Issue

Interpretation 1055 is set out in paragraphs 1 to 23.

1

Roads are major infrastructure assets for some entities.  Road assets comprise a number of components, such as formation or earthworks, drainage, and the road pavement and seal.  Earthworks are carried out to prepare the land for the construction of drainage, the road pavement and seal, and other structures.  Earthworks typically include clearing the land and reshaping and aligning the land surface through cutting, filling, grading and compacting soil and rock to suit the type of road to be constructed.  The amount of construction work involved in building a road depends on many factors, including the nature of the terrain, soil drainage characteristics and weather patterns.

2

Accounting Standard AASB 116 Property, Plant and Equipment requires the depreciable amount of an asset to be allocated on a systematic basis over the asset’s useful life.  The Standard presumes that, with the exception generally of land, a characteristic common to all tangible assets held on a long-term basis is that their useful lives are limited.  Land typically has an unlimited useful life, with some exceptions, such as quarries and sites used for landfill.

3

There are different views concerning whether the earthworks component of road assets should be depreciated, with some entities taking the view that it is not feasible to reliably estimate a useful life for earthworks, and other entities determining depreciation on the basis of an estimated average useful life.  Concern has been expressed that, in the absence of specific authoritative guidance, diverse or unacceptable practices may occur or develop in accounting for road earthworks.  This will undermine the relevance and reliability of general purpose financial statements.

4

The issues are whether particular road earthworks may be assessed as not having a limited useful life, similar to land, and therefore not subject to depreciation, and whether it is possible to reliably estimate a useful life over which particular road earthworks with a limited useful life should be depreciated.