11 Capital Assets AMD Final For Publishing PDF

ACCOUNTING MANUAL
FOR DEPARTMENTS
CHAPTER 11
Capital Assets
Chapter 11: Capital Assets
Chapter Content
1 Overview.......................................................................................................................................... 4
2 Key Learning Objectives ................................................................................................................. 4
3 Scope .............................................................................................................................................. 5
4 Identifying, Classifying and Recording Capital Assets .................................................................... 6
4.1 Control of a capital asset ....................................................................................................... 6
4.2 Tangible assets ..................................................................................................................... 8
4.3 Intangible assets ................................................................................................................... 9
4.3.1 Identifiability of an intangible asset .......................................................................... 9
4.3.2 Without physical substance .................................................................................... 11
4.4 Types of a capital assets ..................................................................................................... 13
4.4.1 Loose tools, spare parts and servicing equipment ................................................. 13
4.4.2 Safety equipment ................................................................................................... 14
4.4.3 Library materials ..................................................................................................... 15
4.4.4 Investment property ................................................................................................ 15
4.4.5 Biological assets ..................................................................................................... 18
4.4.6 Heritage assets ...................................................................................................... 21
4.4.7 Infrastructure assets ............................................................................................... 22
4.4.8 Specialised millitary equipment .............................................................................. 24
4.4.9 Internally generated intangible assets .................................................................... 24
4.4.10 Website costs ......................................................................................................... 26
4.4.11 Immovable assets .................................................................................................. 29
4.5 Recording of Capital Assets ................................................................................................ 29
4.5.1 General ................................................................................................................... 29
4.5.2 Asset register ......................................................................................................... 30
4.5.3 Asset components .................................................................................................. 30
5 Measurement of Capital Assets .................................................................................................... 31
5.1 Initial measurement of capital assets .................................................................................. 31
5.1.1 Movable assets ...................................................................................................... 34
5.1.2 Immovable assets .................................................................................................. 34
5.2 Elements of cost .................................................................................................................. 36
5.2.1 Cost of constructed capital asset ........................................................................... 37
5.2.2 Capital work-in-progress (CWIP) ........................................................................... 38
5.2.3 Ready for use capital assets .................................................................................. 40
5.2.4 CWIP project termination ....................................................................................... 42
5.2.5 Possible write-off or impairment ............................................................................. 44
5.2.6 Continuing a project previously terminated ............................................................ 44
Issued December 2019 Page 2

5.2.7 Reporting ................................................................................................................ 47

5.3 Warranty costs .................................................................................................................... 48
5.4 Leasehold improvements .................................................................................................... 48
5.5 Assets transferred ............................................................................................................... 49
5.5.1 Transfer between departments and/or other entities ............................................. 49
5.6 Fair value............................................................................................................................. 50
5.6.1 Fair value of biological assets and agricultural produce ........................................ 54
5.7 Subsequent Measurement of Capital Assets ...................................................................... 56
5.7.1 Subsequent costs ................................................................................................... 56
6 Removal of Capital Assets ............................................................................................................ 57
7 Disclosure of Capital Assets .......................................................................................................... 59
8 Specific Considerations for Immovable Assets ............................................................................. 60
8.1 Interim and Deemed Values................................................................................................ 60
8.2 Structures and Land ............................................................................................................ 61
9 Summary of Key Principles ........................................................................................................... 63
9.1 Definition and identification ................................................................................................. 63
9.2 Recording and measurement .............................................................................................. 63
9.3 Disclosure............................................................................................................................ 64

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:
Definition
Take note
Management process and decision making
Example
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;

3 Scope
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.
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.
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.
• 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;
Some departments acquire capital assets for distribution as part of their service
delivery mandate. These capital assets should be classified as inventory only if they
meet the definition of inventory as outlined in Chapter 12 on Inventories.
These items should also be budgeted for as inventory not capital assets.
Where the budget allocation is for capital assets, the newly acquired capital asset must
be recorded in the asset register and if it was to be transferred to another organisation
or department, the transfer must comply with the requirements of Section 42 (PFMA).

• Consumable items, these are discussed in more detail in Chapter 8 on Expenditure; and
• 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.
Assets should be accounted for by the Principal as and when required in terms of this Chapter.
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 them 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.
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.
Identify Classify Record
• Does the item meet the Consider requirements of MCS Consider requirements of MCS
definition of an asset? MCS paragraphs .23 - .58 paragraphs .59 - .86
paragraph .10
• Is it probable that future
economic benefits or service
potential associated with the
item will flow to the
department? MCS paragraph
.21(a)
• Is the cost or fair value
determinable? MCS
paragraph .21(a)
In the case of immovable assets,
also consider the requirements
in MCS paragraph .13.
In the case of intangible assets
also consider the requirements
in MCS paragraph .19.
4.1 Control of a capital asset
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.

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

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
• Legislation is enacted that mandates a department to administer the asset.
The asset should have future service potential or economic benefit for the department
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.
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.
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.
4.2 Tangible assets
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.

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

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.
Example: Operating Software

Department X purchases 1 Lenovo Desktop T440 for R12 000. This laptop came with
Windows Vista as the operating software.
Windows Vista is not separable (doesn’t meet the identifiability criterion) from the
hardware and is the integral part of the laptop without which the laptop wouldn’t work
and therefore should be treated as part of the hardware (Computer Equipment) and
not disclosed separately as an Intangible asset.

Example: Application software licenses and annual maintenance fees

Department X purchases Microsoft Office package for R10 000 cash and the
department is also to pay R1 000 licence fee on an annual basis for as long as the
package is in use. This annual licence fee will entitle the department to any Microsoft
Office update or upgrades in future. As the department consumes the benefit of the
annual licence fee in the year of payment and will accordingly not recognise an
intangible asset equivalent to the fee paid.
The Microsoft Office package is an intangible and annual licence fee will be expensed
as current expenditure of the department.
Take note: 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.
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
replaced at a future date. The department would to assess the actual useful life of
these licenses with reference to industry practices.
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
Intangible Physical substance Why is it still seen as “without physical

substance”?
Licenses (software Licence document / The department pays for the right of use of, e.g.
licenses, etc.) agreement 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 CD The department buys 20 CD’s for the library.
books for learners These CD’s can be borrowed and listened to,
with eye impairment 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 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 The value of a patent is not driven by the piece of
document 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
Examples of capital assets in the public sector:

• buildings (including investment properties);
• land
• biological assets;
• specialised military equipment;
• heritage assets;
• infrastructure assets;
• motor vehicles; and
• intangible 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 for whatsoever reason(s) 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
c) Those excluded capital assets still need to be controlled and managed.
The classification of these assets does not change but are merely excluded from
recording in the asset register.
4.4.1 Loose tools, spare parts and servicing equipment
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;
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
value of the toolkit does not change significantly by the replacement of an individual
item so the original value remains relevant.
4.4.2 Safety equipment
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.
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;

4.4.3 Library materials
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.
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.
4.4.4 Investment property
Investment property is a property (land or a building or part of a building or both) held

with the primary purpose of earning 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.
Example: Investment property

• A building owned by the department that is leased out under one or more operating
leases in accordance with their service delivery objectives;
• Property that is being redeveloped for continued use as an investment property;
• Property that is being constructed or developed for future use as investment
property;
• Land held for an undetermined use.

Distinction between Investment Property and Other Buildings
Investment property Other buildings
The asset generates its own cash flows (on a Rental income earned is incidental; the asset is
commercial basis). 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 Includes owner-occupied property such as office
developed for future use as investment property. 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]
Includes land held for an undetermined use. Includes assets held for strategic purposes.

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.
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.
Example: 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: 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
4.4.5 Biological assets
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

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.
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.
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.
Harvest is the detachment of produce from a biological asset or the cessation of a

biological asset’s life processes.
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”.

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 never 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 not 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.

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.
4.4.6 Heritage 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.
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.
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.
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 assets 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.
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;
• 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.
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.
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 or not 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.
4.4.7 Infrastructure assets
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.

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.
If any of the required items in the infrastructure is not working or malfunctioning, the
whole system would fail, therefore the department manages the whole system rather
than the individual “components” of the system. For reporting purposes, the
department would record this infrastructure in the asset register as a one line item
though the management records of the system would list each component for
maintenance purposes.
On expiry of the contract or when the department permanently vacates the building
and prohibited from detaching the system from 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
• written off if the building belongs to the private landlord
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 before recording in the asset register. The
asset management policies of the department should specify how this 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.

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
4.4.8 Specialised millitary equipment
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.
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.
4.4.9 Internally generated intangible assets
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.

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
Research is the original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.
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
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.
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:
• the technical feasibility of completing the intangible asset so that it will be available for use or sale;
• its intention to complete the intangible asset and use or sell it;
• its ability to use or sell the intangible asset;
• 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;
• the availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset; and
• 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
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.
Example: 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: 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 40 000 Intangible asset if the department
(220 000 – 80 000 – can demonstrate how the website
100 000) will generate probable future
potential or else its current
expenditure
Graphical design 18 000 Intangible asset if the department
development stage can demonstrate how the website
will generate probable future
expenditure
Content development 25 000 Intangible asset if the department
stage can demonstrate how the website
will generate probable future
expenditure
Website testing 20 000 Current expenditure

4.4.11 Immovable assets
An immovable asset is a capital asset consisting of land, infrastructure, buildings or

a combination of thereof.
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.
For detailed guidance on departments that have the responsibility to account for the
immovable assets belonging to the state, refer to the document on Accounting and
Reporting for Immovable Assets on the Office of the Accountant-General’s (OAG’s)
website.
The document takes into account legislation and specific mandates in the vesting and
custodianship of immovable assets.
4.5 Recording of Capital Assets
4.5.1 General
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.
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 minor capital assets register must be made available to the external
auditors at year-end. The controls over safekeeping, etc. of these assets are the same
as for major capital assets. The register should be as at 31 March of the respective
year. 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 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
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 can be included in a separate minor capital
assets register.
4.5.3 Asset components
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. 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.
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?
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 above discussion offers guidance on when a department elects to do so.
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.
5 Measurement of Capital Assets

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
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 on receipt thereof and any
payments made prior to receipt should be reflected as prepayments or advance depending on the
situation and expensed on receipt of the capital asset.
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.
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.

Example: 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: 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: 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: 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: 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.
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.
5.1.1 Movable assets
Where the cost cannot be determined accurately, capital assets are measured at its 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. This alternative may
not be applied where the cost is or should be available (e.g. current year additions or document retention
requirements). Where the fair value could not be determined a department should have documentation
explaining the steps taken to determine a fair value and motivate why it came to the conclusion that it
was not possible. This evidence should be retained for audit purposes.
Assets acquired before 1 April 2002 (or another day as approved by the OAG), where the cost is not
available for any reason, 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.
5.1.2 Immovable assets
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 in line with the policy
for the 2016/17 reporting period.
Costs of new acquisitions or construction should be available for initial recording. Certain custodians
may however still have a need to fair value land parcels, for example newly vested and surveyed items.
Departments that do not have the cost information are not expected to incur additional costs through
engaging professionals to value immovable assets but can instead utilise the sector valuation
methodology. The first option is to use a municipal valuation roll values when available. Where a
municipal value should be available but is for some reasons not, for example, the land parcel does not
appear on the valuation roll, the department must correspond with the relevant municipality and request
a valuation. The sector methodology allows for a deemed value for certain specific exceptional land
parcels where there is no municipal value or likely to be a value in future. Where the department is
waiting for a valuation from a municipality, the deemed value may be used as an interim measure as
there should no longer be R1 or R0 value assets in the asset register.
When immovable assets qualify for recording and no municipal value is available yet, they can be
recorded at the same value as for exceptional cases and a reconciliation prepared annually to reflect
movement in obtaining municipal values. Documentation regarding correspondence with municipalities
in this regard must be retained as audit evidence. Once the municipal valuation is received, the asset
register is updated to the appropriate value and the difference reflected in a column for “value
adjustment” in the notes to the financial statements. Departments can only utilise this interim measure
where a municipality has been made aware of the need for a municipal value.
Where the fair value for the immovable asset has already been determined as a reliable estimate, the
department can use that fair value. A fair value option should not be applied where cost information
can be expected to be available, such as recently constructed assets (ready for use after 2013/14).
Processes and procedures should be instituted to allow the accumulation of accurate and reliable cost
for projects.

Immovable assets must be measured at cost as per MCS 11.69 or fair value as per
MCS 11.71. Values determined in accordance with the Property Rates Act 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.
A department should use the principles and guidance in the Section on Fair value below in determining
the fair value of a capital asset.
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.
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.

5.2 Elements of cost
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.
“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;
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.
5.2.1 Cost of constructed capital asset
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.
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 and will be added 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 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.

5.2.2 Capital work-in-progress (CWIP)
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
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.

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 and a transfer is initiated to transfer the building
to the custodian 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.
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 Current Ready for use Closing

Balance Year (Asset register)/ balance
Capital WIP Project
terminated
Buildings and other fixed R’000 R’000 R’000 R’000
structures
*Non-residential 3 700 1 500 (5 200) 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.
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.
5.2.3 Ready for use capital assets
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, report thereon and also

complete the relevant note to indicate that the transfer is pending. 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.
Example: 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 R3 700 R5 300 R3 300 R12 300
(A+B)(C)
Current expenditure - R1 500 R1 000 R2 200 R4 700
20x2 (D) Ready for use Terminated on-going
Total expenditure R5 200 R6 300 R5 500 R17 000
(C+D)
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 Current year Ready for use Closing

balance capital WIP (Asset register) balance
20x1 R’000 / Project R’000
terminated
R’000
R’000
Buildings and other fixed 12 300 4 700 (11 500) 5 500
structures
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.

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.
As part of the reporting requirements, a department must reflect the ages of projects and explain why
projects are taking overly long to complete. Current requirements need motivation for projects older
than five years as most projects should be completed and ready for use within a reasonable time.
Reasons for projects taking longer than anticipated could be due to lack of or trouble with required
materials (e.g. the cement shortage during construction activities for the FIFA 2010 World Cup),
problems with contractors or employee strikes, etc.
Similarly, reasons for the termination of projects are required as projects should only be terminated in
unusual circumstances. Where prior research and feasibility studies were done to assess the need and
future sustainability of a project, budget allocated based on the sound findings, there should be no
reasons to terminate a project.
PFMA sections 27 and 38 require departments to assess fully the implications of capital projects on
current and future years and to ensure that this is taken into account 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.
5.2.4 CWIP project termination
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

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

5.2.5 Possible write-off or impairment
Where a project was started and the 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. It is also possible that a separate disclosure can be
required for projects resumed during a reporting period where the ‘old’ value (as adjusted) can be dealt
with.
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.
5.2.6 Continuing a project previously terminated
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 5.2.4 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 to 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 5.2.5 above.
Example: 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.
a) Project 11 was ready for use and moved to the asset register at a value of R5 200.
b) Project 12 was terminated at a cost to date of R6 300 and
c) Project 13 continued at cost to date of R5 500
The following expenditure has been incurred on capital projects after 20x2.
Year Project 13 Project 14 Project 12A Total
(Project 12
resumed , now
identified as
12A)
R’000 R’000 R’000 R’000
20x3 (A) 1 500 0 0 1 500
20x4(B) 1 500 2 800 0 4 300
ready for use new project
20x5(C) 0 4 900 300 5 200
continuing
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 Current year Ready for use Closing

balance capital WIP (Asset balance
20x4 R’000 register) / 20x5
Project
R’000 R’000
terminated
R’000
Buildings and other fixed 7 600 5 200 0 12 800
structures
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 / 20x1 / 20x2/ 20x3/ x4 20x4/ x5 Total to

x1 x2 x3 date
closing
R’000 R’000
R’000 R’000 R’000 R’000
11 20x0 Ready for 1 200 2 500 1 500 Transferred 5 200

(File0011) use – to the asset
Asset register
number
45678
12 20x0 Terminated 3 500 1 800 1 000 Project terminated and 6 300
(File0012) transferred to the
register of terminated
projects
13 20x0 Ready for 1 300 2 000 2 200 1 500 1 500 8 500
(File0013) use –
Asset
number
48567
14 20x4 Open 0 R0 R0 2 800 4 900 7 700
(File0014)
12A 20x5 Open Terminated project 12 4 800 300 5 100
(File0012) restarted at fair value
and renamed to 12A
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 Cost to Date Fair Write Status

Date date restarted value off
at
restart
R’000 R’000
date
R’000
3 20x2 20x3 2 000 Terminated
(File 0003) due to land
claim
(File 0006) material
tremor
movement in
land
(File 0010) material
shortage no
alternative
available
12 20x0 20x3 6 300 20x5 4 800 1 500 To CWIP as
(File 0012) 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.
Where the asset is transferred out to the books of the relevant custodian department before all costs
have been updated against the relevant asset, a situation can occur where capital expenditure is
incurred and the payment cannot be allocated. The amount cannot be taken to the asset register as it
does not represent an asset but only a fraction thereof. It can also not be taken to CWIP as there is no
project anymore. It is suggested that an approved policy should indicate the appropriate treatment and
also how to inform the custodian to update the value of the asset with proof of documentation.
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).
5.2.7 Reporting
In addition to the financial information required by Chapter 11 on Capital Assets, certain non-financial
information is also required to assist in assessing the information presented. The on-going projects
need to be aged between one and five years with narrative comment(s) on projects older than five years
so that users are able to assess the reasons for projects taking so long. Reasons can range from
planned as an eight year project to material shortages to changed scope to contractor problems, to
whatever the driver in delay. The amount of projects aged should agree to the final balance on the
CWIP Annexure.

Projects terminated during the current year (only current year – 2017/18, no comparatives) should be
disclosed in total and a narrative given on the reasons for the terminations. The information will assist
users in assessing what troublesome issues are being dealt with, as well as the soundness in planning
of projects by the department.
The additional financial information required regarding CWIP projects are accruals and retention.
Accruals 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 MCS 14 -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.
5.3 Warranty costs
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
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 years. 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 Leasehold improvements
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 if they meet the definition of a capital asset. Repairs and
maintenance is expensed as current expenditure as they are done to retain the status of the capital
asset rather than 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.. 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 the situation where the
asset reverts to the landlord the asset register will be updated on expiry of the lease to indicate that
control over the asset has been relinquished.
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 an improvement is done to a structure such as a hospital, the cost of the improvement should
be transferred complying with Section 42 (PFMA) when all the contractual obligations under the project
contract have been fulfilled to allow the custodian department to update its asset register accordingly.
In a situation where specialized machinery or equipment is fixed to a structure being leased by a
department, they should be recorded in the asset register of the department enjoying the service
potential and also reported on. Where a custodian is the landlord, the custodian should be informed of
the installation prior to the action.
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.
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 for
review as and when required.
5.5 Assets transferred
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.
5.5.1 Transfer between departments and/or other entities
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 an immovable asset where contractual obligations were completed

before year end and subject to transfer to another department after year end
Transfer of assets should take place in terms of Section 42 of the PFMA. In instances
where the contractual obligations with regards to an immovable asset construction was
fulfilled before year end, but the immovable 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 transferor department will report on the
immovable asset as per its asset register but must also include a note disclosing the
details of the immovable asset to be transferred subsequent to year end. The intention
of this requirement is to make information more useful to users and encourage
departments finalise asset transfers as soon as possible to keep asset registers of
custodians relevant and up to date for management purposes.
5.6 Fair value
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.
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;
• 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.

Market Approach
Is there an active and liquid
Use quoted price
market?
Are there current market prices Use current or recent transaction

or recent transaction prices for price adjusted for differences in
similar assets? nature, condition, location of asset or
changes in economic conditions
since date of recent transaction
Cash flow
Discount cash flow projections using Approach
rate that reflects current market
assessment of uncertainty in the
amount and timing of the cash flows
Specialised asset(s)
Calculate depreciated Lower of the reproduction or replacement

replacement cost of the asset cost less accumulated depreciation to reflect
the already consumed or expired service
potential of the asset
Cost
Approach
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

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
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
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.
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 will 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 ‘Accounting And Reporting For Immovable
Assets’ previously known as immovable asset guide
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.
5.6.1 Fair value of biological assets and agricultural produce
When determining the fair value of biological assets, the following should be considered:
No
Active market No active market No available
exists exist market-based
values
Use quoted Use market Use discounted

price that values for similar cash flow
market asset calculation
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.
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.
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.
5.7 Subsequent Measurement of Capital Assets
Since departments are on the modified cash basis of accounting, capital assets are not depreciated
and not subject to impairment testing or revaluation adjustments, i.e. in terms of any policy to apply a
revaluation accounting model. Capital assets should therefore continue to be recorded at cost after
initial recording thereof in the financial statements and asset register.
5.7.1 Subsequent costs
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.
Capital Capital project expenditure Current

expenditure relating to project that expenditure
spans over more than one
financial year
Recognise as
Add to the cost Add to cost of capital asset expenditure
of existing at the point in project when under goods
capital asset available for use (final and services
costing differences to
include at end)
Improvements on government property
If a building on which improvements is carried out by the budget holder, is owned or accounted for by
another department, all costs associated with the building project must be included in the asset register
of the budget holder when the asset is ready for use. Once all contractual liabilities have been fulfilled
such as payment of retentions the asset should be transferred to that other department through the
asset register. Refer to example in the Section on Elements of cost.
If a project consists of elements of repairs, maintenance, upgrading and additions, the department
needs to assess upfront whether the project is significantly a current or capital project. The significant
element, whether current or capital, must be used for recording purposes throughout the project. If the
project is predominately capital in nature, all costs incurred on the project will be recorded as capital
assets in the asset register however the department should endeavour to distinguish in the contract
before signing what would be current cost and what would be capital wherever possible, this will assist
in fair presentation of the subsequent cost.
The assessment is usually carried out by the relevant Department of Public Works as it manages and
contracts the work on behalf of the department and will indicate to the relevant department whether it
is a capital or current project.
Improvements on private property
If a department carries out capital works on property that is leased from a private party, the total value
of the improvements must be recorded in the asset register of the department (budget holder) when
ready for use.

When the project is finalised and the total cost calculated the asset register must be updated to reflect
the total cost.
This “asset” is removed and transferred out of the asset register when the asset needs to be transferred
to a custodian or when the department vacates the property.
6 Removal of Capital Assets

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 must be recognised in departmental revenue - sale of capital assets when received.
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, the lower value should
be properly motivated.

Example: Disposal of a capital asset
Department R has a printing press which is recorded as machinery and equipment in its financial
records. After careful consideration Department R made a decision to sell this printing press. A potential
buyer was found on the 25th of November 20x0 and after several meetings a sale agreement was signed
on the 28th of January 20x1. The buyer deposited the funds into the department’s bank account on 28
February 20x1.
The following information pertains to the example:
Cost of capital asset R650 000
Selling price - at fair value R1 500 000
The following will be disclosed in the notes to the financial statements regarding this disposal:
Extract from Notes to the Sold for Transfer out Total Cash
financial statements cash or destroyed disposals Received
or scrapped Actual
DISPOSALS OF MOVABLE R’000 R’000 R’000 R’000
TANGIBLE CAPITAL
ASSETS PER ASSET
REGISTER FOR THE
YEAR ENDED 31 MARCH
20x1
HERITAGE ASSETS
Heritage assets
MACHINERY AND xxx xxx xxx xxx

EQUIPMENT
Transport assets
Computer equipment
Furniture and office
equipment
Other machinery and 650 xxx 1 500
equipment
SPECIALISED MILITARY
ASSETS
Specialised military assets
BIOLOGICAL ASSETS
Biological assets
TOTAL DISPOSALS OF xxx xxx xxx xxx

MOVABLE TANGIBLE
CAPITAL ASSETS

The R1,500,000 proceeds received will be disclosed under “Sales of capital assets” under
“Departmental Revenue”. Department should make sure that this amount agrees to the amount as
shown above in the extract as “Cash Received Actual”.
7 Disclosure of Capital Assets

Refer to the Specimen Annual Financial Statements for the illustrated disclosure requirements.
For the purposes of preparing the asset reconciliations and the notes disclosure, the
LOGIS team has prepared a detailed presentation on the reports available for the
reconciliation and reporting requirements for all minor and major assets. This
document can be found on either the LOGIS website or on the OAG website.

8 Specific Considerations for Immovable Assets

The Accounting And Reporting For Immovable Assets document, previously known as immovable
asset guide which is the extension of modified cash standard (MCS) has certain specific treatments and
requirements set around the legislative environment. This is not always aligned 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.
8.1 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
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 to municipal value will be reported on by using ‘value
adjustment’ column in the secondary note to the financial statements relating to immovable assets and
reflecting the difference between the interim value and the valuation. This is not seen as a revaluation
process but rather updating the value in line with the accounting policy. It is also not a prior year error
as the information was not available in the prior year for use by the department.
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.
8.2 Structures and Land
As noted above, structures (buildings, dams, roads, bridges, etc.) and the land underneath them is
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 if
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 through use of the valuation adjustment column to ensure that the
structure is appropriately disclosed. It is not seen as an error or prior period error as the matter could
have been interpreted differently, depending on circumstances.
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.

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:
Assets used in production, supply of goods or E.g. machinery and equipment

services
Rental to others E.g. buildings
For administrative purposes E.g. administration building, furniture
To be used for more than one year.
Assets with a purchase price of less than R5,000 are called minor capital assets and separately
reported in Chapter 8 on Expenditure.
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).
Costs include:
• Cost of purchase;
• Restoration and rehabilitation costs; and
• Other cost.
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 to the financial statements.

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ACCOUNTING MANUAL

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5.2.7 Reporting ................................................................................................................ 47

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Management process and decision making

2 Key Learning Objectives

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

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Example: Assets acquired by an agent

4 Identifying, Classifying and Recording Capital Assets

Identify Classify Record

4.1 Control of a capital asset

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The definition of an asset, as discussed in Chapter 2 on Concepts and Principles as well as in

Example: Existence of control

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Example: Indicators of past transactions or events are:

Future economic benefit or service potential embodied in an asset is the potential

Example: Service potential

4.2 Tangible assets

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

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4.3 Intangible assets

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

4.3.1 Identifiability of an intangible asset

Example: Operating Software

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Example: Application software licenses and annual maintenance fees

Termed software licenses versus perpetual software licenses

Other types of intangible assets include the following:

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• Import / export licenses; and

4.3.2 Without physical substance

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

Application software CD The value of application software is not driven by

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4.4 Types of a capital assets

Examples of capital assets in the public sector:

4.4.1 Loose tools, spare parts and servicing equipment

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✓ spanners or wrenches; and

Example: Loose tools

4.4.2 Safety equipment

Examples: Safety equipment

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4.4.3 Library materials

4.4.4 Investment property

Investment property is a property (land or a building or part of a building or both) held

In determining whether a capital asset should be classified as investment property, a department

Example: Investment property

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Distinction between Investment Property and Other Buildings

Investment property Other buildings

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Example: Distinguishing between different types of properties

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

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

4.4.5 Biological assets

Biological assets are living animals or plants.

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