do not change the capital asset or make it better in any way. Even training employees to use a software system does not improve the system but merely the effectiveness or efficiency the entity will derive from the use of the capital asset.

The distinction between which costs would add value to the capital asset itself and which would add value to the use of the capital asset is important to ensure that the capital asset is not over-valued. This is specifically important in ‘turnkey’ projects where service providers are engaged to provide different types of services, from research to acquisition and training. Careful consideration should be given to classify costs and that only costs of a capital nature are recorded as such.

5.3 Warranty costs

[MCS Chapter 11.79]

When a department acquires an asset, such as a motor vehicle, the invoice price sometimes includes an element relating to the manufacturer’s warranty. These costs are deemed to form part of the initial cost of the asset as they are directly attributable to bringing the asset to its location and condition necessary for it to be capable of operating in the manner intended by management. The warranty enables the department to derive service potential from the related asset in at a reduced cost than could

“professional” means a person who is registered as such in terms of any of the professions’ Acts;

“professions’ Acts” means the -

(a) Architectural Profession Act, 2000;

(b) Project and Construction Management Professions Act, 2000;

(c) Engineering Profession Act, 2000;

(d) Landscape Architectural Profession Act, 2000;

(e) Property Valuers Profession Act, 2000; and

(f) Quantity Surveying Profession Act, 2000;



have been derived had the warranty not been there. The cost of the warranty is therefore accounted as part of the asset acquisition cost.

Where a warranty is bought subsequently the definition of an asset should be applied to determine whether it should be recorded as such or not. There should be future service potential or significant savings flowing to the department as a result and extend over more than one financial year. An example is the warranty on major parts which can be purchased for vehicles or extended service warranties. These items will not form part of the cost of the original capital asset (it does not improve the capital asset which is already in a location and condition for use as envisaged by management) but may be assets in their own right, depending on the terms of the contract (the capital asset could be tangible or intangible).

5.4 Assets transferred

[MCS Chapter 11.63; 11.71; 11.80 – 11.81]

In the public sector, it is sometimes necessary to transfer assets to other departments or other institutions when the capital assets are no longer needed or to further service delivery where another institution is better able to deliver a service. The contract arrangements are varied and need to be assessed on an individual basis. Where assets of a capital nature are transferred, the transaction should be recorded as such. This adds to the overall value of the cost of services and achievements of government.

It is also normal for non-government institutions to donate capital assets to certain government departments and these capital assets should be recorded in the asset register of the department that received the donation in kind.

5.4.1 Transfer between departments and/or other entities

[MCS Chapter 11.80 – 11.81]

All capital assets must be transferred at cost where cost information is available. Where the asset is recorded at R1 or at its fair value in the asset register of the transferor, then the asset should be transferred at fair value (including a copy of the valuation methodology), except for movable or intangible assets acquired before 1 April 2002 (or another date approved by the OAG) where they have been recorded at R1.

All the documentation supporting the value should accompany the assets transferred.

Accounting for the capital assets where contractual obligations were completed before year end and subject to transfer to another department after year end.

Departments can construct or develop a number of capital assets. The related expenditure is reported on by the budged holder. The budget holder is not always the custodian of such newly constructed or developed capital assets. The custodian department has the ultimate responsibility to report on such capital assets once the budget holder has formally transferred the capital asset (or costs thereof if it’s capital improvements to the existing capital asset) to the custodian department in line with PFMA section 42.

In instances where the contractual obligations with regards to the newly constructed or developed capital asset were fulfilled before year end, but the capital asset has not yet been transferred to the custodian department as required (or where no agreement has been reached between the custodian and the budget holder), the transferring department will report on these newly constructed or developed capital asset(s) in its asset register.



5.5 Fair value

[MCS Chapter 11.82 – 11.86]

Fair value can be determined by applying one of the following methods:

• The fair value of most capital assets can be determined by reference to quoted prices in an active and liquid market. For example, current market prices can usually be obtained for land, non-specialised buildings, motor vehicles and many types of machinery and equipment;

• Where market values are not available, estimates can be made with reference to the market value of assets with similar characteristics, in similar circumstances and location or with reference to recent arm’s length transactions concluded for similar assets. For example, the fair value of vacant land that has been held for a long period during which time there have been few transactions may be estimated by reference to the market value of land with similar features and topography in a similar location for which market evidence is available;

Similar characteristics refer to the similar function, comparable models if not the same model. These comparable assets don’t need to have been manufactured by the same manufacturer (for example, entry level motor vehicles with similar target market). Similar circumstances refer to the similar manner in which these capital assets are used and they are of the same age (for example comparable motor vehicles used for online purchases delivery purposes. They both stand to travel more or less the same distance and are exposed to similar risks.) Location refers to the same area in which these capital assets in question are being used.

• Another method of estimating fair value in the absence of current prices in an active market, is the use of discounted cash flow projections based on reliable estimates of future cash in- and outflows, using discount rates that reflect current market estimates of the uncertainty in the amount and timing of the cash flows; or

• If an asset is of a specialised nature, and market-based fair value is not available, a department may need to estimate the fair value using either the reproduction cost or replacement cost. In many cases, the depreciated replacement cost of an asset can be established by reference to the buying price of a similar asset with similar remaining service potential and similar condition in an active and liquid market. In some cases, an asset’s reproduction cost will be the best indicator of its replacement cost. For example, in the event of loss, a parliament building may be repaired to its original state rather than be replaced with alternative accommodation because of its significance to the community.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.



Is there an active and liquid market?

Use quoted price

Market Approach

Are there current market prices or recent transaction prices for

similar assets?

Use current or recent transaction price adjusted for differences in

nature, condition, location of asset or changes in economic conditions since date of recent transaction

Discount cash flow projections using rate that reflects current market assessment of uncertainty in the

amount and timing of the cash flows

Cash flow Approach

Lower of the reproduction or replacement cost less accumulated depreciation to reflect

the already consumed or expired service potential of the asset

Calculate depreciated replacement cost of the asset

Identify all costs

Split complex assets into components

Determine “gross” cost for each component

Adjust for differences in service potential

Determine value of remaining service potential

Cost Approach

Specialised asset(s)



Depreciated replacement cost

The depreciated replacement cost represents the value of the asset as is after use with the condition thereof and the age taken into account. It should therefore reflect the remaining service potential of the asset being valued.

The value is determined by the cost of a new asset of the same type (gross replacement cost). The cost is then adjusted to take into account the differences between the old asset and the new in terms of bigger capacity, higher performance, etc. and depreciation to reflect the remaining useful life of the actual asset on hand.

The depreciated replacement cost is calculated using the following steps

Step 1: Determine the gross replacement cost.

Gross replacement cost is defined as the cost that entity has to bear in order to replace the asset with such resource that can provide the same benefits in pursuing business objectives under normal conditions. Normally the market price is a good point to start from however; current market price is not always what entity has to bear as a consideration for benefits to be obtained.

Step 2: Determine accumulated depreciation.

This is done to have equitable basis of valuation as if current asset for which replacement cost is determined has been in use and has depreciated over a period of time then replacement cost needs to be reduced as well to reflect the devaluation in future economic benefits on the same pattern. But as value under replacement cost may be different so it is up to valuer to decide at what rate replacement cost needs to be depreciated that reflects the same level of devaluation of asset that fairly equates with devaluation in the original asset.

Step 3: Calculate the depreciated replacement cost by deducting the value of step 2 (accumulated depreciation) from the value from step 1

The reproduction cost is the cost of creating an exact replica of the asset. This method is usually used for specialised structures of heritage assets of a structural nature.

Example: Calculation of depreciated replacement cost

During the asset verification conducted at the end of the current financial year – 31 March 2015, an asset, a Glugle, a very specialised machine used for testing air purity in an office environment was identified on the floor but could not be traced to the asset register. The asset management officials could not tell the exact date or year the above mentioned asset was purchased or the supplier from which it was purchased. The users, new to the department, indicated that they have been using the specialised machine since the beginning of 2013 when they were employed in March and thought the machine looked new at the time .

The machine did not have any visible defaults and working as intended, the users were satisfied with the performance of the Glugle.

The department’s asset management policy is to write-off machines of this nature over a period of 5 years using the straight line method

Step 1



The fair value of an immovable capital asset is usually its market value determined by an appraisal. An appraisal of the value of the asset is normally, but not necessarily undertaken by a member of the valuation profession, who holds a recognised and relevant professional qualification. As the cost of such exercise can be very high, it is recommended for use only when consideration is given to disposal to determine a more accurate value. For recording purposes, the value of an immovable asset can be estimated by someone with sufficient experience in the built environment.

For some assets, it may be difficult to establish their market value because of the absence of market transactions for these assets. Some departments may have significant holdings of such assets. In certain circumstances, it may also be costly to undertake a detailed professional valuation of each individual property, particularly for those departments that act as default custodians of the state’s immovable assets.

To facilitate cost-effective compliance with the MCS and to avoid unnecessary duplication of costs across different spheres of government, departments are encouraged to as far as possible make use of existing available information (for example municipal valuation rolls) as an alternative to undertaking their own professional valuations on each individual immovable asset. Should the municipal valuation change the department should not revise the initial recognition amount except if there is evidence that the initial recognition value was erroneous.

In cases where the depreciated replacement cost of a capital asset is required in lieu of fair value, this may be established by reference to the market buying price of components used to produce the asset or the indexed price for the same or a similar asset based on a price for a previous period. When the indexed price method is used, judgement is required to determine whether production technology has changed significantly over the period, and always differences identified and allowances made therefor such as whether the capacity of the reference asset is the same as that of the asset being valued.

Consistency in applying any valuation methodology is of great importance to ensure that calculations can be subjected to scrutiny and values are comparable over a category of assets.

Obtained quotations from the few known suppliers selling this specialised machine for the price of a similar new machine and the prices from these suppliers were relatively the same and the average price being R100 000.

The gross replacement cost is therefore R100 000

Step 2

Two years is to be assumed as the period the machine has been in use due to its good condition and lack of other evidence to the contrary

Accumulated depreciation (R100 000/5*2) = R40 000

Step 3

Depreciated replacement cost at 31 March 2015 (R100 000 – R40 000) = R60 000

It is not a requirement that costs should be incurred in engaging external valuators for establishing the fair value of assets. Employees of a department with the necessary skills and experience should be able to determine a fair value for assets within their field of expertise. It is of utmost importance that the methodology used including all the assumptions made are documented in detail and applied consistently. It is also good practice to include the methodology to be used for specific asset classes in the asset management policy.

A valuation methodology has been developed by the major custodians which can be utilised, see ‘ Annexure A – Application of the fair value model’ of this AMD.



5.5.1 Fair value of biological assets and agricultural produce

[MCS Chapter 11.89]

When determining the fair value of biological assets, the following should be considered:

No

If an active market is not available, a department can consider using one or more of the following:

• the most recent market transaction price, given that the economic circumstances between the date of that transaction and the reporting date has not changed significantly;

• the market price for similar assets adjusted to reflect differences;

• sector benchmarks, for example value of cattle expressed per kilogramme of meat;

• the present value of expected net cash flows from the asset.

Sometimes the sources above may result in different values for an asset. It is then necessary to consider the reasons for the differences in order to determine the most reasonable estimate of fair value.

Where biological transformation is negligible or the impact of the biological transformation on the price is not expected to be material, the cost of the assets may approximate fair value.

Bear in mind when using the discounted cash flow method of valuation that:

• It is used to determine the fair value of a biological asset in its present location and condition. This should be taken into account in determining an appropriate discount rate to be used;

• Fair value is determined for a biological asset in its present condition; therefore it excludes any increase in value from additional biological transformation not yet occurred;

• Cash flow for financing the assets, taxation (if applicable) or re-establishing biological assets after harvest should be excluded; and

• Fair value reflects any possibility of variations in cash flows of the transaction therefore the expectations about possible variations in cash flows will be included in either the cash flows or the discount rate or a combination of the two.

The important thing to remember is that double-counting must be avoided, therefore if a specific assumption or condition is included in the cash flows, the same assumption or condition cannot be included in the discount rate.

It is further important to document the process followed and to motivate why specific assumptions were made, the weight allocated to an assumption and reasons for that.

Active market exists

No active market exist

No available market-based

values

Use quoted price that

market

Use market values for similar

asset

Use discounted cash flow

calculation



Other measurement considerations

In the unlikely situation where market-determined prices or values are not available and alternative estimates of fair value cannot be reliably measured, biological assets should be measured at cost. As soon as the fair value can be reliably measured, biological asset should be measured at fair value less estimated point-of-sale costs.

It is of the utmost importance that the methodology used is documented and applied consistently for a class of assets. This will ensure systematic and comparable values period on period. The specific methodology per class should also form part of the asset management policy to ensure the consistent use and application thereof.

5.6 Subsequent Measurement of Capital Assets

[MCS Chapter 11.87 – 11.93]

Since departments are on the modified cash basis of accounting, capital assets are not depreciated and not subject to impairment testing or revaluation adjustments for appreciation or devaluation. Capital assets should therefore continue to be recorded at historical cost in the asset register.

5.6.1 Subsequent costs

[MCS Chapter 11.90 – 11.93]

Should a department incur costs relating to a capital asset already recorded (i.e. an existing capital asset), the subsequent costs will be treated according to the nature thereof.

Example: Fair value valuation of biological asset

Department C owns a sugar plantation on approximately 220 hectares of land. Currently no active market exists for the plantation in its current stage of biological transformation and condition.

The fair value for the land with the plantation together however, can be determined and is estimated at R25 million. Empty or undeveloped land in the neighbouring area are sold at a market price of R72 000 per hectare.

The fair value of the sugar plantation can thus be determined as follows:

Fair value of combined asset R 25 000 000

Fair value of land (R72 000 x 220) R15 840 000

Fair value of plantation R 9 160 000.

The fair value of the plantation could change over a period of time as biological transformation takes place, therefore it will be necessary to determine the fair value of both the neighbouring land and combined asset on a regular basis. The fair value determination should be done at year-end to ensure the value is relevant for reporting purposes.



6 Accounting for Immovable Assets

[MCS Chapter 11.69 – 11.73, 11.90 – 11.93, MCS Chapter 11 - Appendix A]

Immovable assets are valued at cost or fair value for inclusion in the asset register and the notes to the financial statements. The valuation hierarchy on initial recognition is cost of acquisition / construction, then fair value. Departments were required to have their immovable assets valued at either actual cost or fair value from the 2016/17 reporting period. The department should have documentation explaining the steps taken to determine the deemed cost including sound reasons for not being able to determine the cost price if applicable. This documentation should be retained for record keeping purposes including audit purposes.

Costs of new acquisitions or construction should be available for initial recording. Processes and procedures should be instituted to allow the accumulation of accurate and reliable cost for projects.

Where the fair value for the immovable asset has already been determined as a reliable estimate, the department can use that fair value.

A department should use the principles and guidance in the Section on Fair value above in determining the fair value of a capital asset.

Immovable assets must be measured at cost as per MCS 11.69 or fair value as per MCS 11.71 & 72. Municipal valuation rolls may be used as an indication of fair value.

Certain specific exceptional cases have been excluded from this requirement for practical and cost containment reasons.

Distinguishing between assets being movable or immovable assets

Portable structures temporarily located in specific areas due to shortage or lack of capacity within other fixed structures, such as a temporary site office constructed on a building site, or at a school to relieve capacity constraints is intended to be immovable and forms part of fixed structures, residential or non-residential depending on the use thereof.

Mobile clinics or libraries that are driven from area to area in delivering a service are easier to identify and are treated as movable capital assets and such assets should be classified as transport assets as they are generally self-powered and can be moved to where needed without much trouble.

Capital expenditure

Capital project expenditure relating to project that spans over

more than one financial year

Current expenditure

Add to the cost of existing

capital asset

Accumulate relevant costs via capital work in progress (CWIP)

Recognise as expenditure under

goods and services



6.1 Cost of constructed assets

[MCS Chapter 11.78]

The cost of a self-constructed capital asset is determined using the same principles as for an acquired asset. This means that any costs of a ‘research’ nature do not form part of the costs of the capital asset. Costs of ‘research’ nature would be feasibility studies to ascertain if it would be possible to build on a given property or location. At this stage a final decision to build has not been taken. Once a final decision, based on the feedback of the research is taken that construction is viable, any costs incurred from that point forward will form part of the costs of the eventual capital asset (this means that the project has been approved based on thorough option analysis and it is envisaged that it will be completed and the budget allocated based on the knowledge gained. It should thus cover all known issues, be sufficient and no surprised expected). This cost could include removing some rocks or trees or other obstacles, specialised drilling required for foundations, etc. It will also include professional fees for survey and architectural design of the structure.

6.1.1 Capital work-in-progress (CWIP)

[MCS Chapter 11.90 – 11.93]

Departments sometimes need to construct the facilities required for service delivery as they are specialised in nature and may not be available in the market. The construction process normally spans more than one financial period and as such expenditure needs to be accumulated over time leading to a CWIP account for each project. Under the modified cash framework, payments are expensed as payments for capital assets but cannot be recorded in the asset register as yet as an asset is only

Prefabricated or portable structures that are installed or constructed, such as those mounted on a concrete slab on brick plinths and prefabricated units on suspended floors that cannot be relocated due to health and safety risks, are immovable assets. Such structures should be classified as non-residential buildings.

With the portable structures that are temporarily located, the intention is to move them around to alleviate shortage of facilities when needed but they are not self-powered and can only be moved with some effort e.g. rental of a truck and some manpower to load and off load. These structures should be classified as immovable assets and should be recorded by the department that budgets for it and not the custodian for immovable assets as the intention of the budget holder is to retain the structure for a period of time (could be more than a year) and then move it to another location for another project or to increase capacity with a few classrooms at another school. Due to their nature, they can be utilised for more than one reporting period and thus must be reflected as capital assets.

The decision to stay in position or move the structure, thus remain with the mandate holder who requires the facility and best suited to know the needs and will move the structure when needed. This information and may not necessarily be available to the custodian of immovable property.

Project expenditure - construction of capital assets

Costs incurred to acquire a capital asset through construction by way of a project that spans over more than one financial year should be accumulated via capital work in progress (CWIP) to determine the cost of the ultimate asset once available for use based on the principles above. During the stage where the capital asset is being constructed, all relevant costs are regarded as capital work in progress (CWIP).

Regarding reporting requirements for capital work in progress (CWIP), MCS 11.91 &91A should be considered.



recognised as such and recorded when it is ready for use. Expenditure needs to be recorded and accumulated as CWIP either in a register or other format to ensure the cost of construction of a specific structure can be calculated for recording in the asset register when ready for use.

Where a department undertakes maintenance as well as capital projects, it is very important that an assessment is made during the planning stage so that the distinction between capital and current budget can be made. This will ensure that project costs can be allocated correctly as incurred from the beginning of the project and also that the budget allocation is accurately placed. It may sometimes be difficult to separate the capital and maintenance portions within one project where a project has elements of both, in that instance; a decision should be made as to the nature of the major part of the project and if that major portion is maintenance, the whole project should be planned for as such and budgeted accordingly. It is difficult to change allocation after one or more reporting period as that would result in restating expenditure that was previously incorrectly allocated and reported on.

Example: Fully constructed assets ready for use in the current financial year

Department ABC completes construction phase of an office building in 20x2, it is now ready for use. The construction commenced in 20x0. Over the past three years the costs incurred were as follows:

R’000

20x0 1 200

20x1 2 500

20x2 1 500

Provincial Department ABC is the budget holder and custodian of the immovable asset and as such records the capital asset in its own asset register when ready for use. The total cost of construction is currently reflected in CWIP at R5,2 million. The whole amount must be deducted from CWIP as the capital asset is ready for use and instead the newly constructed capital asset be recorded in the asset register.

In this instance the department must record the total cost of construction to date (R5,2 million) for the office building as a ‘non-cash’ addition in the note of additions to immovable assets and its asset register during the current financial year.

The department will reflect the annual expenditure (R1,5 million) under ‘additions’ note for the year in the “cash” column (agrees with expenditure for capital assets – Immovable assets in the statement for financial performance) and will remove these costs (R1,5 million) using the “capital work-in-progress” column (this is to ensure there is no double accounting).

At the end of 20x1, there will be R3,7 million (R1,2 million plus R2,5 million) in CWIP for this project. The CWIP is reduced by R5,2 million (R3,7 million plus R1,5 million) and the asset register increased by the same amount as a non-cash addition. CWIP does not get recorded in the asset register as an asset is only recognised as such when it is ready for use. CWIP is accumulated in a CWIP register per project to enable identification of the cost of an asset when ready for use.

There are no minimum requirements for a CWIP register but it must be possible to identify the project and costs allocated to it separately from other projects.



Using the figures* from the previous example for 20x2, the CWIP note/annexure would reflect:

Movement in CWIP for the year ended 31 March 20x2

Opening Balance

Current Year Capital WIP

Ready for use (Asset register)/ Project terminated

Closing balance

Buildings and other fixed structures

*Non-residential

R’000

3 700

R’000

1 500

R’000

(5 200)

R’000

0

The above reflects the movement in the CWIP by reducing some thereof with the amount attributed to the capital asset read for use, which will now be recorded in the asset register and any further costs incurred added to the value of the capital asset in the asset register. The example assumes that the department had only one project for illustrative purposes.

Certain departments are users of multiple facilities and are constantly improving or constructing additional facilities as needed e.g. Heath, Education, Correctional Services, etc. While the facilities are being constructed, the projects need to be managed to ensure that payments are in line with contracts and within the approved and made available budget.

All projects in progress at one point should be recorded and identified by project number or other code so that costs incurred can be classified against the same identifier. This will enable the facilities / project management unit capture costs per project on an on-going basis and ensure that budget is available and the spending happens as envisaged and according to plan. Payments should be reconciled to BAS and any deviations noted and authorisation ensured on a monthly basis. It has become increasingly important that budget holders have processes in place to ensure that what has been paid for, is actually received.

Example: Fully constructed assets ready for use in the current financial year

Provincial Department ABC is the budget holder but not the custodian of the immovable asset.

If the building is being constructed by Department ABC or its duly appointed service provider using its own allocated budget, the department would accumulate all the related expenditure incurred, transaction by transaction as part of CWIP. When the asset is ready for use, the accumulated work in progress will become the cost of the asset and be recorded in the asset register of Department ABC.

Any additional expenditure such as the payment of retention, professional fees, late invoices, etc. will be added to the cost of the asset in the asset register when paid.

Thus far the process is similar to what was done in scenario 1. There is however a difference going forward.

Once the contractual obligations are fulfilled and final costing can be done, the information in the asset register, is updated and used to initiate a transfer of the building to the custodian department complying with PFMA S42 requirements.

This will ensure that the custodian records the capital asset at the actual cost incurred and the budget holder takes accountability for spending incurred. It also leaves an audit trail; the newly received capital asset in the books of the custodian department is taken on as a “non-cash” addition.



It is common for a structure to be taken into use before all the contractual obligations have been fulfilled. The outstanding issues are mostly to pay a professional to assess the costs of the project which should be added to the pure construction costs and the retention money that needs to be paid to the contractor, usually after a certain period specified in the contract.

6.1.2 Ready for use capital assets

[MCS Chapter 11.90 – 11.93]

It can be a problem to decide when a capital asset is ready for use especially when the work is carried out by an implementing agent dealing with the service provider. Payments requested by the service provider usually require a progress certificate to be attached which indicates the level of completion. Some implementing agents make payments and claim amounts back from the budget holder including their fee(s) making it difficult to establish a point of completion as the budget holder is often not directly involved.

The following can be indictors that the capital asset is ready for use:

• A certificate of practical completion is received. This certificate indicates that all construction work has been done;

• The budget holder / user department of the capital asset has taken occupation of the capital asset and is operating from or in the premises;

• The budget amount is nearly exhausted and only the retention money remains to be paid under the contract. No problems or issues that could indicate to any deviations from plans were experienced.

• Claims from the contractor have stopped and the physical capital asset can be viewed and appears ready for use for the intended purpose, it can be safely accessed;

• The implementing agent indicates formally that the construction phase has been completed.

The above indicators are not exhaustive and a department can, based on its own experience and circumstances expand on these.

Once the retention period has passed, the retention amount will be paid to the contractor if he fulfilled all his contractual obligations. The retention amount will be added to the cost of the capital asset in the asset register on payment, due to the uncertainty around the timing and the amount that will be paid.

The retention period and amount can vary depending on the contract. The definitions in Chapter 14 on Provisions and Contingents should be applied to determine how the retention money should be reported prior to payments thereof for year-end purposes.

It is important that all contractual obligations are fulfilled to enable the final costing to be done. Where the capital asset must be transferred to the custodian department, the budget holder must update its asset register to agree with the final costing and at that stage initiate the transfer of the capital asset in compliance with the requirements of PFMA section 42. Where the transfer is not complete by year-end, the budget holder should keep the capital asset in its asset register and report thereon. A transfer is completed when accounting officers or other delegated official from both departments have signed off on the transfer.

As with transfer of other capital assets between departments, the transfer should be finalised within a reasonable period and not unduly delayed. The only reason for delay should be that the transferring department has not complied fully with the requirements in providing proper documentation to verify the value of capital assets. Assets noted as subject to transfer in one financial period should be finalised and cleared by the next financial year. With a view to prepare working papers for audit purposes, the process should also be started timeously so that departments are not left close to year end with vast numbers of capital assets to record.

Once the transfer is complete (PFMA section 42 complied with), the capital asset will be reported on as a transfer and the asset register updated. The CWIP account / register is reduced by capital assets



ready for use during the reporting period (which is taken into the asset register) and also by projects that have been terminated during the period.

It may be that maintenance projects are undertaken by the department but they should be expensed as incurred. To ensure that the budget is not exceed where these projects run over more than one reporting period, a department can keep a maintenance project register similar to the CWIP register for control and management purposes but there is no requirement to report separately thereon as it will not create an asset for recording but merely maintain an existing asset already recorded.

PFMA sections 27(3)(d) and 38(1)(a)(iv) require departments to assess fully the implications of capital projects on current and future years and to ensure that this is considered before the final decision is made to commence with a project. The budget should also specifically reflect capital expenditure and this should, through strategic planning, be aligned to expected and planned spending per project.

6.1.3 CWIP project termination

[MCS Chapter 11.90 – 11.93]

Capital projects could be terminated for various reasons and the department must interrogate the reasons for the project termination in an effort to determine if the experienced problem could have been prevented or foreseen. It is very important to understand what went wrong and why, ‘lesson learned’ for the future. The following should for part of the considerations during the assessment:

• Had thorough research been done prior to the decision to implement the project; feasibility studies, environmental studies, sustainability and costing exercise, community involvement, service delivery impact studies, etc.?

• What was not done and would it have made a difference?

• Were the services of experienced service providers with suitable qualifications used to carry out the research?

• Were the project specifications and expectations clearly communicated in tender documentation?

• Were the project related risks identified and managed, when, and was the problem identified early enough and added to risks?

• How often was feedback given to management by the project management team, and was there enough experience / expertise in the team?

• Were payments aligned to progress and budget planning?

• Were appropriate additional skills appointed on the project to cope with the risks?

The key determination is whether the issue / problem which led to the termination of the project could have been avoided and if the answer is positive, the department may have a problem with compliance with PFMA (capital projects) and or have to assess the total expenditure for fruitless and wasteful expenditure. Where the answer is negative, it means that something totally unexpected happened / changed during the project period which was impossible to predict with even the best research.

Examples of reasons for terminating a project

1. A project to build an additional school in a particular neighbourhood is terminated due to the discovery of gold four hundred kilometres away, causing people to leave the neighbourhood in search of employment. When the project started, the discovered had not yet been made. There is now no further need for additional school facilities.

2. The project to build a clinic in a village is terminated as new information reflects an unexpected population growth in the village and the surrounding areas that may be better served by a hospital. The project has been terminated in favour of new feasibility studies to assess the possibility of redesigning the clinic into a hospital. Depending on the outcome, the project



It is suggested that all planning and decision-making documentation as well as those relating expenditure incurred are filed per project and when projects are terminated for any reasons, the motivation for and the rest of the documentation are kept in a suitable document storage facility in accordance with a document management policy and not archived until there is no more possibility that the project could be resumed. When the project is resumed at a later stage, the previous amount spent on the project should be brought back into CWIP to form part of the total project costs at the eventual completion of the project.

6.1.4 Possible write-off or impairment

[MCS Chapter 11.90 – 11.93]

would be resumed as a clinic or additional funding secured to build a hospital to serve the greater area.

3. A project was planned and construction started to build a road connecting two major highways. The project was started after a feasibility study was done to assess the need and the number of people that would benefit from the new connection. After eighteen months, the project had to be terminated as it came to light that the road would be constructed through a rare eco-system which was the only habitant of the blue-spotted beetles. It is the only place in the country where these beetles migrate to, annually to lay eggs. Their presence is also very important for certain birds as their burrows unearth some roots and seeds considered to be very nutritious and important for the continued growth of the unusual yellow-bush grass that grows there. Due to pressure from conservationists, the planned road cannot be completed unless huge costs are incurred to build around the entire eco-system to safeguard its existence. During the planning phase for the road, no environmental studies were done which would have highlighted this issue including the overall cost implications.

4. A department initiated a project to improve and enlarge an existing building used for service delivery. The feasibility studies were conducted and a decision was made that a larger facility is needed as it would be more efficient and would bring the overall cost of service delivery down. The designs were drawn up by an architect and the budget appropriated over a three-year period. An implementing agent was appointed as project manager and contractors contracted to start the work. The project was progressing well until it came to light after eight months that the main contractor was using sub-contractors whose work was not of a desired quality. The main contractor’s agreement was cancelled and the work stopped for a period of six months while new appointments were being made. The new contractor progressed well in redoing the work previously done but then disappeared after a year. Apparently, he demanded more money from the project manager than agreed upon. Again, the appointment of a new contractor had to be done which stopped the project for another six months. A third contractor was appointed and the project was advancing well. However, after three years, the project was not finalised and over budget. The department could not secure more funding and the project had to be terminated. Only half the planned improvements were done and mostly not ready for use. The re-appointment of contractors and wasted materials due to sub-standard work consumed the budget and the department has not been able to secure more funding and cannot give an indication of when the budget will be available again.



Where a project was started and then terminated for any length of time, it is quite possible that some of the structural work previously done would have on resumption / continuation of the project been damaged due to the passage of time or destroyed through vandalism. This is a risk as some of the structures, especially new structures, are not used or covered for protection and presents an opportunity for natural wear and tear due to the weather. The cost incurred previously might thus not be a true value of the structure at the point in time when resuming the project. The cost of the project will have to be assessed to determine if it represents a fair presentation of the value of the structure at resumption of the project. This will have to be done by a professional who would have to do an official assessment of the structure to decide if any work needs to be redone or repaired from safety point of view as well as feasibility to continue with the project.

Where some work needs to be redone, the value of such work originally done should be excluded from the CWIP as it amounts to wastage, which does not form part of the cost of an asset. CWIP should thus be reduced and the cost to replace or rebuild added to the cost of the structure as incurred. As the CWIP is currently outside of the registers due to the modified cash framework where an asset is only recorded when ready for use, the CWIP can be adjusted and the net amount brought back into CWIP (As part of the opening balance of the Annexure and a note) for continuation of the project. The change of value must however be documented and filed for audit purposes as the value of the resultant or eventual asset will depend on this documentation.

Another possible situation which can lead to a reduction in value could be of an asset that has been completed but awaiting transfer to the custodian. The asset could be damaged due to a burglary or partly destroyed e.g. due to a truck driving into the structure by accident. In this situation, the value of the asset may have been reduced and some work will be necessary before it could be transferred. The extent of the damage will indicate if it is repairs which would not affect the value of the asset or whether the damage is so substantial that capital improvement will be required (the asset value will need to be adjusted). In the example of the truck accident above, a new block with three separate surgeries for three doctors were completed as extension of a clinic. A truck loaded with bricks for a nearby building site drove too fast around a bend and the driver lost control of the truck. It left the road and ploughed full speed into the centre of the building. It went almost right through the building. Luckily, the rooms were empty and no injuries were sustained but the structure and walls were so damaged that the roof collapsed completely. The structural engineer assessed the building and declared it unfit for use. He ordered that it must be broken down to foundation level, the foundation strengthened, the structure rebuilt and that a fence should be constructed around the building to protect it in the future. In this instance, the asset must be written off as it has no value left apart from the foundation. There will thus be nothing to transfer to the custodian as most work must be redone.

The above two scenarios have different outcomes. In the first instance, authorisation for repairs will be obtained complying with normal processes, the repairs done and the asset transferred to the custodian department. In the second scenario, the asset lost its value and should be written down. Although impairment is not required under the modified cash framework, there is no asset anymore so no future economic benefits or service potential exist and a formal process should be started to obtain authorisation to write off the asset. The value should be reduced to the foundation value that can still be used. The process will be as per the applicable departmental policy (write off of assets lost or destroyed). When the asset is rebuilt, the value will be added to that of the foundation to determine the cost of the asset as a whole.

6.1.5 Continuing a project previously terminated

[MCS Chapter 11.90 – 11.93]

Instances occur where a decision is taken that a project terminated in a previous reporting period, should be continued. This will usually be an executive decision due to new information obtained during a reassessment of the need or feasibility study. As in the examples under 6.1.4 above, various reasons can lead to the termination of projects. In the example of an additional school no longer needed due to the change in community numbers, a decision could be made to redesign the initial structure and utilise it for another purpose e.g. a clinic or housing for the aged. The repurpose of a partly completed structure is preferable than breaking it down or leaving it to decay. If the repurposing fulfils a need of the community, it aids service delivery. The initial structure will be assessed to determine a fair value thereof based on the condition thereof and what can be used. The initial project costs will be adjusted



to reflect this value and current project costs added to the ‘fair value’ in determining the cost of the eventual asset. The adjustment process will follow policy as in 6.1.5 above.

It is always good practice, for all assets, to keep documentation relating to the value and maintenance, for as long as the asset exists. It could be archived on sale or transfer of the asset (copies of documentation are then retained where originals are given to recipient).

6.1.6 Reporting

[MCS Chapter 11.103]

The additional financial information required regarding CWIP projects are payables not recognised. Payables not recognised are restricted to progress invoices received but not paid yet. The total amount must be reflected under the CWIP note. This amount does not get included in the additions note as it does not represent a capital asset yet (the additions note relates to the asset register with a column headed ‘assets received not paid and paid received prior year’ are added and subtracted). The accrual amount must also be added to the liabilities note as an accrual relating to CWIP.

The retention must be analysed according to the definitions in Chapter 14 on Provisions and contingents to determine how it should be reflected. This will depend on the retention period and the contractor’s right to claim the amount.

6.2 Leasehold / capital improvements on the existing property

[MCS Chapter 11.90 – 11.91]

A leasehold improvement is an improvement made to a leased building by a department that has the right to use this leasehold improvement over the term of the lease. Leasehold improvements are disclosed and recorded as capital assets by the department carrying out those improvements. Repairs and maintenance are expensed as current expenditure as they are done to retain the status of the capital asset rather than to improve it and they do not meet the definition of capital asset.

As a lessee, the department is responsible for recording the improvement that they have paid for in the asset register as the future economic or service benefit will flow to the department. If the property on which the improvements were carried out is state-owned, the improvements are transferred out to the custodian department in line with the requirements of PFMA section 42 on final completion of the project (when all the contractual liabilities have been fulfilled). If the property in which improvements are carried out is not state-owned, the terms of the binding agreement may specify if the improvements will revert to the lessor at the expiration of the lease or the lessee should remove them without damaging the leased property. In a situation where the capitalised asset improvements revert to the landlord, the asset register of the department will be updated through derecognition (writing off) of the improvements previously accounted for on expiry of the lease to indicate that control over the asset has been relinquished. Ordinarily, if the department was applying accrual accounting, the leasehold improvements recorded in the books (asset register) of the department would have been depreciated over the remaining lease period.

Lessees generally need prior approval from the landlord before carrying out any capital improvements on the leased property.

Examples of leasehold improvement include:

• Electric lighting fixtures over and above those standard with the building

• Interior partitions

• Floor finishing such as carpets

• Machinery attached to a building

• Filing room customised with built in filing system

• Shelving system installed to control access and



• An additional wing to a hospital (Where the building belongs to the private sector)

Where improvements are done to leased premises that are on a month to month lease basis, an agreement should be entered into with the landlord to ensure that expenditure can be recouped on termination. Motivation for the expenditure in this scenario must be carefully considered.

In the event that there is uncertainty whether the expenditure represents an improvement (capital) or maintenance (current) the following can be considered:

• Will the cost incurred enhance the service provision capacity of the asset beyond original expectation?

• Will the expenditure result in an increase in performance beyond the original performance?

• Will the cost incurred increase the useful life of the main asset?

• Will the cost incurred increase the size of the asset or change its shape?

• Will the cost incurred amount to significant savings in future?

Where any of the answers to the questions above result in a positive response it is likely to be an improvement rather than maintenance.

6.3 Specific considerations for Immovable Assets

[MCS Chapter 11 Appendix A]

The MCS chapter 11 Appendix A - Accounting and Reporting For Immovable Assets has certain specific treatments and requirements set around the legislative environment. This is not always aligned with GRAP (pure accounting which MCS is trying to emulate) but a phased approach will be followed to bring the legislative and accounting reporting streams closer together as time moves along.

To assist with interpretation of legislative requirements and avoid unintended consequences, the following paragraphs deals with some practical issues highlighted during various interactions and suggested treatment thereof in view of the reporting requirements.

6.3.1 Interim and Deemed values

Land and structures built thereon are separable assets and reported on as such with each having its own value. To determine the value of a land parcel can be very expensive as it can only accurately be determined by a professional valuer. As the cost of such exercise is inhibitive, it has been indicated above that it is not a requirement to appoint professional valuers but that, alternative methods should be utilised as well as those appropriately skilled officials in the employ of the department.

To ensure an economic, efficient and consistent way of obtaining fair value, a model was developed with the default valuation being municipal values. It however happens that for some land parcels, the municipal value is not available e.g. not valued yet at time of vesting as they were newly surveyed by the office of the Surveyor-General (OSG), or that the municipal value does not appear on the municipal valuation roll, etc.

As an interim measure, as these land parcels cannot be recorded in the asset register with no value, the deemed value of R1 000 may be used until the municipal value is available. Correspondence with

Departments must document their own policy on how to differentiate between improvements and maintenance expenditure. The policy should clearly indicate the approach to the decision-making process.

All conclusions should also be documented and made available to the auditors as and when required.



the relevant municipality must be on hand to verify that a request for valuation has been made and followed up where needed. When the valuation is received from the municipality, the timing of the valuation must be considered (especially in instances where improvements are or have been done i.e. is value inclusive or exclude the improvements) and the asset register updated to the municipal value. The improvements must be dealt with appropriately either added to the municipal value if excluded or not double counted where included. The change from the interim measure of R1 000 to municipal value will be reported on as additions to the existing asset

There are also instances where land parcels will not have a municipal valuation and it is unlikely to be valued in the near future, such as:

• Land that borders the ocean, usually not required to be surveyed by the OSG and commonly referred to as the ‘beach’ and defined as the land between the high and low water marks. Surveying of beaches is unlikely to be conducted as they are public spaces and use thereof should not be limited.

• An admiralty reserve, land between the high water mark and the point of the first surveyed land parcel inland, which is usually required to be a certain considered safe distance from the water. Admiralty reserves will remain un-surveyed for the foreseeable future.

• Conservation areas, inaccessible mountainous areas and islands and rocky outcrops that is geographically inaccessible for use, may be proclaimed protected areas or not consist of wetlands, swamps, nature reserves, rivers, etc. There areas are unlikely to be required to be surveyed by the OSG as they fall within environmentally sensitive areas to be protected, etc.

These land parcels, when qualifying for recording in the asset register, are recorded at a deemed value of R1 000 in line with the valuation model. These areas are seen as the responsibility of the state to manage and protect from abuse and misuse and not to be disposed of, as such, investing large amounts of money to survey and value these land parcels is currently not envisaged.

Land parcels not qualifying for recording in the asset register are recorded in a register and reported on as additional information in the secondary information to the financial statements and no requirement is set to report on a value. This will include land that is held in trust by departments on behalf of a group of people as a result of donation or other means.

6.3.2 Structures and Land

As noted above, structures (buildings, dams, roads, bridges, etc.) and the land underneath them are reported on separately as different asset classifications. The main reason is that land has an indefinite lifespan whereas any man-made structure has a limited lifespan by comparison. Certain structures can however by design and appropriate maintenance or ideal environment exist for a long time (e.g. certain heritage assets). Normal operational structures however are designed, due to available materials, to be safe for use for a limited period which could be anything from 30 to 80 years depending on the type of the structure and use.

In the public sector it happens frequently that due to service delivery needs, structures are erected on land closer to a community but which is not necessarily state land e.g. farm schools, clinics or police stations on tribal land, etc.

To determine what is state land and where and by whom it should be recorded, a vesting process is followed which is in terms of the Constitution of South Africa, 1996. This is a very cumbersome but important process that needs to be done carefully and for that reason; certain reporting rules have been set for reporting consistency purposes on land parcels and the structures thereon.

The basic rule is that where the underlying land is state land, the land and the structures thereon are reported on in financial terms in the secondary information to the financial statements ( this means that both the land and the structure are recorded in the asset register) and where the land parcel is not state land, the land and the structure are reported on as additional information in the secondary information to the financial statements (Only recorded in the register, not the asset register). There is thus a distinction between what qualifies for recording in the asset register and what does not.



Land parcels are regarded as state land where ownership of the land parcel can be proven to be in the state e.g. a vesting certificate has been issued, a title deed is available indicating the land belonging to national or provincial department, an endorsement on a title deed indicates such ownership, etc. A vesting certificate entitles the holder thereof (national or provincial department) to request the Deeds Office to register title to the land in the name of the holder, the Deeds Office where supplied with the required documentation cannot refuse the registration. The vesting certificate is thus a legal document of ownership and the registration thereof being an administrative process following the request.

Land parcels are often acquired by the state through buying from the owners in the market. In this instance, the payment will be made but ownership only to be confirmed on registration by Deeds Office. The payment signifies an acquisition but the transaction is only complete on registration (money is usually held in trust until registration). The title deed will be issued by the Deeds Office indicating the new ownership of the land parcel in the name of the state.

It is customary for the state to acquire land parcels through expropriation in specific situations to further specific service delivery needs e.g. land parcels or portions thereof expropriated to construct a road. Owners are notified and a process followed with a final notice in the Government Gazette. After the final notice, the state has a right to construct the road on the land parcel. These land parcels have thus become state land through the action of legislation. However, the department must still go through a process of registering the expropriated land parcels with the Deeds Office changing the title deed (to reflect the new ownership). Where the entire land parcel has been expropriated, it can be said that the registration process is an administrative action as the cadastral description of the land will not change. Where only a portion of a land parcel is expropriated, there is a legal process that needs to be followed before it can be registered, it must be formally surveyed by the OSG. The description for the whole parcel cannot be recorded in the asset register as the state’s ownership is only relevant to the part requiring survey to properly identify the land. In addition, roads are designed and approximate measurements assigned to land needed for construction. The expropriation is done on this basis given that the exact measurement or the extent will be concluded upon survey. The ‘right’ to use the land however is in the hands of the state.

As a result of the existence of this ‘right’, the road so constructed on the land parcels and portions thereof is seen as constructed on state land and can be reported on as secondary information to the financial statements in financial terms as the road can be uniquely identified and recorded in the asset register. The interpretation for recording of the structure may have been different (not recognising the right to the land due to un-surveyed expropriated portions), which could be viewed as an unintended consequence. Where such interpretation impacted on the amounts reported for structures, it should be addressed in the current year as a change in accounting policy or error.

The land parcels that were expropriated as a whole can be recorded in the asset register (the registration process will not change the cadastral description) and reported on, but portions of land parcels that have not been surveyed do not have a unique description and accurate extent (unless surveyed by the OSG) and are therefore on as additional information in the secondary information to the financial statements. These portions of land parcels are not recorded in the asset register as they do not have a cadastral description that uniquely identifies them with an accurate extent due to the approximations used during the expropriation process. These portions of land parcels can be recorded in a register with reference to documentation e.g. the expropriation notice and other documentation, to prove the right of the state. To survey all the small land parcels (a road can stretch over several portions of land parcels at a time) can be a costly exercise and sometimes deferred. The state’s right to the land is however not impacted by the delay.

Structures constructed on land that is not state land are not reported on in financial terms but are included in a register and reported on as additional information in the secondary information of the financial statements. In that instance, there is only a right to access and use of the structure which is dependent on the duration of the land ‘right’ as there is no state ownership. It is therefore important that there is some arrangement with the land owner before investing in construction to ensure that service delivery will benefit over the long term. Typical examples of structures that may be on non-state land are schools, clinics, state domestic facilities, etc. on private farms, traditional land or municipal land (from a national and provincial perspective, a municipal land is a non-state land). The structures are reported on as they are used for service delivery and maintenance including management activities are carried out.



7 Removal of Capital Assets

[MCS Chapter 11.94 – 11.95]

A capital asset must be removed from the secondary information to the financial statements (and from the asset register):

• on disposal; or

• when no future economic benefits or service potential are expected from its use and the necessary approval from the delegated authority or officials to do so has been obtained.

This means all assets sold, donated / transferred, scrapped, lost, damaged, etc. are removed from the notes to the financial statements and the asset register after the approval process and control has been relinquished.

For immovable assets, removal includes the transfer of the immovable asset to a custodian in terms of GIAMA.

All proceeds received from the disposal of capital assets should be recognised in terms of Chapter 7 on Revenue.

Capital assets lost due to the proven negligence of the officials

Officials sometimes loose assets allocated to them by their employer. Upon completion of the relevant investigations, an official could be found to have been negligent and as a result, be held responsible for those losses suffered by the department. The department would need to determine the amount to be recovered from its relevant official. Departments are highly advised to be transparent in their relevant policies regarding how the amount of the loss suffered is determined. The amount to be recovered could be the fair value of the capital asset on the date it was lost or its historical cost or any other determination as the management deems appropriate.

Management of debtors is dealt with in terms of Treasury regulations 11, and management of losses is dealt with in terms of Treasury Regulations 12.

If an immovable asset is to be disposed of by way of a sale and was kept at a value less than its fair value in the asset register, the fair value of the asset must be determined before the asset is disposed of. This is to avoid a situation where a department has, for example, an immovable asset valued much lower than the market value and sells the immovable asset at the lower value.

Assets in general should not be sold for their carrying value but a fair market value.

If an immovable asset is not disposed of at least at its fair value, prior approval from relevant treasury should be obtained.

Treasury regulations 16A7 should always be considered when disposing of state-owned assets.



8 Disclosure of Capital Assets

(MCS Chapter 11.96 – 11.103)

Refer to the Specimen Annual Financial Statements for the illustrated disclosure requirements.

Assets under investigation disclosure requirements (MCS 11.102)

It refers to only those capital assets already recorded in the asset register but cannot be physically found on the floor, normally during the asset verification process.

There are various reasons for not being able to locate these assets. For example, they could have either been moved to a different location without following the asset movement processes or lost and management cannot immediately remove them from the asset register without first conducting an investigation. The investigation is to determine what happened to these assets in order to enable the management to make an informed decision regarding the way-forward based on the findings.

The investigation is expected to be concluded within a reasonable timeframe so that these assets do not remain under investigations longer than necessary. Departments are encouraged to define reasonable timeframes needed to conclude the investigations in their relevant policies. The nature of the capital asset under investigation plays a huge role in determining reasonable timeframes.

These assets are not removed from the asset register as long as the investigation is not concluded.



9 Summary of Key Principles

This chapter provides guidance on how to identify and report on capital assets.

9.1 Definition and identification

To classify an asset as capital assets, management should consider the definition, nature, timing and materiality of the item.

Capital asset types:

Tangible assets (Movable and immovable assets)

Intangible assets

Heritage assets

Biological assets

Investment properties

Classification of capital assets between major and minor assets based on R5 000 threshold. All those costing below R5 000 are minor assets and the rest are major assets.

9.2 Recording and measurement

Capital assets are recorded and disclosed in the notes and annexures to the financial statements when it meets the recognition criteria:

• it is probable that future economic benefits or service potential will flow to the department; and

• its cost or fair value can be measured reliably.

Capital assets are recorded at cost, except when it is acquired at no cost in which case it is recorded at fair value.

Where the cost cannot be determined reliably, capital assets, except for immovable assets, are measured at fair value and where fair value cannot be determined, at R1. Where the cost cannot be determined reliably for immovable assets, they are measured at their fair value. (Should only hold true for older assets).

For capital assets being constructed, all related costs would be shown as capital work in progress until the asset is ready for use and once ready for use, it would be recorded in the asset register of the budget holder at the total construction costs incurred. Once all obligations of the contract have been fulfilled, the final costing must be done and the asset register updated. If the asset must be transferred to a custodian in terms of legislation, it would be transferred to the relevant department in compliance with PMFA section 42 requirements.

Regarding reporting requirements for capital work in progress (CWIP), MCS 11.91 &91A should be considered.

Any gain on disposal of capital assets, which is the cash received on disposal, is recognised as departmental revenue.



9.3 Disclosure

Capital assets purchased are recorded as expenditure under “expenditure for capital assets” in the statement of financial performance.

Capital assets are also recorded in the notes to the financial statements where more detail is provided, such as opening balance, additions, disposals and closing balance.

Details of capital work in progress are shown in the annexures and or notes to the financial statements, detailing opening balance, current year expenditure, assets that are ready to use or contracts that are terminated, and closing balance.



ANNEXURE A: Application of the Fair Value Model

1. Purpose of this document

The purpose of this document is to propose the application of a fair value (at reasonable cost to the State) or a nominal value as deemed cost, for certain exceptional cases, in alignment with provisions of the MRPA. The deemed cost is to be applied to properties that have carrying values that need to be replaced given that they are unreliable and cannot be supported by adequate records to satisfy the current reporting and/ or external audit requirements.

2. Background

The National and Provincial Departments initially record immovable assets based on the cost of the item. The cost of an asset is defined as the total cost of acquisition or construction. As an interim measure, where the cost could not be determined reliably, the immovable capital asset was recorded and reported on at a R1 value, unless the fair value had been reliably estimated. This was a special interim allowance in terms of the MCS chapter on capital assets. Reporting immovable assets at R1 did not aid the users of financial statements and rather raised concern. It also did not assist custodians in creating reliable information for management of these assets. The majority of carrying values (historical cost) in the Immovable Asset Registers (IARs) and Annual Financial Statements (AFS) are not reliable and can no longer be traced to supporting documentation or valuation methods given the state of accounting records and lack of audit trail. In the current accounting framework, the application of fair value or a deemed cost to older assets is permitted where the initial cost of an asset is either unknown, cannot be reliably determined, or where the asset was acquired at a value less than the actual cost (MCS chapter on capital assets .71).

3. Valuation Methods

The IAR GITC Asset Register Task Team has recommended three methods to be considered in determining the fair values of immovable assets:

• Municipal valuation rolls (and supplementary rolls) (MVR) can be utilised as the default method to determine a fair value as deemed cost. The municipal rolls, where rates are paid in accordance with the rolls, are considered to be third party documents (independent from the department) and the audit outcome of the municipality thus irrelevant. Where the Municipal value is disputed an alternative fair value should be determined.

• Market based value (Sales Comparison method): – This method takes into account comparable properties that have been sold recently in the same area and adjustments for rights, location, time, size, shape and layout. It can be used in the absence of Municipal values or where MVR values were deemed to be out-dated /unreliable (with reasons documented). This method can be used for vacant land, farms & some residential properties.

• Depreciated replacement cost (DRC) – value calculated by using the acquisition cost of a similar asset which is then adjusted by taking into account condition (depreciation/impairment) or functionality of the asset, this method can also be used in the absence of reliable Municipal values for certain specialised properties, e.g. hospitals, airports, weighbridges, etc. The value typically used by and approved for Roads Management Systems (RAMS).

4. Exceptional Cases

• Admiralty Reserve Definition: Usually an un-surveyed area wherever it exists, that is mostly delineated as the area between the high water mark and a specific distance inland from the high water mark (the distance to the point of the first surveyed land parcels). - Apply the nominal value of R1,000 per Admiralty Reserve Note: Coastal reserves/ protected areas usually fall within the admiralty reserve and where the first land parcel is bounded by the high water mark no admiralty reserve is applicable



• Commonages

Definition: Commonage or common pasture lands are lands adjoining a town or village over which the inhabitants of such town or village either have a usufruct right for grazing for their stock, and, more rarely, the right to cultivate a certain portion of such lands, or in respect of which the inhabitants have conferred upon them by regulation certain grazing rights. The modern commonage is characterized by miscellaneous land uses. Examples: Grazing, pastures, low cost housing and public infrastructure on same land - Apply the nominal value of R1,000 per land parcel

• Communal Land Definition: State Land allocated to tribal authorities and managed by Department of Rural Development and Land Reform (DRDLR), and other custodians/institutions. Example: Farms or Land in the former TBVC States traditionally/beneficially occupied. - Apply the nominal value of R1,000 per land parcel

• Inaccessible / Mountainous areas Definition: Areas that is not valued due to their inaccessible geographical location and topographical nature, including proclaimed or non-proclaimed conservation and protected areas. Examples: National and provincial nature reserves and protected areas, mountain catchment areas, wetlands, marshlands, swamps, caves, rivers, etc. like the Great Fish River Wetland nature Reserve. - Apply the nominal value of R1,000 per land parcel

• Islands , Offshore Rock Outcrops and Conservation Areas Definition: Any piece of sub-continental land that is surrounded by water. Islands can be offshore as well as inland islands (e.g. in rivers) Examples: Off-shore islands will include islands such as Bird Island and St Croix Island and inland islands, which can be found in a lake, a river or a reservoir will include Driekops Island, the Kosi Bay islands and an example of a rocky outcrop is found in ‘Hole in the Wall’ at Aasbank. - Apply the nominal value of R1,000 per land parcel. Note: Conservation Islands/Rocks, conservation areas such as world heritage sites can fall into this category. Where the merits of the situation for the subject property/island warrant it, a professional valuer may be appointed to undertake a valuation. This is however envisaged to be necessary only in unusual circumstances.

• Land parcels with Graves and Cemeteries Definition: A land parcel used as a place of burial for the remains of people and usually referred to as a cemetery or graveyard. Although used interchangeably a graveyard is primarily the place of burial within the property of a church.

- Apply the nominal value of R1,000 per land parcel (whether fully developed or not) Note: Custodians should prioritise the transfer of land on which cemeteries and graveyards are situated to local authorities (or churches where applicable) with the exclusion of grave sites of a historic, military or heritage nature for example the Cullinan Military Cemetery and the Prince Imperial burial site.



• Road reserves Definition: Land parcel surveyed or framed for the exclusive usage of road or access purposes (all road classifications). - Apply the nominal value of R1,000 per registered road reserve, regardless of classification; Note: The nominal value can also be applied to unregistered road reserves where the reserve can be properly identified. Where a municipal value exists for a particular registered road reserve, such value may include the improvements to the land parcel and the nominal value should still be used. The cost of the improvements will form part of the road structure asset.

• Seashore Definition: The seashore is the land that borders the ocean or sea. The area is typically un-surveyed and consists of the land between the low water mark and the high water mark commonly referred to as the beach. Examples: Beaches are commonly referred to by the name of the area in which it is situated in, such as Camps Bay, Shelley Beach, and Durban South Beach, etc. - Apply the nominal value of R1,000 per beach

Other specific cases

• Accounting for one Facility built over a number of Land Parcels (Where there are Municipal Values)

Challenge: The current manner in which municipal valuation rolls are drafted is to reflect a value for the land parcel including any improvements thereon. Splitting of the land value from the structure value disclosed together on a municipal valuation roll thus requires a methodology or policy for consistent treatment. Example: Addington Hospital – 1 Facility built over 21 land parcels, with only 3 land parcels indicated as having a municipal value. The value of the three land parcels represents the municipal value for the entire facility (thus the structures and the other 18 land parcels).

o In these instances, the asset register should reflect the values exactly as per MVR – i.e. per land

parcel including the value of the structure. The other land parcels without value (after checking with the municipality) should be noted as being included in the value.

o The exercise of splitting the value of the land parcel from the value of the structure should be undertaken by a professional (thus expensive). Although land and the buildings thereon are separable assets it is currently allowed to report the total value under buildings and other fixed structures, where the value cannot be split, until a methodology has been developed. Custodians should embark on a process to consolidate land parcels where a facility is constructed over more than one land parcel to alleviate problems in this regard.



5. Motivation and Benefits of Using Municipal Valuation Rolls and Nominal Value for Exceptional Cases

• Municipalities use professional valuators to perform property valuations in order to fairly and objectively determine the approximate market values. Property valuations are performed at least every 4 years and the market values obtained are used in determining rates and taxes paid by the property owners. Property valuations are performed in accordance with Local Government Municipal Property Rates Act 6 of 2004 (MPRA), which requires a market related value to be determined.

• Section 81 of the MPRA assigned the responsibility to the MEC for Local Government to monitor and to ensure that municipalities comply with all provisions of the Act, including the appointment of qualified valuators as required in terms of Section 39 and processing the objections etc. Custodians can therefore assume that Local Government has complied with the requirement of MPRA of 2004.

• All municipalities are required to perform regular general property valuations and update the rolls with information relating to new valuations (supplementary rolls) and therefore such values should reflect or approximate market value.

• The use of a nominal value in exceptional cases, where values cannot be determined, is restricted to specific cases and thereby limits abuse of the nominal value and strengthens the reliability of the IAR and reporting thereon. The exceptional cases include exceptions noted in the MPRA which are thus unlikely to be valued by municipalities in the near to distant future. Certain interim allowances were made for properties awaiting valuation which, should reduce year on year as valuation information is obtained.

6. Sources to be Used

• Municipal valuation rolls (MVR)

• Aging Indices – ABSA Housing Review (www.absa.co.za)

• Building cost Indices – aecom Africa Property and Construction Handbook (www.aecom.com)

• Additional information from third parties such as Lightstone (www.lightstone.co.za) and Rode & Associates (www.rode.co.za) recognised as industry leaders

7. Procedures to be followed

• Obtain the latest MVR’s from all relevant municipalities or use previous rolls where the latest rolls are unavailable

• Determine if MVR is reliable with the correct data fields e.g. age of MVR, Extent etc.

• Convert MVR into useable format i.e. excel

• If the MVR is an older version (the previous issue), adjust it using aging index (Vacant land and residential properties only)

• Match MVR value to IAR land parcel

• Use this default method to determine value of land without improvements:

o Calculate total vacant land value and total extent for each town using the MVRs

o Calculate the average vacant land ratio (total land value of vacant land divided by total extent)

o Apply the vacant land ratio (per town) to the actual extent in the IAR (in that town) to calculate land carrying value (average vacant land ratio x actual IAR extent for the land parcel = land carrying value)

o Subtract the calculated land carrying value from the market value in the MVR to determine improvement carrying value (MVR value less calculated land carrying value = improvement carrying value)

o Subtract the calculated component value(s) from the improvement carrying value

http://www.absa.co.za/

http://www.aecom.com/

http://www.rode.co.za/



• Where, there is no or an unreliable municipal value or where there is no extent in the IAR/MVR, use the Comparison approach:

This method takes into account comparable properties in the MVR that appear in the same area and that are similar in size, shape and layout. This method can be used for vacant land, farms, residential and some specialised properties like defence facilities, prisons etc. Then follow these steps from the default method:

o Apply the average vacant land ratio to the actual extent in the IAR to calculate land carrying value (average vacant land ratio x actual IAR extent for the land parcel = land carrying value)

o Subtract calculated land carrying value from the compared market value from the MVR to determine improvement carrying value (compared MVR value – calculated land carrying value = improvement carrying value)

o Subtract the calculated component value(s) from the improvement carrying value

• Where a similar property cannot be identified, use the Replacement cost method:

This method makes use of the vacant land ratio used in the default method to calculate the land carrying value (vacant land ratio x land parcel extent in the IAR) and building cost indices (www.aecom.com – Africa Property and Construction Handbook) to calculate the improvement carrying value (cost indices per sqm. x the extent of the improvement(s)). This method can be used for vacant land, residential and specialised properties e.g. defence facilities, prisons etc.



8. Glossary of Terms & Abbreviations / Acronyms/ Definitions

MCS Modified Cash Standard

MVR Municipal Valuation Roll

IAR Immovable Asset Register

SDF State Domestic Facilities

DRC Depreciated Replacement Cost/ Replacement Cost

GITC GIAMA Implementation Technical committee

RAMS Roads Asset Management System (including related road sytems)

SQM Square Meters

TBVC – States Transkei, Bophuthatswana, Venda, Ciskei

DPWRT Department of Public Works, Roads and Transport

GRAP Generally Recognised Accounting Practice



10. Definitions

An active market is a market in which all the following conditions exists:

o The items traded within the market are homogeneous;

o Willing buyers and sellers can normally be found at any time; and

o Prices are available to the public.

Condition assessment is an assessment of the current condition of an asset (and its components) in relation to its service performance, as well as the maintenance or renovation required and associated costs.

Fair Value refers to the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties at arms’ length transaction.

Immovable asset means any tangible asset acquired or owned by government, excluding any right contemplated in the Mineral and Petroleum Resources Development Act, 2002 (Act No.28 of 2002). Immovable assets may include land, fixed structures such as buildings and infrastructure assets. Plant that is built-in to the fixed structures and is an essential part of the functional performance of the primary asset is considered an immovable asset (though it may be temporarily removed for repair)

Improvements refer to structures built or constructed on land, e.g. a building, Immovable infrastructure assets on a land parcel.

Infrastructure assets are assets that usually display some or all of the following characteristics:

o They are part of a system or network;

o They are specialised in nature and do not have alternative uses;

o They are immovable, and

o They may be subject to constraints on disposal.

State Domestic Facilities (SDF)’s are improvements controlled by DPW but situated on land that is not under the custodianship of the Minister of Public Works.

Useful life is: the period over which an asset is expected to be available for use by an entity, or The number of production or similar units expected to be obtained from the asset by an entity.



12. Required Fields for an Immovable Asset Register

The requirements for immovable assets are dealt with under the following headings:

A) Land

B) Improvements (Buildings and other structures)

C) Financial

The minimum information required for properties recorded in the immovable asset registers of National and Provincial custodian departments is as follows:

A) LAND

REQUIREMENT DESCRIPTION OF REQUIREMENT

1. GENERAL

1.1 ASSET NUMBER

Unique property code as per the asset register

1.2 ASSET CLASS Indicate URBAN or RURAL

1.3 ASSET TYPE Indicate ERF / FARM / AGRICULTURAL HOLDING (AH) / SECTIONAL TITLE (SS)/ etc.

1.4 DEEDS OFFICE Indicate relevant Deeds Office where the asset is registered or to be registered (in the case of surveyed but unregistered State Land)

2. GEOGRAPHICAL LOCATION

2.1 PROVINCE The relevant Province in which the asset is located

2.2 DISTRICT MUNICIPALITY

The relevant District Municipality in which the asset is located

2.3 LOCAL AUTHORITY

The relevant Local or Metropolitan Municipality in which the asset is located

2.4 MAGISTERIAL DISTRICT

The relevant magisterial district in which the property is located

2.5 PHYSICAL ADDRESS

The street address of the asset situated in a formalized urban area. Where a street address is not available, e.g. land locked property, property in rural area and townships without formal street names indicate NO STREET ADDRESS. Custodians may refer to a general locality description should there be no street address

Notes:

o The physical address may not be applicable to certain land parcels for the Department of Rural Development and Land Reform.




o Departmental policy of a custodian should indicate how to describe

and which properties the ‘no street address’ situation would apply to.

2.6 GPS COORDINATES

Either the physical address (2.5) or GPS-coordinates (2.6) must be recorded as a minimum (Custodians should however strive to include both).

The global positioning coordinates of the immovable asset to be reflected in any of the following recognized formats:

Coordinates Decimal Decimal Deg. Min. & Sec. Deg. & Decimal Min.

Latitude -32.3638° S 32.3638° S 32° 21' 49.68" -32° 21.828'

Longitude 28.4897° E 28.4897° E 28° 29' 22.92" 28° 29.382'

The GPS-points obtained from the Office of the Chief Surveyor-General or any recognized GIS-system (e.g. Lapsis, Google Earth) is acceptable as a geo-reference requirement. Notes: o One GPS co-ordinate will be acceptable in the case of a facility (land use

function) i.e. school or nature reserve situated on multiple land parcels.

o Custodians using other formats of reflecting co-ordinates are encouraged to change to one of the above examples with effect from 1 April 2016.

o The GPS-coordinates obtained from the Surveyor-General dataset refer

to the central point of the property polygon. o Should GPS-coordinates be sourced from GIS-sources, it should be

taken as close as possible to the centre point of the land parcel. o Should GPS-coordinates be sourced in situ, it should be taken at the

entrance to the property or any point on the property (custodian policy should be developed).

3. PROPERTY DESCRIPTION – formal cadastral description as per approved Surveyor-General diagram

3.1 REGISTRATION DIVISION

The relevant registration division / administrative district under which the asset is registered in the relevant Deeds Office – e.g. JR; Cape RD, Colesberg RD

(Referred to as the Major Region Code)




3.2 TOWNSHIP NAME

The relevant town name with regard to urban assets and relevant registration division with regard to rural assets (farms) – e.g. Matatiele (urban); Matatiele RD (rural)

(Referred to as the Minor Region Code)

3.3 LAND PARCEL The erf number / farm number / agricultural holding number / sectional title number.

(Referred to as the Parcel Region Code)

3.4 LAND PORTION The erf portion number / farm portion number / agricultural holding portion number.

(Referred to as the Portion Region Code)

3.5 LAND REMAINDER

Indicate if the land parcel or land portion is a remainder or not, by using the following indicators: R/E = remainder and 0 = no remainder

3.6 FARM NAME The official name of the farm (where applicable) as depicted on the official surveyor-general diagram, e.g. Aloe Ridge, Ntlaza Trading Station, Farm 65

3.7 S.G.-DIAGRAM NUMBER

The number of the approved S.G.-diagram / General Plan / Sectional Diagram

3.8 EXTENT (ha) The extent of the asset in the metric unit of hectare as depicted on the official survey-general diagram.

3.9 LPI CODE The land parcel indicator / giskey (21 digit code) as generated by the Office of the Chief Surveyor-General.

Examples:

o N0ET00000000825100001, or

o T0JQ00000000005400002, or

o C00900000000017100002

(Combination of relevant Survey Office, major, minor, parcel and portion codes)

4. OWNERSHIP DETAILS

4.1 TITLE DEED NUMBER

The number as reflected on the Title Deed. In the event that the asset is not registered in the Deeds Office (unregistered State Land), indicate UNREGISTERED

Examples:




o T3344/1999

o G4/1908

o TX12/1977

4.2 REGISTRATION DATE

Date on which the asset was registered or endorsed in the name of Government

4.3 REGISTERED OWNER

The registered owner(s) of the asset as described in the Title Deed. There may be more than one owner in the case of shares held in a property (in this instance the percentage ownership should be recorded).

Note:

The registered owner as reflected on Aktex / WinDeed is acceptable where the Title Deed is unavailable (an indicator should reflect the source of information – custodian policy needed).

4.4 VESTING DATE Date on which the Item 28(1) / Section 239 Certificate was issued by the Department of Rural Development and Land Reform.

Note:

If the immovable asset is not subject to confirmation of vesting in terms of the Constitution – indicate NOT APPLICABLE (e.g. property purchased by custodian for exercising of its mandate)

4.5 OWNERSHIP CATEGORY

Refer to either ‘State-owned’ or ‘Non State-owned’

Note:

Lease-in properties (expense leases) are included under ‘non state-owned’, where capital expenditure has been incurred on a site, but a separate expense lease register should be available for recording all leases.

5. LAND USE AND MANAGEMENT DETAILS

5.1 LAND USE Land use classification or facility type (where applicable) should be indicated.

Note:

Land use and certain management details may not always be applicable to the Department of Rural Development and Land Reform. Custodian policy should indicate the applicability or not.

5.2 USER DEPARTMENT

Name of the relevant User Department that the asset is allocated to for service delivery purposes.




If not allocated to a User Department, the Custodian Department should be reflected as the User Department

5.3 FACILITY NAME

Is the name of the facility as for the function that is performed on the site e.g. Health District Office – Upington, Coleford Nature Reserve, Extension Office for Agriculture, Government Garage, etc.

Notes:

• In cases where land is vacant, a facility name will not be applicable. It should be noted that one property (land parcel) might have more than one facility. In these instances departmental policy should dictate how this should be indicated to avoid duplication.

• It is possible that the name of the facility can be the same as the name of the building e.g. for schools, hospitals and clinics, etc. See 6.1

5.4 INCOME LEASE STATUS

This should be indicated with only a YES (valid lease agreement in place) or a NO (valid lease agreement not in place).

In cases where there is a valid lease agreement, the relevant detail should be reflected in a separate lease register with a linkage/unique identifier/cross-reference to the immovable asset register. A policy on what identifier to be used as the cross-reference should be developed to ensure consistency.

The following minimum requirements must be covered in the Lease Register:

• Nature of lease (e.g. residential, business, etc.)

• Name of lessee

• ID-number of lessee / Company registration number

• Commencement date

• Expiry date

• Escalation rate (percentage) and date

• Rental per month / annual

• Lease number and location



B) IMPROVEMENTS (BUILDINGS OR OTHER STRUCTURES)


6. IMPROVEMENT DETAILS

6.1 STRUCTURE NAME

Indicate the name of the building(s)/structure located on the land.

Note:

• It is possible that ‘building name’ can also be the facility name, e.g. Nompumelelo Clinic; Bluedowns Police Station; Stutterheim High School, etc. In this instance it will be important to ensure no duplicate names occur for facilities/ structures in different locations e.g. Madiba High School, where one is in located in Queenstown and the other in East London. Should this occur an additional identifier should be available to distinguish the structures. A policy to the effect should be developed.

• Improvement details may not be relevant for the Department of Rural Development and Land Reform but documented motivation should be available where structures are not reflected.

6.2 FACILITY CODE

A unique code generated by the Custodian for each facility/ structure).

Note:

To be phased in over a 2 (two) year period for reporting purposes. It will be a minimum requirement for the 2018/2019 financial year.

6.3 LEVEL OF UTILIZATION

Utilization of facilities should be covered in the respective user asset management plans (U-AMPs) of User Department.

Note:

This will not be required in the Asset Register, of custodians at this stage.

The following value-added information can be covered in the respective user asset management plans (U-AMPs) and not in the Asset Register (IAR) until the 2022/2023 financial year. These requirements will be phased in over the next 5 (five) years and are not an immediate requirement in this document:


IMPROVEMENT DETAILS

a SITE COVERAGE

Combined extent (in m²) of the foot print of all improvements (buildings/structures) of a facility over the site.

Note:

The extent may be calculated manually or vide GIS-calculation.




b EXTENT OF BUILDINGS

Combined and individual extent (in m²) of the floor areas (foot print) of all improvements (buildings/structures) in a facility

Note:

This information must be available in the U-AMPs of User Departments.

c USABLE AREA Area, excluding common areas (e.g. balcony, lifts, passage, etc.) that is available for accommodating line function work (Office accommodation only)

Note:

This information should be available in the U-AMPs of User Departments.

d LEVEL OF UTILIZATION

Level of utilization expressed in a percentage against the usable area of a facility.

e CONDITION RATING

The custodian assessment rating of the condition of a building / facility / structure (by way of using a technical condition assessment for example, as stipulated in the Guideline for Custodians: Custodian Asset Management Plans)

Notes:

• The Custodian Assessment Rating for office accommodation to be phased in over a period (2020/2023 FY) for C1, C2 and C3 functional performance rated buildings only

• Condition Assessments to be completed within a five-year cycle for example, as required for applicable structures in terms of Section 13(1)(d)(iii) of Act 19/2007

f FUNCTIONAL PERFORMANCE RATING

The user’s perception of the functional performance of a building / facility / structure by way of using a functional performance assessment as stipulated in the Guideline for Users: User Asset Management Plans.

Note:

Functional performance ratings for office accommodation to be phased in over a two year period (2020/2021 FY) and the balance of the portfolio over a three year period (2023/2024 FY)



C) FINANCIAL

The financial component of the Asset Register is guided by the Accounting Guide for Immovable Assets (Modified Cash Standard towards alignment to GRAP)


7. GENERAL

7.1 LAND USE CLASS

Refer to the categorisation of assets according to the Financial Accounting Framework and SCOA (e.g. dwellings, non-residential buildings, heritage assets, land and other fix structures including infrastructure networks)

7.2 NATURE OF ASSET

Refer to the categorisation of assets as per Accounting Manual for Department (Capital Assets) (e.g. property, plant and equipment, investment assets, infrastructure assets; heritage assets; biological assets)

8. SECONDARY INFORMATION NOTE

8.1 ADDITIONS CASH

Total value of money spend to acquiring (purchase price with transfer costs) or constructing a structure including while still part of work in process

8.2 ADDITIONS NON-CASH

Properties acquired without cash valued at fair value.

Newly confirmed vested properties to be recorded based on municipal valuation or fair value as determined in terms of the Fair Value Model. (Where municipal value not available yet, documented request to municipality to value should be on hand.

Properties constructed and ready for use at total cost to date (by budget holder).

Section 42 transfer received by a custodian from a budget holder at the total cost of property.

Note:

• As from 2016/2017 FY the initial cost of all newly confirmed vested properties must be recorded at municipal value or fair value in terms of the Fair Value Model

8.3 ADDITIONS - RECEIVED CURRENT YEAR, BUT PAID IN PRIOR YEAR

Newly acquired properties which are not yet registered in the name of Government, but for which the purchase price has been paid (monies held in trust by conveyance attorney), where legal transfer is pending registration

8.4 DISPOSALS – TRANSFERRED OUT /

Not disposed for money – e.g. exchanged, gratis transfer or write-off (latter would only be applicable to structures)




DESTROYED / SCRAPPED

Newly constructed structures transferred out (Section 42) from budget holder to custodian on formal completion of project at total cost of project.

8.5 CLOSING BALANCE

The closing value of the asset as on 31 March of a financial year

9. VALUATIONS – applicable for current non-cash additions only (where cost is not available)

Note:

Valuations may not necessarily be applicable/ appropriate for the Department of Rural Development and Land Reform but documented motivation must be available in instances where valuation is thought to be inappropriate

9.1 MUNICIPAL VALUATION

As per latest valuation roll of the local municipality (consider prior or subsequent improvements)

9.2 DATE OF MUNICIPAL VALUATION

Date when valuation roll was published by the local municipality – or if different, the effective date of the valuation

9.3 NON-MUNICIPAL VALUATION

Valuation determined by – individual and qualification (professional/ expert)

9.4 DATE OF NON-MUNICIPAL VALUATION

Date of valuation certificate signed by professional

As from 1 April 2016, all immovable assets recorded in the asset register should be stated at cost, replaced with the fair value of the property as per the approved Fair Value Model, where not available or at nominal value where applicable.

Notes:

Where the immovable asset register cannot maintain all the critical information it is recommended that additional documentation with sufficient cross-referencing be kept to facilitate the proper management of these assets. Separate registers for leases are acceptable. Information of or on buildings should be available (cross checked) in the U-AMPs of User Departments.

The use of documentation outside the asset register to carry outstanding or additional information is encouraged in order to improve the management of assets and application of the life-cycle approach. Since various systems being utilised at present, are not all able to create additional fields of information as needed it therefore necessitates the use of documentation outside the AR. More information is better than less, it creates a database for future decision making, which can be more informed and thereby more effective, efficient and economical in the long run.

Additional information that can assist in the management of immovable assets could include detail on occupants of buildings such as period of lease, escalation of rent, etc. In the case of land any claim by a person or group with regards to the land would assist in the proper management of said land. This



information would normally be included under the heading ‘Accountability’ as a ‘Restriction’ but as the field is not as yet required, it is encouraged that such information, once known, be accumulated as additional to the AR for future use.

This information can be accumulated a numerical code such as the unique property code as per the asset register or the 21 digit (LPI code), generated by the Surveyor- General. The choice will be based on the volume of information needed and the ease of identification and matching to the chosen code.



ANNEXURE B: AFS Notes on Capital Assets

1. MCS 11.96, 97, 99, 100



1.1 Opening balance: The opening balance is the closing balance reported in the prior year note, and

must agree to the closing balance in the note: “MOVEMENT IN MOVABLE/ IMMOVABLE (IN)/TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH (e.g. 20x0)”. This column represents the cost / value of the assets included in the asset register at the beginning of the financial year (including any corrections made relating to the prior year or years prior to that). The note for the prior year must be completed first as the closing balance pulls through automatically to this column (on the template).

1.2 Adjustments due to changes in value: Departments may elect to revalue all or a class of biological assets at its fair value at the reporting date (MCS 11.89). This column is used to record the changes in biological assets fair value.

1.3 Additions: An addition is any asset that has come under the control of the department during the current reporting year. Assets only recorded in the current year that have been under the control of the department in previous reporting periods (thus in the case of an incomplete asset register) should be excluded and instead included in the “Prior period errors” column. The additions column includes all assets relating to transactions effected during the current financial year, whether involving cash or non-cash. The additions must agree to the total amount in the “ADDITIONS TO MOVABLE/ IMMOVABLE / (IN)TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH (e.g. 20x1)” note. These include the total costs to date of multi-year projects brought into use in the current year.

1.4 Disposals: Disposal in terms of the asset register includes any asset that needs to be removed from the asset register as the said asset is no longer under the control of the department including items sold, transferred, lost, stolen or destroyed for any reason. The cost of all assets disposed of for cash and at no value during the current financial year, must be reported in this column at their cost value as recorded in the asset register. The disposals must agree to the total amount in the “DISPOSALS OF MOVABLE/ IMMOVABLE/ (IN)TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH (e.g. 20x1)” note.



1.5 Closing balance: The closing balance is the calculated result of the other columns. This closing balance must agree to the cost as reflected in the asset register for movable/ immovable/ (in) tangible capital assets as at 31 March (e.g. 20x1).

2. MCS 11.103 - CAPITAL WORK IN PROGRESS (CWIP) NOTE

2.1 Opening balance: This is the closing balance reported in the prior year.

2.2 Capital expenditure in the current year towards capital work- in- progress: Cash expenditure incurred in the current year relating to the specific capital WIP project (Cash Addition).

2.3 Project assets transferred as non-cash additions to the asset register as they became ‘ready for use’: Total project capital costs accumulated since the inception of the project. This includes current year’s cash additions. These “ready for use” projects would then be cleared (deducted) from CWIP and added as non-cash addition to the asset register of the relevant department at the same cost cleared from CWIP.

2.4 Projects removed from work-in-progress as a result of being stopped or abandoned during the year: Total project capital costs accumulated since the inception of the project. This includes current year’s cash additions if any. These stopped and abandoned projects would then be deducted from CWIP as the projects are no longer on-going. Depending on the reasons for abandoning the project(s), the total accumulated cost should be tested against fruitless and wasteful expenditure.

2.5 Closing balance: Accumulated CWIP costs at year end for the projects that are still on-going (not yet ready for use).



ANNEXURE C: Comprehensive Examples

1. AMD section 4.4.4 Investment property

Example 1: One property used as owner-occupied property and to earn rentals

A department owns a building of 750 square meters. The building consists of four floors of which the bottom floor of 210 square meters are offices used by the department and the top three floors consists of the remaining 540 square meters with 9 apartments which are being rented out to unrelated tenants. The office space and each apartment can be sold separately.

In this example the department has one property with a portion being owner-occupied and a portion being used to earn rentals. These portions are easily identifiable and as a result require different accounting treatment. The portion of the building used to earn rentals is investment property and the portion used by the department itself will be classified as owner-occupied (non-residential buildings).

Example 2: One property used as owner-occupied property and to earn rentals

Department A owns a property which consists of two adjoining warehouses. The department uses the smaller warehouse of 100 square meters to store inventory and the larger warehouse of 700 square meters is being rented out and the department cannot dispose of these warehouses separately. According to Department A’s policy, significance regarding the classification between the investment property and other buildings is anything more than 40% of the floor space

In this example the department has one property with a portion being owner-occupied and a portion being used to earn rentals.

Before the department can classify the property as investment property it first needs to determine if the owner-occupied portion of the warehouse is insignificant or significant.

Total size of the warehouses = 800 square meters

Owner-occupied portion of total size = 12.5% (100 sqm / 800 sqm)

Investment Property portion of the total size = 87.5% (700 sqm / 800 sqm)

As per the asset management policy of department A, the property would therefore be classified as an Investment Property since the owner-occupied portion is significantly less than 40% of the floor space

2. AMD section 4.4.10 Website costs

Example 1: Website cost - Determining whether a website can be capitalised as an intangible asset

It is important to note that a department will need to demonstrate how the website will generate probable future economic benefits or service potential, in order to capitalise the website as an intangible asset. If the department cannot demonstrate this, all expenditure on such a website should be recognised as a current expense under goods and services when it is incurred.

It is difficult to demonstrate that probable future economic benefits or service potential will be generated from a website developed solely or primarily to promote and advertise its own products or services; consequently, all costs on developing such a website will be classified as a current expense. It is thus treated in the same manner as traditional ‘advertising’ cost as the impact thereof on the business is difficult to estimate or measure.

Where an entity created a website specifically for the use of e-learning students, where study material can be accessed after paying the relevant fees, the entity can show that future economic benefit or service potential will flow to the entity and the cost incurred in development of the website can be recorded as an intangible asset.



Example 2: Website cost

Department A decided to develop a website for its own use as well as the use by its target market.

Since the department had never developed a website previously, it was decided to first undertake a feasibility study and if successful, define hardware and software specifications, evaluate alternative products and suppliers and then select preferences. These steps were executed and eventually expenses of R60 000 were incurred in this regard.

In the next stage of the project, hardware was purchased, a domain name was obtained and operating software was developed. These developed applications were installed on the web server and the total cost incurred in this stage amounted to R220 000, of which the hardware comprised R80 000, the software R100 000 and the remainder was spent on obtaining the domain name.

Once the above had been completed, the appearance of the web pages was designed. A graphic designer rendered an account of R18 000, which was paid in cash immediately. The content of the website was then developed. The cost involved in this development amounted to R25 000.

The website was brought into use on 01 April 20xx. During the 6 months following on it being commissioned, graphics were updated, the website was registered with a few new search engines and the usage of the website was analysed to establish the effectiveness thereof as a marketing tool. The costs amounted to R20 000.

Description Amount (R) Classification

Feasibility study 60 000 Current Expenditure

Hardware 80 000 Tangible capital asset

Software 100 000 Intangible asset

Domain name

(220 000 – 80 000 – 100 000)

40 000 Intangible asset if the department can demonstrate how the website will generate probable future economic benefits or service potential or else its current expenditure

Graphical design development stage

18 000 Intangible asset if the department can demonstrate how the website will generate probable future economic benefits or service potential or else its current expenditure

Content development stage 25 000 Intangible asset if the department can demonstrate how the website will generate probable future economic benefits or service potential or else its current expenditure

Website testing 20 000 Current expenditure

3. AMD section 5.1 Initial measurement of capital assets

Example 1: Donated capital asset received from non-government entity

Hi & Bye (Pty) Ltd, a private entity not related to any government institution donates a laptop to Government Department A together with all its historical supporting documentation including the original invoice and the asset register details on the 28th of February 2014 and the details as per the asset register are as follows:



• Cost Price = R9 000 (Agrees to the invoice supplied)

• Accumulated depreciated = R3 000

• Book Value = R6 000

• Purchase Date = 01/03/2013

The asset is a donation from a non- government entity, therefore Department A is still required to fair value the donated asset even though all the supporting documentation was provided.

This is to ensure that the asset is initially recorded at its fair value as required by the MCS and since the book value of an asset doesn’t translate to the fair value of the asset. Government in general is gaining an asset that was never recorded by any department.

Example 2: Interdepartmental donation where costs records are available

Government Department A donates a laptop to Government Department B on the 15th of September 2014.

Accompanying the donation is the original purchase invoice amounting to R10 000 with the purchase date of 01/06/2010 and all the applicable PFMA S42 requirements being complied with.

This is a transfer from one department to the other department, therefore Department B will accept and record the laptop at the provided amount of R10 000

Government in general is not gaining any additional asset as the asset was already within the government environment.

Example 3: Interdepartmental donation where costs records are not available

Assuming the same information as above. Department A recorded the laptop at a value of R1 as it did not keep a proper asset register at the time of acquisition. As the Department did not retain documentation as required by the Treasury Regulations it cannot provide substantiating documentation on the cost of the laptop. Department A must therefore determine the fair value of the laptop; update its asset register, and then transfer (Section 42) to Department B providing documentation as to how the fair value was arrived at. Department B will record the laptop at its fair value as provided

Example 4: Asset was acquired before 1 April 2002

Department A wants to donate a laptop to Department B

(a) Department A could not determine the cost amount of the laptop when the asset register was compiled and recorded the asset at a value of R1 as allowed by the OAG.

Department A will transfer the asset at R1 and Department B will record the asset in its asset register at R1.

(b) Department A could not determine the cost of the laptop when the asset register was compiled in 2005 and recorded the asset at R1 as allowed. During 2007/08 financial year Department A engaged a service provider to fair value all assets where the cost could not be determined. As a result the Department has no more R1 values in its asset register.

The fair value of the laptop was determined as R4000 using the methodology applied by the service provider.

Department A will transfer the laptop to Department B at R4000 and provide a copy of the methodology applied by the service provider to substantiate the value. Department B will record the laptop in its asset register at R4000 as the fair value was reliably estimated before the MCS was implemented.



Example 5: Donation of library material

External parties donate five new books to the library of Department E. The donor does not furnish details of the value of the books. The librarian searches three booksellers’ websites on the internet to determine the cost of the books and prints relevant page(s) for each book. The average cost of books from the three booksellers is R5 800.

The books meet the definition of capital assets and are in good condition as they are still new. Each book will be captured in the major asset register at R5 800 as fair value and copies of the website information retained.

4. AMD section 5.2.3 Ready for use capital assets

Example 1: Constructed asset ready for use in the current financial year

Department ABC had three projects in CWIP over the past three years. The construction commenced in 20x0. Over the past three years, the costs incurred were as follows:

Year Project 11 Project 12 Project 13 Total

20x0 (A) R1 200 R3 500 R1 300 R6 000

20x1(B) R2 500 R1 800 R2 000 R6 300

20X2 opening balances (A+B)(C)

R3 700 R5 300 R3 300 R12 300

Current expenditure - 20x2 (D)

R1 500

Ready for use

R1 000

Terminated

R2 200

on-going

R4 700

Total expenditure (C+D)

R5 200 R6 300 R5 500 R17 000

Ready for use (R5 200) R0 R0 (R5 200)

Terminated project R0 (R6 300) R0 (R6 300)

CWIP Closing balance R0 R0 R5 500 R5 500

Movement in the CWIP for the year ended 31 March 20x2

Opening balance

20x1

R’000

Current year capital WIP

R’000

Ready for use (Asset register)

/ Project terminated

R’000

Closing balance

R’000


12 300 4 700 (11 500) 5 500

Non-residential 9 000 2 500 (11 500) 0

Other fixed structures 3 300 2 200 0 5 500

Only CWIP is accumulated for reporting in the financial statements.



5. AMD section 5.2.6 Continuing a project previously terminated

Example 1: Project(s) previously discontinued resumed in the current financial year

The example used in the example on ‘ready for use’ projects under section 5.2.3 is continued. Department ABC reported the following during 20x2.

• Project 11 was ready for use and moved to the asset register at a value of R5 200.

• Project 12 was terminated at a cost to date of R6 300 and

• Project 13 continued at cost to date of R5 500

The following expenditure has been incurred on capital projects after 20x2.

Year Project 13

R’000

Project 14

R’000

Project 12A (Project 12

resumed , now identified as

12A)

R’000

Total

R’000

20x3 (A) 1 500 0 0 1 500

20x4(B) 1 500

ready for use

2 800

new project

0 4 300

20x5(C) 0 4 900

continuing

300 5 200

Total (A+B+C) 3 000 7 700 300 11 000

During 20x5 a feasibility study, carried out by the local municipality, indicated that an old discontinued project of the department could be repurposed at the relatively low cost to serve as a community centre for the local municipality. The department identified the discontinued project (project 12, discontinued in 20x2) and entered into an agreement with the local municipality. It was agreed that that the department will adapt the design of the existing structure to serve as a centre for the community and thereafter complete the structural work required. On completion, the municipality would accept the structure at no cost but will assume full responsibility for furnishing the centre, providing the required equipment and all future operational and maintenance costs.

The department estimated that R2 800 and eighteen months will be required to adapt the old design and complete the structural work needed for the repurpose till hand over.

As the current structure had been abandoned since 20x2, some damage had been done due to bad weather and vandals have broken down walls, broken out window frames and burned fires in two sections burning some of the roofing structure.

The damage done is sufficient to impact on the structural safety of the building and must be broken down completely and rebuilt. The engineer estimates, after thorough inspection is that the damage amounts to R1 500. This amount should be written off the cost to date of the old project, thus the fair value of the current structure is estimated at R4 800 (R6 300 – R1 500). The department estimates that to complete the old project as designed, it would cost around R5 000 including the restoration of the damage. To repurpose the current structure appears to be a better option as it also means value gained from the money already spent currently valued at R4 800.



Movement in the CWIP for the year ended 31 March 20x7

Opening balance

20x4

R’000

Current year capital WIP

R’000

Ready for use (Asset register)

/ Project terminated

R’000

Closing balance

20x5

R’000


7 600 5 200 0 12 800

Non-residential 4 800* 300 0 5 100

Other fixed structures 2 800 4 900 0 7 700

*The amount represents the fair value of a previously terminated project (20x2 R6 300) which has been redesigned for completion and thus included in CWIP again.

A summary of projects between those in CWIP and terminated projects as at 31 March 20x5 using the information from the above examples will reflect the following:

CWIP REGISTER

Project Started Status 20x0 / x1

R’000

20x1 / x2

R’000

20x2/ x3

R’000

20x3/ x4

R’000

20x4/ x5

R’000

Total to date

closing

R’000

11 (File0011)

20x0 Ready for use – Asset number 45678

1 200 2 500 1 500 Transferred to the asset register

5 200

12

(File0012)

20x0 Terminated 3 500 1 800 1 000 Project terminated and transferred to the register of terminated projects

6 300

13 (File0013)

20x0 Ready for use – Asset number 48567

1 300 2 000 2 200 1 500 1 500 8 500

14 (File0014)

20x4 Open 0 R0 R0 2 800 4 900 7 700

12A (File0012)

20x5 Open Terminated project 12 restarted at fair value and renamed to 12A

4 800 300 5 100

Only minimum information is given above, to give a quick overview for purposes of illustration. Normally, more detail would be included in the register with the project file containing all information such as reasons for termination, authorisations, etc. The register would have enough information to indicate where more could be accessed.



Register of terminated projects

Project Started Termination Date

Cost to date

R’000

Date restarted

Fair value

at restart

date

R’000

Write off

R’000

Status

3

(File 0003)

20x2 20x3 2 000 Terminated due to land claim

6

(File 0006)

20x1 20x3 5 500 Terminated material tremor movement in land

10

(File 0010)

20x1 20x2 3 400 Terminated material shortage no alternative available

12

(File 0012)

20x0 20x3 6 300 20x5 4 800 1 500 To CWIP as project 12A, 20x5

Similar to be above CWIP register, minimum information is given as illustration to create an overview. Important is the link to other registers and where more information can be located.

The asset register will reflect two assets, numbers 45678 (R5 200) and 48567 (R8 500) with full descriptions and, any cost incurred subsequent to the ready for use status will be added to the value of the asset in the asset register. On transferring the asset to the relevant custodian, the move will be updated as a disposal (transfer out) in the asset register after complying with all the requirements of PFMA section 42 and the asset will no longer form part of the budget holder’s asset register.

Documents

CHAPTER 11 Capital Assets - OAG