Benefits of condition inspections in asset management. This is an article written for the IPWEA WA Asset Management Committee's topic of the month for February 2017.

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3 Benefits of Asset Condition Inspections
Hein Aucamp
WA Integrated Asset Management
WA Integrated Asset Management is an
Infrastructure Asset Management company
serving Local Government and the mining
sector based in Perth, Western Australia.
www.waiam.com.au
Background
Each member of the IPWEA WA Asset Management Committee was asked to provide an article
about condition inspections, which is our topic of the month for February 2017. This is my
contribution and will appear on the committee forum when available. In the meantime, I am also
publishing it in my usual locations.
Similar assets, different performance
I have heard that every year, hundreds of baby turtles hatch in the sands of the beach on the same day
and haul themselves down towards the waves.
They start their lives at the same time, in the same circumstances, and with the same strengths and
capacities. Yet their destinies end up very differently. Many are killed before reaching the water. A
few make it to the sea. Only a very few reach maturity – or to smuggle in a term from Asset
Management: only a very few reach their useful life.
Hawksbill Sea Turtle, commons.wikimedia.org

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Although not as markedly as turtles, identical assets also perform differently in the field. They don’t
march along in orderly platoons, coming to a well-drilled halt at the end of their useful lives.
Some assets are impaired. Some reach their useful lives only with considerable maintenance. Some
exceed their useful lives with little or no maintenance. Their useful lives are different under different
conditions and in different locations.
Remember what we are trying to achieve in asset management. We want to provide infrastructure at
an agreed level of service with the lowest lifecycle cost:
• We want to replace assets when necessary to maintain the level of service.
• But we don’t want to replace them earlier than necessary, because that makes the lifecycle
cost higher than necessary.
As we pursue our agenda of asset management, condition inspections can help us. Most of the
benefits of condition inspections are related to this undeniable fact that identical assets have non-
identical performance.
1. First benefit: evidence-based asset management
Infrastructure assets are the hardest assets to manage because there is no market value for them. We
must determine their value ourselves.
Before doing statutory reporting, Local Governments have to establish replacement costs and useful
lives for their assets:
• Replacement costs are easier to establish. Project costs can be developed into unit rates. The
evidence is easy to present.
• But the only way to determine useful lives is through asset inspections.
2. Second benefit: accommodates varying asset performance in the field
The most obvious benefit here is that we can find out in due time whether assets have been impaired,
or whether they are lasting longer than expected.
This allows us to establish the remaining useful lives accurately, and to program the works. Our
budgets can be derived from the expected replacement costs at the expected replacement date well in
advance, and we can plan for this. I could give many different examples of expected costs; here is one
from an SPM project showing the renewal profile in different years for part of a building portfolio.
But there are other less obvious benefits too. For example, we should have hierarchies of assets –
groups of assets that have similar performances. By doing condition inspections, we can refine our

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hierarchies: we can discover, for example, that unsealed roads made from identical material in a
higher rainfall area have lower useful lives, and hence introduce a new category of roads.
Asset hierarchies allow us to make sense of the different performance in the field, to be able to get
groups that behave similarly. For example, instead of one group with an average useful life that is
vague, we will have two groups with average useful lives that are representative.
For example, consider this totally fabricated set of data for the evidence-based assessment of useful
lives of unsealed roads in a Council area. The average useful life is 15.3 years, with assessed useful
lives ranging from 10 to 20 years.
But let’s say that on reflection, the Asset Management staff realise that the roads actually belong to 2
different categories based on some criteria (perhaps rainfall, perhaps material type, perhaps traffic
loading).
Here is the same dataset, now with improved stratification.1
(All the odd bars in the graphic above are
grouped at the left of the graphic below; all the even, at the right.)
1
Stratification is a term used in Six Sigma, which means the process of separating data so that patterns can be
detected.

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By disentangling the first dataset, we have a much more useful hierarchy, with the averages being
much more representative. Our ability to predict asset behaviour (and hence to manage assets
proactively) has taken an upward step.
3. Third benefit: reality-based financial reporting of assets in the field
There is one important thing to note when we use asset conditions as the basis of deprecation
calculations: we must always use a 3-step process:
• Determine condition.
• Use condition to calculate remaining life.
• Use remaining life to calculate accumulated depreciation and annual depreciation.
(I mention this because there is an approach which the Australian Accounting Standards prohibit,
which uses asset condition but not the remaining life or the depreciable amount. The details are in
UIG 1030, clauses 4 and 18.)
Another consideration is that the condition of the asset can vary over its life in a non-linear fashion.
You might know that opinions vary about how to recognise this. I heartily recommend the approach in
the AIFMG, which makes materiality the first consideration; introduce additional detail only when
necessary. It is best to have direction from your auditors about whether and how to recognise
deviations from an assumed straight line, especially in mixed portfolio of assets.
With these two considerations out of the way, it is helpful to have financial reporting of asset
depreciation tied to the asset conditions in the field. The depreciated amounts (or written down
values) will match the actual asset consumption. The depreciated amount for an asset class (e.g.
kerbing) will be a summary for the average field condition.
Two final considerations
How often should condition inspections be done?
• In Australia, the figure of a 3 year inspection cycle is the norm. But this would vary if our
situation changed. 3 years is the present figure that fits in with the Accounting Standards’
definition of materiality. A 10% margin of error in financial reporting is a material error. In
our current low inflationary climate of around 3% per annum, revaluations later than every 3
years will risk a material error. If the revaluation is based on conditions, new condition
assessments should be done at the same time.
Should condition inspections be done on all assets?
• Not unless you need to. Consider your other options – and consult your auditors. For
example, the AIFMG mentions a network asset approach for low value high volume assets
such as street signs.