ASSET MANAGEMENT POLICY

For implementation as from 1 July 2019

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TABLE OF CONTENTS

1. DEFINITIONS AND ABBREVIATIONS 3

2. OBJECTIVE OF THE ASSET MANAGEMENT POLICY 5

3. ROLE OF THE ACCOUNTING OFFICER 5

4. ROLE OF THE CHIEF FINANCIAL OFFICER 5

5 ROLE OF OTHER DEPARTMENTS 8

6 DEFINITION OF AN ASSET 10

7 FORMAT OF THE ASSET REGISTER 11

8 CLASSIFICATION AND IDENTIFICATION OF PPE 13

9 HERITAGE ASSETS 15

10 DONATED/ BEQUEATHED ASSETS 16

11 AGRICULTURAL ASSETS 16

12 INTANGIBLE ASSETS 18

13 CAPITALISATION CRITERIA 20

14 CALCULATION OF CAPITALISATION COST OF ASSETS 21

15 RESIDUAL VALUES 23

16 DEPRECIATION OF ASSETS 24

17 REVALUATION OF ASSETS 29

18 DISPOSAL OF ASSETS 30

19 RECOGNITION OF ASSETS IN FINANCIAL STATEMENTS 33

20 FUNDING SOURCES 34

21 IMPAIRMENT LOSSES 35

22 INVESTMENT PROPERTY 37

23 REPLACEMENT STRATEGY 43

24 ASSET RISK MANAGEMENT 44

25 MAINTENANCE OF ASSETS 45

26 GENERAL REQUIREMENTS 46

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1. DEFINITIONS AND ABBREVIATIONS

Item Description
An asset is a resource, tangible or intangible, controlled by the entity
as a result of past events which is expected to be used during more
Asset than one reporting period and from which future economic benefits or
service potential will flow.

Management of the assets of the municipality as required by

Asset
municipal legislation which inter alia includes the compilation of
management
an asset register
The amount at which an asset is included in the statement or
Carrying Amount financial position after deducting any accumulated depreciation
and any impairment losses thereon.
CFO Chief Financial Officer or the official acting in that capacity
The amount of cash or cash equivalents paid or the fair value
Cost of the other consideration given to acquire an asset at the time
of its acquisition or construction.
This is the systematic allocation of the cost of use of an asset
Depreciation
over its useful life.
Depreciable The cost of an asset, or other amount substituted for cost in
Amount the financial statements, less its residual value.
The amount for which an asset could be exchanged or a
Fair Value liability settled between knowledgeable, willing parties in an
arm's length transaction.
An asset register is a list of the assets owned or controlled by an entity.
It contains pertinent details about each asset to track their value and
physical location. Asset Register preferably in computerized format
Asset Register
and maintained strictly in accordance with this document, which shall
reflect all the assets of the municipality.

GRAP Standards of Generally Recognised Accounting Practice

IAS International Accounting Standards
An asset is impaired when the carrying amount exceeds its
Impairment recoverable amount or recoverable service amount.

Owner-occupied Property held (by the owner or by the lessee under a finance

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 Item Description

Property lease) for use in the production or supply of goods or services

or for administrative purposes

PPE Property, Plant & Equipment – These are tangible assets that:
- are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
and
- are expected to be used during more than one reporting
period

Residual value The estimated amount that the municipality would currently
obtain from disposal of the asset after deducting the estimated
costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.

Recoverable The estimated amount which the municipality expects to obtain

Amount for an asset at the end of its useful life after deducting the
expected costs of disposal.

Recoverable service Recoverable service amount is the higher of a non-cash-generating

amount asset’s fair value less costs to sell and its value in use
SCM Supply Chain Management

Useful life Useful life is either:

- the period over which an asset is expected to be available
for use by the municipality, or
- the number of production or similar units expected to be
obtained from the asset by the municipality.

Value in use Value in use reflects the amount that can be derived from an
asset through its operation and its disposal at the end of its
useful life.

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2. OBJECTIVE OF THE ASSET MANAGEMENT POLICY

The Asset Management Policy provides direction for the management, accounting and control
of Non-current Assets (Fixed Assets) owned or controlled by the municipality.

3. ROLE OF THE ACCOUNTING OFFICER

Section 63 of the MFMA states that:-

(1) The Accounting Officer is responsible for the management of—

(a) the assets of the municipality, including the safeguarding and the maintenance of those
assets; and
(b) the liabilities of the municipality.
(2) The Accounting Officer must for the purposes of subsection (1) take all reasonable steps to
ensure—
(a) that the municipality has and maintains a management, accounting and information
system that accounts for the assets and liabilities of the municipality;
(b) that the municipality’s assets and liabilities are valued in accordance with standards of
generally recognised accounting practice; and
(c) that the municipality has and maintains a system of internal control of assets and
liabilities, including an asset and liabilities register, as may be prescribed.”

4. ROLE OF THE CHIEF FINANCIAL OFFICER

The CFO shall be the custodian of the asset register of the Municipality, and shall ensure that a
complete, accurate and up-to-date computerised asset register is maintained. No amendments,
deletions or additions to the fixed asset register shall be made other than by the CFO or by an
official acting under the written instruction of the CFO.

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4.1 Asset Control Section

o Shall ensure that complete records of asset items are kept, verified and balanced
regularly.
o Shall ensure that all movable assets are properly tagged and accounted for. (see also
24.1)
o Shall conduct an annual asset verification by scanning selected movable assets and
compare this inventory with the Departments asset sign-offs of the previous year.
(see also 26.2)
o The asset verification report shall reflect any discrepancies between the articles found
during verification and the record referred to in the point above;
o Shall ensure that the Asset Register is balanced annually with the general ledger and
the financial statements.
o Shall ensure adequate bar codes to exercise the function relating to asset control are
available at all times.
o Shall provide the Auditor-General or his personnel, on request, with the financial
records relating to assets belonging to Council as recorded in the Asset Register.
o Shall ensure that all audit queries are resolved in a timely manner.
o Shall ensure that the relevant information relating to the calculation of depreciation is
obtained from the departments and provided to the Finance department in the
prescribed format.
o Shall ensure that asset acquisitions are allocated to the correct asset code.
o Shall ensure that, a completed asset disposal form, counter signed by the Asset
Control Section, is presented.
o Shall ensure that a verifiable record is kept of all obsolete, damaged and unused asset
or asset inventory items received from the departments.
o Shall compile, in conjunction with the stores controller, a list of the items to be
auctioned in accordance with their guidelines in the Supply Chain Management
(SCM) Policy.
o Shall compile and circulate a list of unused movable assets to enable other
departments to obtain items that are of use to them.

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4.2 The Manager: Budgets

o Shall ensure that the capital budget as submitted by the departments after budget
cutting and balancing process, and funded is included in the budget for consideration
by council. A clear description of the funding source is also required.
o Shall include a capital project only after receiving written authority and a clear and
concise description of the item to be purchased as well as an allocated responsible
person for this asset. This information must be indicated by the department in the
capital budget documents
o Shall ensure that any changes in the capital budget, with regards to funds transferred
or project description changes are communicated to the Asset Control Section.

4.3 The Manager: Expenditure section

o Shall ensure that invoices authorised for payment are matched to the goods received
note / proof before processing such payment.
o Shall if any doubt exists as to whether the invoice is in accordance with policy, query
the payment with the relevant department and shall not process a payment until the
invoice meets the policy criteria.
o Shall ensure that the Procurement section is notified of any auctioning or disposing of
written-off asset or asset inventory items.

4.4 Procurement Section/Supply Chain Section

o Shall dispose, in conjunction with the Manager: Expenditure Section assets via
auction or public tender or other approved method in accordance with the provisions
in the Supply Chain Management (SCM) Policy.
o The Bid Adjudication / Bid Specification Committee must comply with and be
constituted in accordance with the procurement SCM policy.
o Shall ensure that the completed “asset take-on” document, indicating the asset ID,
accompany above documents before processing order.
o Shall ensure that the completed “asset take-on document: infrastructure assets” when
infrastructure assets are purchased accompany above documents before processing
order.

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5 ROLE OF OTHER DEPARTMENTS

Section 78 of the MFMA, Senior managers and other officials of municipalities, states that:

“(1) Each senior manager of a municipality and each official of a municipality exercising
financial management responsibilities must take all reasonable steps within their
respective areas of responsibility to ensure—

a) that the system of financial management and internal control established for the
municipality is carried out diligently;
b) that the financial and other resources of the municipality are utilised effectively,
efficiently, economically and transparently;
c) that any unauthorised, irregular or fruitless and wasteful expenditure and any other
losses are prevented;
d) that all revenue due to the municipality is collected;
e) that the assets and liabilities of the municipality are managed effectively and that
assets are safeguarded and maintained to the extent necessary;
f) that all information required by the accounting officer for compliance with the
provisions of this Act is timeously submitted to the accounting officer; and
g) that the provisions of this Act, to the extent applicable to that senior manager or
official, including any delegations in terms of section 79, are complied with.”

5.1 Human Resources Department

The Human Resources Department:

o Shall ensure that no monies are paid out on termination of service without receiving
the relevant asset resignation form signed off by the relevant department. (See also
25.6)
o Shall ensure that every asset resignation form is counter signed by the Asset Control
Section before processing the termination of service.

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5.2 All Departments

Directors:
o Shall ensure that employees in their departments adhere to the approved Asset
Management Policies.
o Shall ensure that an employee with delegated authority has been nominated to
implement and maintain physical control over assets in the department. The Asset
Control Section must be notified of who the responsible person is. Although authority
has been delegated the responsibility to ensure adequate physical control over each
asset remains with the director. The delegated individuals will be known as Asset
Controllers.
o Shall ensure that assets are properly maintained in accordance with their respective
asset maintenance policies.
o Shall ensure that the assets of the Municipality are not used for private gain.
o Shall ensure that all their movable assets as reflected on the Asset Register are bar
coded where possible.
o Shall ensure that the Asset Control Section is notified of any changes in the status of
the assets under the department’s control. This must be done on the prescribed form
and include the following:
▪ Movements/Disposals which relate to the transfer of assets (inter
departmental transfers).
▪ Changes in the estimated useful lives of assets for depreciation purposes.
▪ Changes in depreciation methods to best reflect an assets pattern of use.
▪ The identification of impairment losses on assets by following the
procedures as outlined in section 20 of this policy document.
▪ Shall certify in writing that they have assessed and identified impairment
losses on all assets at year end.
o Shall ensure that all obsolete and damaged asset items, accompanied by the relevant
asset form and attached disposal forms, are handed in to the Asset Control Section
without delay.
o Shall ensure that the correct cost element and description are being used before
authorizing any requisitions.
o Shall not procure any asset until the asset number is obtained, asset number allocated
and will ensure that assets are bar-coded by the Asset Control Section and insured
by the Finance Department.

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 o The detailed projects as created must be categorized and clearly identified as
prescribed in version 6.2 of the mSCOA chart.
o Shall ensure that all Managers of all departments inform the AFS, Assets & Returns
department of any projects completed during the year and provide written
confirmation of the date the project asset was handed over to the municipality and
related assets available for use. A completion certificate must also be provided to
AFS, Assets & Returns department within 7 days of handover and/or completion in
order to ensure that completed projects are taken up in the asset register of the
municipality and are properly insured.
o Shall ensure that when asset(s) are donated to the municipality, the Manager that will
be responsible for the maintenance and operation of the asset, informs the AFS,
Assets & Returns department within 7 days of receipt of the asset and provide all
relevant documentation of hand-over process in order for the asset to be taken up in
the municipality’s asset register and ensure that the asset(s) are properly insured.

6 DEFINITION OF AN ASSET

6.1 Definition of an Asset

An asset is a resource controlled by the municipality as a result of past events and from
which future economic benefits or service potential is expected to flow to the municipality.

The definition has three components, which must all be satisfied in order to be classified
as ‘an asset' in an accounting sense. They are relevant to all forms of assets:

o The municipality has the capacity to control the service potential or future economic
benefits of the asset, that it is control of the economic benefits or service potential of
the asset rather than 'physical' control;
o The service potential or future economic benefits arose from past transactions or
events existing on reporting date (that is future assets cannot be recognised in the
financial statements); and
o The asset has future service potential or economic benefit for the municipality. The
future economic benefit embodied in an asset is the potential to contribute, directly or
indirectly, to the flow of cash and cash equivalents to the municipality. The potential
may be a productive one that is part of the operating activities of the municipality. It

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 may also take the form of convertibility into cash or cash equivalents or a capability
to reduce cash outflows, such as when an alternative process lowers the costs of
providing a service.
o Service potential is thus the capacity of an asset, singularly or in combination with
other assets, to contribute directly or indirectly to the achievement of an objective of
the municipality.
o An asset held under a finance lease, if it meets the remaining criteria of a fixed asset,
shall be so recognized, as the municipality has control over such an asset even
though it does not own the asset.

6.2 Role of Assets

The role of assets is to support the delivery of a service to the public. Assets should exist
to support program delivery.

7 FORMAT OF THE ASSET REGISTER

7.1 Format

The fixed asset register shall be maintained in the format determined by the CFO, which
format shall comply with the requirements of any accounting requirements which may be
prescribed.

Without in any way detracting from the compliance criteria mentioned in the preceding
paragraph, the asset module shall reflect at least the following information:

o a brief but identifiable description of each asset

o classification of each asset
o the date on which the asset was acquired for use
o the location of the asset
o the departments or cost centre within which the assets will be utilised
o the title deed number, in the case of fixed property (where available)
o the stand number, in the case of fixed property

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 o encumbrances or impediments upon fixed property such as servitudes, caveats,
mortgages, etc.
o status of the fixed property (land) in terms of the municipal town planning scheme
(where available)
o where applicable, the identification number, as determined in compliance with 7.2
below
o the original cost or fair value if no costs are available
o the (last) effective date of revaluation of the assets subject to revaluation
o the revalued value of such assets
o the valuer who did the (last) revaluation
o accumulated depreciation to date
o the carrying value of the asset
o the method and, where applicable, the rate of depreciation
o impairment losses
o impairment recovery
o the source of financing
o the current insurance arrangements
o whether the asset has been used to secure any debt, and – if so – the nature and
duration of such security arrangements
o maintenance plan referrals
o whether the asset is required to perform basic municipal services
o the date on which the asset is disposed of
o the disposal proceeds
o the date on which the asset is retired from active use, and held for disposal
o the residual value of each asset
o measurement model
o periods when the asset were idle and reason for the idleness.

All directors of departments under whose control any asset falls shall promptly provide the
CFO in writing of any information required to compile the asset register, and shall promptly
advise the CFO in writing of any material change which may occur in respect of such
information.

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 An asset shall be capitalised, that is, recorded in the asset register, as soon as it is
acquired and commissioned when available for use. If the asset is constructed over a
period of time, it shall be recorded as work-in-progress until it is available for use, where
after it shall be appropriately commissioned as an asset.

An asset shall remain in the asset register for as long as it is in physical existence. The
fact that an asset has been fully depreciated shall not in itself be a reason for writing-off
such an asset.

7.2 Different categories within FAR

The following is an outline of the requirements relating to the various types of asset
categories that the municipality will maintain:

o The CFO is responsible for ensuring that complete records of asset items are kept,
verified and balanced regularly.
o The Asset Register (FAR) for the Municipality will contain assets categorized in line
with version 6.2 of the mSCOA chart.

8 CLASSIFICATION AND IDENTIFICATION OF PPE

8.1 Classification

In compliance with the requirements of mSCOA and GRAP standards; the CFO shall
ensure that all assets are classified under the following headings, and directors of
departments shall in writing provide the CFO with such information and assistance as is
required to compile a proper classification.

8.2 Identification

The Accounting Officer shall ensure that the municipality maintains an asset identification
system which shall be operated in conjunction with its computerised asset register.

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 The identification system shall be determined by the Accounting Officer, acting in
consultation with the CFO and other directors of departments, and shall comply with any
legal prescriptions, as well as any requirements of the Auditor-General, and shall be
decided upon within the context of the municipality's budget.

Every director of a department shall ensure that the asset identification system approved
for the municipality is scrupulously applied in respect of all fixed and movable assets
controlled or used by the department in question.

8.3 Verification

The Asset Control Section shall at least once during every financial year provide all
directors of departments with a comprehensive list of assets which is registered under their
control.

Every director of a department shall be responsible for verifying this list with the assets
under their control and investigate any discrepancies arising out of the asset verification
exercise. The director of each department will be required to sign and date a declaration
stating that the list of assets verified for his/her department is complete & accurate except
for the discrepancies as reported to the Asset Control Section.

8.4 Safekeeping

Section 63 of the Municipal Financial Management Act (Act no 56 2003) determines that
the Accounting Officer is responsible for the management of the assets of the municipality,
including the safeguarding and the maintenance of those assets.

Section 78 of the Municipal Financial Management Act (Act no 56 2003) determines each
senior manager of a municipality and each official of a municipality exercising financial
management responsibilities must take all reasonable steps within their respective areas
of responsibility to ensure that the assets and liabilities of the municipality are managed
effectively and that assets are safeguarded and maintained to the extent necessary. A
senior manager or such official must perform the functions subject to the directions of the
Accounting Officer.

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 Every director of a department shall be directly responsible for the physical safekeeping
of any asset controlled or used by the department in question.

In exercising this responsibility, every director of a Department shall adhere to any written
directives issued by the Accounting Officer to the Department in question, or generally to
all Departments, in regard to the control of or safekeeping of the municipality's assets.

Every Director of a department shall ensure that no assets are kept at employees’ private
residences, unless otherwise approved by the Director or delegated person in that
department, e.g. people that are on standby, computer laptops and tablets (form handed
in at the IT Section). Cell phones must be safely kept by the person issued to.

9 HERITAGE ASSETS

9.1 Definition

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. Examples are works of art, conservation areas, historical
buildings and statues.

9.2 Recognition and Disclosure of Heritage assets

The municipality shall choose as its accounting policy either the cost model or the
revaluation model and shall apply that policy to an entire class of heritage assets.

Where no evidence is available to determine the market value in an active market of a

heritage asset, a valuation technique may be used to determine its fair value. Valuation
techniques include using recent arm’s length market transactions if available. In the case
of specialised heritage buildings and other man-made heritage structures, such as
monuments, the municipality may need to determine fair value by using a replacement
cost approach.

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 If the municipality is unable to determine fair value reliable due to market-determined
prices or values that are unavailable and alternative estimates of fair value are determined
to be clearly unreliable, the heritage asset shall be measured using the cost model.

10 DONATED/ BEQUEATHED ASSETS

10.1 Definition

An item donated or bequeathed to the municipality or acquired by means of an exchange

of assets between the municipality and one or more other parties shall be recorded in the
asset register only if it subscribes to the definition of an asset as set out in section 6 above.

10.2 Disclosure of Donated/Bequeathed Assets

Donated assets will be disclosed in the Statement of Financial Position at fair value less
accumulated depreciation at date of acquirement. Fair value being what the asset would
cost in the open market at the date of acquirement. If there is no open market for such
assets the depreciated replacement value will be applied to determine fair value.

The transaction of acquirement will reflect on the Statement of Changes to Net Assets as

“Assets Donated/Bequeathed”

10.3 Budgetary requirements

The same budget requirements as for other assets are applicable.

11 AGRICULTURAL ASSETS

11.1 Definitions

Biological assets are defined as living and productive animals or plants. Agricultural
produce is the harvested product of the biological assets.

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11.2 Measurement
A biological asset shall be measured on initial recognition and at each reporting date at its
fair value less estimated point-of-sale costs, except for assets which market-determined
prices or values are not available and for which alternative estimates of fair value are
determined to be clearly unreliable which shall be measured at its cost less any
accumulated depreciation and any accumulated impairment losses.

Agricultural produce harvested from an entity’s biological assets shall be measured at its
fair value less estimated point-of-sale costs at the point of harvest.

Records of the details of agricultural assets shall be kept in a separate section of the asset
register or in a separate accounting record altogether and the municipality must provide a
quantified description of each group of biological assets, distinguishing between
consumable and bearer biological assets or between mature and immature biological
assets, as appropriate.

11.3 General

If any agricultural asset is lost, stolen or destroyed, the matter, if material, shall be reported
in writing by the director of the department concerned in exactly the same manner as though
the asset were an ordinary asset.

If the municipality’s investment in agricultural assets does represent a material part of its
financial activities, the CFO, in consultation with the director of the Department concerned,
shall ensure that expert valuations are done at such more frequent intervals as the Council
shall deem appropriate. Such valuations shall then account for losses, sales, acquisitions
and other changes to the composition of the agricultural assets concerned.

The Departments shall annually insure the municipality's agricultural assets, provided the
Council considers such insurance desirable and affordable.

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12 INTANGIBLE ASSETS

12.1 Definition

Items belonging to the category ‘intangible’ do not have a physical form and meets the
identification criterion in the definition of an intangible asset when it:
o is separable, i.e. is capable of being separated or divided from the municipality and
sold, transferred, licensed, rented or exchanged, either individually or together with a
related contract, asset or liability; or
o arises from contractual or other legal rights (excluding rights granted by statute),
regardless of whether those rights are transferable or separable from the municipality
or from other rights and obligations.

Examples of intangible items are:

o Mineral exploration rights

o Computer software (not operational software)
o Licensing rights.
o Servitudes
o Copy and patent rights
o Advertising rights
o Encroachment rights

12.2 Recognition and measurement

Intangible items are initially recorded at their cost price. Where an intangible asset is
acquired at no cost, or for a nominal cost, the cost shall be its fair value as at date of
acquisition.

After initial recognition, the municipality shall choose either the cost model or the
revaluation model as its accounting policy.

If an intangible asset in a class of revalued intangible assets cannot be revalued because

there is no active market for this asset, the asset shall be carried at its cost less any
accumulated amortization and impairment losses.

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 Cost model

An intangible asset shall be carried at its cost less any accumulated amortisation and any
accumulated impairment losses.

Revaluation model

An intangible asset shall be carried at a revalued amount, being its fair value at the date
of the revaluation less any subsequent accumulated amortization and any subsequent
accumulated impairment losses.

12.3 Useful life

The municipality shall assess whether the useful life or service potential of an intangible
asset is finite or indefinite and, if finite, the length of, or number of production or similar
units constituting, that useful life. An intangible asset shall be regarded by the entity as
having an indefinite useful life when, based on an analysis of all of the relevant factors,
there is no foreseeable limit to the period over which the asset is expected to generate net
cash inflows or service potential for the entity.

An intangible asset with a finite useful life is amortised and an intangible asset with an
indefinite useful life is not.

12.4 Retirements and disposals

An intangible asset shall be de-recognised:

o on disposal; or
o when no more future economic benefits or service potential are expected from its use
or disposal.

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12.5 Review of useful life assessment

The useful life of an intangible asset that is not being amortised shall be reviewed each
period to determine whether events and circumstances continue to support an indefinite
useful life assessment for that asset.

13 CAPITALISATION CRITERIA

13.1 All asset acquisitions that complies with the definition of

PPE

All items of PPE acquired that comply with the asset definition must be capitalised in the
FAR at cost and be provided for on the capital budget. These items will be bar-coded
(when moveable).

13.2 Group Assets

Are assets of a similar nature and usually purchased as a group. Group items identified
are (examples of such assets):
o Water and electricity meters;
o Chairs for community centers and the city hall;
o Library books (purchased by the municipality).

All group asset purchases will not necessarily be tagged but must be capitalised on the
Asset Register as a group and provided for on the capital budget.

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14 CALCULATION OF CAPITALISATION COST OF ASSETS

14.1 Initial Cost

An item of property, plant and equipment that qualifies for recognition as an asset should
initially be measured at its cost. The cost of an item of property, plant and equipment
comprises its purchase price, including import duties and non-refundable purchase taxes,
and any directly attributable costs of bringing the asset to working condition for its intended
use. Any trade discounts and rebates are deducted in arriving at the purchase price.
Examples of directly attributable costs are:

o The cost of site preparation,

o Initial delivery and handling costs,
o Installation and assembly costs, and
o Professional fees such as for architects and engineers that is directly applicable to
the project;
o Feasibility studies will only be capitalised as cost if the capital project, for which this
study was applied, will be executed. Up to the starting time of this capital project the
cost of this study will be carried as work in progress. If no capital project will flow from
this study the cost will be adjusted to the accumulated surplus account.
o The initial estimated costs of dismantling and removing the item and restoring the site
on which it is located, to the extent that it is recognised as a provision.
o Administrative and other general overhead costs are only a component of cost if it can
be directly attributed to the acquisition or construction of the asset without which the
asset could not have been brought to working condition.
o Interest on external loans that are directly attributable to the acquisition, construction
or production of a qualifying asset are that interest that would have been avoided if
the expenditure on the qualifying asset had not been made.

14.2 Costs incurred on existing PPE subsequent to the initial

recording of the cost price

Assets are often modified during their life. There are two main types of modification:

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Enhancements / Rehabilitation:

This is where work is carried out on the asset that increases its service potential.
Enhancements normally increase the service potential of the asset, and or may extend an
asset's useful life and result in an increase in value.

These expenses are not part of the life cycle of the asset. These costs normally become
necessary during the life of an asset due to a change in use of the asset or technological
advances.

Disbursements of this nature relating to an asset, which has already been recognised in
the financial statements, should be added to the carrying amount of that asset. The value
of the asset is thus increased when it is probable that future economic benefits or service
potential will flow to the municipality over the remaining life of the asset.

To be classified as capital spending, the expenditure must lead to at least one of the
following economic effects:

o Modification of an item or plant to extend its useful life, including an increase in its
capacity;
o Upgrading machine parts to achieve a substantial improvement in the quality of
output;
o Adoption of new production processes enabling a substantial reduction in previously
assessed operating costs;
o Extensions or modifications to improve functionality such as installing computer
cabling or increasing the speed of a lift;
o Improve the performance of the asset.

Maintenance / Refurbishment:

Expenditure related to repairs or maintenance of property, plant and equipment are made
to restore or maintain the future economic benefits or service potential that a municipality
can expect from the asset.

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 Refurbishment of works does not extend functionality or the life of the asset, but are
necessary for the planned life to be achieved. In such cases, the value of the asset is not
affected, and the costs of the refurbishment are regarded as operating expense in the
statement of financial performance.

Thus, if the improved performance or extended life of an asset is not beyond what
has originally been estimated for the asset and the expenditure is only to bring
performance back to the level that is normally expected for the asset the
expenditure will be considered an operating expense.

Repair and maintenance of an asset do not negate the need to depreciate it.

15 RESIDUAL VALUES

15.1 Definition

The residual value of an asset is the estimated amount that the municipality would
currently obtain from disposal of the asset, after deducting the estimated costs of disposal,
if the asset were already of the age and in the condition expected at the end of its useful
life.

15.2 Determine residual value

Residual value will be determined on PPE where practicable in terms of the definition as
stated above.

The residual value of an asset may increase to an amount equal to or greater than the
asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless and until
its residual value subsequently decreases to an amount below the asset’s carrying
amount.

The residual value and an asset shall be reviewed at least at each reporting date and, if
expectations differ from previous estimates, the change(s) shall be accounted for as a
change in an accounting estimate

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16 DEPRECIATION OF ASSETS

16.1 Definition

Depreciation is the accounting process used to allocate the cost to particular accounting
periods of 'using up' the service potential of the asset over its useful life.

Note: depreciation is not a method of financing the replacement of assets and is necessary
even when assets are revalued every year (excluding valuation of biological assets).

16.2 Which assets must be depreciated

All assets, except land, heritage assets and biological assets, shall be depreciated - or
amortised in the case of intangible assets.

Although typically disclosed together, land and buildings are separable assets and
because land normally has unlimited life it is not depreciated whilst buildings are. Heritage
assets such as works of art, historical buildings and statues are also not normally
depreciated. The reason is that these assets have cultural significance and as such are
likely to be preserved for the benefit of future generations. It should therefore be impossible
to determine their useful lives.

16.3 Determining useful lives of assets

The CFO shall assign a useful operating life to each depreciable asset recorded on the
municipality's Asset Register. In determining such a useful life, the CFO shall adhere to
the useful lives set out in the accounting policy of the Municipality’s Annual Financial
Statements.

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In the case of an asset which is not listed in the accounting policy, the CFO shall determine
a useful operating life, if necessary in consultation with the director of the department who
shall control or use the asset in question, and shall be guided in determining such useful
life either by the useful lives assigned in the accounting policy to the asset most closely
comparable to the asset in question or by any appropriate GRAP standards.

The municipality shall assess at each reporting date whether there is any indication that
the entity’s expectations about the residual value and the useful life of an asset have
changed since the preceding reporting date. If any such indication exists, the municipality
shall revise the expected useful life and/or residual value accordingly. The change(s) shall
be accounted for as a change in accounting estimate in accordance with the Standard of
GRAP on Accounting Policies, Changes in Accounting Estimates and Errors.

In assessing whether there is any indication that the expected useful life of an asset has
changed, the municipality shall consider the relevant indicators including considering
whether there has been any change in the expected timing of disposal and/or replacement
of the asset.

The amortisation period for an intangible asset with a finite useful life shall be reviewed at
least at each financial year-end. If the expected useful life of the asset is different from
previous estimates, the amortisation period shall be changed accordingly.

Only the CFO may amend the useful operating life assigned to any item of property, plant
and equipment, and when any material amendments occurs the CFO shall inform the
Council of such amendments.

The CFO shall amend the useful operating life assigned to any asset after
recommendation from the affected Department, if it becomes known that such asset has
been materially impaired or improperly maintained to such an extent that its useful
operating life cycle will not be attained.

If the value of an item of property, plant and equipment has been diminished to such an
extent that it has no or a negligible further useful operating life or value such asset shall
be fully depreciated in the financial year in which such diminution in value occurs.

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 The additional depreciation expenses shall be debited to the Department’s expense vote
controlling or using the asset in question.

16.4 Depreciation calculation

Tangible assets

The municipality applies straight line depreciation method to best reflect the pattern of use
of an asset, whereby items of property, plant and equipment are depreciated on a constant
or uniform amount over their estimated useful life. For example, if a vehicle is purchased
and has an estimated useful life of 5 years, each month 1/60th of the vehicle will be
depreciated.

Depreciation is an expense both calculated and debited on a monthly basis against the
appropriate line item in the Department or vote in which the item of property, plant and
equipment is used or consumed and should be recognised as such.

Depreciation shall be charged from the calendar month following the month in which an
item of property, plant and equipment is available for use and will continue until the
accumulated depreciation equals the cost or valuation amount of the respective item of
property, plant and equipment or the item is disposed or written off.

When depreciation is calculated, a corresponding accumulated depreciation account is

created. The accumulated depreciation account is a statement of financial position item (it
is an asset provision). This account balance reflects the depreciation charge that has been
expensed or capitalised since the asset was available for use. The balance on the
accumulated depreciation account can never exceed the cost or valuation of the specific
item of property, plant and equipment to which it relates.

Intangible assets

Amortisation period and amortisation method

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 Finite useful life

The depreciable amount of an intangible asset with a finite useful life shall be allocated on
a systematic basis over its useful life. Amortisation shall begin when the asset is available
for use, i.e. when it is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Amortisation shall cease on the date
that the asset is derecognised. The amortisation method used shall reflect the pattern in
which the asset’s future economic benefits are expected to be consumed by the
municipality. If that pattern cannot be determined reliably, the straight-line method shall be
used. The amortisation charge for each period shall be recognised in profit or loss unless
another Standard permits or requires it to be included in the carrying amount of another
asset.

Infinite useful life

No amortisation will take place.

The amortisation method for an intangible asset with a finite useful life shall be reviewed
at least at each financial year-end. If there has been a change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the amortisation
method shall be changed to reflect the changed pattern.

16.5 Budget requirement

Each director of a Department, acting in consultation with the CFO shall ensure that
reasonable budgetary provision is made annually for the depreciation of all applicable
assets controlled or used by the department in question or expected to be so controlled or
used during the ensuing three financial years.

In calculating this provision, the following must be taken into consideration:

Assets in commission with useful life that will span the budget period or a portion thereof:

o full 12 months per budget year unless fully depreciated before the final budget year;
o Expected assets that will be commissioned in the current year of operations:
o full 12 months per budget year unless fully depreciated before the final budget year;

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 o Expected assets that will be commissioned in the ensuing three years:
o pro rata for commission year and full 12 months for ensuing years on commission
year.
o For ensuing years 1 January of each year will be regarded as date of commissioning.

The procedures to be followed in accounting and budgeting for the amortisation of

intangible assets shall be identical to those applying to the depreciation of property, plant
and equipment.

16.6 Disclosure requirements

In the accounting policy notes

The depreciation methods used and the depreciation rates or useful lives.

On the Statement of Financial Position

The depreciation is part of the Net Property, Plant and Equipment amount.

On the Statement of Financial Performance.

The depreciation charged in arriving at the net surplus or deficit disclosed in the income
statement.

In the notes to the statements

The gross carrying amount and the accumulated depreciation at the beginning and end of
the period in respect of each class of property, plant and equipment, together with all the
other movements on the asset accounts.

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17 REVALUATION OF ASSETS

The municipality must adopt the cost or revaluation method at re-measuring PPE. In adopting the
revaluation method, the following will be relevant:

17.1 Revaluation process

In adopting the revaluation method, a class of PPE, after initial recognition, whose fair
value can be measured reliably shall be carried at a revalued amount, being its fair value
at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying amount
does not differ materially from that which would be determined using fair value at the
reporting date.

17.2 Revaluation Reserve

The CFO shall also, where applicable, create a revaluation reserve for assets equal to the
difference between the value as recorded in the valuation roll and the carrying value of the
asset before the adjustment in question.

17.3 Depreciation of revalued property

The asset concerned shall, in the case of buildings, thereafter be depreciated on the basis
of its revalued amount, over its remaining useful operating life, and such increased
depreciation expenses shall be budgeted for and debited against the appropriate line item
in the Department’s vote controlling or using the asset in question.

The CFO shall ensure that an amount equal to the difference between the new (enhanced)
monthly depreciation expense and the depreciation expenses determined in respect of
such asset before the revaluation in question is transferred each month from the
revaluation reserve to the municipality's appropriation account. An adjustment of the
aggregate transfer shall be made at the end of each financial year, if necessary.

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17.4 Disclosure of revalued property

Revalued PPE shall be carried in the asset register, and recorded in the annual financial
statements, at their revalued amount, less accumulated depreciation.

18 DISPOSAL OF ASSETS

18.1 Disposal

In compliance with the principles and prescriptions of the Municipal Finance Management
Act the transfer of ownership of any asset shall be fair, equitable, transparent, competitive
and consistent with the municipality's supply chain management policy as well as the
policy on the disposal of unserviceable, obsolete or redundant assets

Every Director of a Department shall report in writing to the CFO annually on all assets
controlled or used by the department concerned, which such director of Department
wishes to dispose of such assets by public auction or public tender within the period up to
30 June (by completing the necessary disposal form). The CFO shall thereafter
consolidate the requests received from the various departments, and shall promptly report
such consolidated information to the Disposal or relevant Committee prior to being
reported to the Council or the Accounting Officer (by 30 April of the financial year), as the
case may be, recommending the process of disposal to be adopted. The Accounting
Officer may however only dispose of moveable assets with a value as determined per the
Delegation to the Accounting Officer.

Any items declared obsolete or damaged will be handed in to the Auction Stores situated
in Marais Industria for safekeeping. No items will be received without a completed asset
disposal form, describing the status of the item and the reason for writing-off the item.

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The Asset Control Section must counter sign the disposal form after the disposal
committee has recommended the method of disposal. Each Department must take the
necessary steps to ensure that all their obsolete or damaged assets are disposed of in the
correct and approved manner. It is the responsibility of each Department to ensure that all
such assets to be disposed of are delivered to and received at the Auction Stores. The
receiving of assets to be disposed of, will only be done at least once monthly on a date to
be determined by the Stores Section.

The Council shall ensure that the disposal of any asset takes place in compliance with
Section 14 of the Municipal Finance Management Act 2004 and the Supply Chain
Management Policy.

Every director of a department shall ensure that any incident of loss, theft, destruction, or
material impairment of any asset controlled or used by the Department in question is
promptly reported in writing to the Insurance Section, the Asset Control Section, the
internal auditor, and, in cases of suspected theft or malicious damage, also to the South
African Police Services. Once the assets are disposed of, the CFO shall remove the
relevant records from the asset register.

Transfer of assets to other municipalities, municipal entities (whether or not under the
municipality's sole or partial control) or other organs of state shall take place in accordance
with the above procedures, except that the process of disposal shall be by private treaty.

In the case of the free disposal of computer equipment, the provincial department of
education must first be approached to indicate within 30 days whether any of the local
schools are interested in the equipment.

The municipality’s ICT department will indicate to the Asset Section which ICT equipment
are not needed to provide the minimum level of basic municipal services and is available
to be donated to schools that qualify for the donation in terms of Section 14(2)(b)(iii) of the
MFMA.

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18.2 Other write offs

An asset even though fully depreciated, shall be written off only on the recommendation
of the director of a department controlling or using the asset concerned, and with the final
approval of Council.

Every director of a department shall annually report to the CFO on any assets which such
director of a department wishes to have written off, stating in full the reason for such
recommendation. The CFO shall consolidate all such reports and shall promptly submit a
recommendation to the Council on the assets to be written off.

The only reasons for writing off assets, other than the disposal of such assets, shall be the
loss, theft, destruction, incorrect capitalisations or material impairment of the asset in
question.

18.3 Proceeds /Gain or Loss on disposal of assets

When assets are disposed of whether by disposal or written off the asset values needs to
be readjusted and offset against the proceeds. If the proceeds of the disposal are less
than the carrying value recorded in the asset register, such difference shall be recognised
as a loss in the cost centre of the Department concerned. If the proceeds of the disposal,
on the other hand, are more than the carrying value of the asset concerned, the difference
shall be recognised as a gain in the cost centre of the Department concerned.

If this asset has an outstanding balance on the Revaluation Reserve this balance must be
transferred to the Accumulated Surplus.

18.4 Disclosure of assets disposed of

The carrying value of the asset disposed of is removed from the records and will not reflect
on the Statement of Financial Position as part of the balance on Property, Plant and
Equipment under Non - Current assets

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 The gain or loss will be reflected in the Statement of Financial Performance as a gain
under Revenue or as a loss under Expenditure.

19 RECOGNITION OF ASSETS IN FINANCIAL STATEMENTS

Recognition is the process of incorporating in the Statement of Financial Position or Statement of

Financial Performance, an item that meets the definition and satisfies the criteria for recognition.

Assets are classified into categories as set out in section 8 (Classification of Assets) and the
information for each category summarised in a table format is disclosed as:
o a note to the financial statements;
o the net value (carrying value at year-end), for all categories is added together and reflected
as a single line item in the statement of financial position.

The failure to recognise such items is not rectified by disclosure of the accounting policies used,
or by notes or explanatory material.

To be able to assess the utilisation of assets all assets should be listed once the recognition
criteria are met.

An asset item should be recognised in the financial statements if it meets the:

o Probability criteria (it is probable that any future economic benefits or service potential
associated with the asset will flow to the municipality);
o Measurement criteria (the asset has a cost or value that can be measured with reliability).

In many cases, cost or value must be estimated. In these circumstances the use of reasonable
estimates is an essential part of the preparation of financial statements and does not undermine
their reliability. When, however, a reasonable estimate cannot be made, the item is not recognised
in the Statement of Financial Position or Statement of Financial Performance.

An item that possesses the essential characteristics of an asset but fails to meet the criteria for
recognition may nonetheless warrant disclosure in the notes, explanatory material or in
supplementary schedules. This is appropriate when knowledge of the item is considered to be
relevant to the evaluation of the financial position, performance and changes in financial position
of the municipality by the users of financial statements.

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No asset is recognised in the Statement of Financial Position for expenditure incurred where it is
improbable that economic benefit or service potential will flow to the municipality beyond the
current financial year. Where the probability is low, such a transaction will result in the recognition
of an expense in the Statement of Financial Performance.

Where the expenditure has been incurred in connection with an asset already recognised,
consideration should be given to the probability that the expense will result in an extension of the
asset’s estimated useful life. If the probability is high the expense will be added to the value of the
asset in the Statement of Financial Position and written off by way of depreciation over the
remaining life of the asset.

Expenditure incurred on an existing asset that will not extend the useful life or the functionality of
the asset, will be reflected in the Statement of Financial Performance as an expense
(maintenance).
Assets may be acquired for safety or environmental reasons. The acquisition of such assets, while
not directly increasing the future economic benefits or service potential of any particular existing
asset, may be necessary in order for the municipality to obtain the future economic benefits or
service potential from its other assets. When this is the case, such acquisitions of assets qualify
for recognition as assets, in that they enable future economic benefits or service potential from
related assets to be derived by the municipality in excess of what it could derive if they had not
been acquired. However, such assets are only recognised to the extent that the resulting carrying
amount of such an asset and related assets does not exceed the total economic benefits or
service potential that the municipality expects to recover from their continued use and ultimate
disposal.

20 FUNDING SOURCES

Section 19(1) of the MFMA, Capital projects, states that:

“A municipality may spend money on a capital project only if—
a) the money for the project, excluding the cost of feasibility studies conducted by or on
behalf of the municipality, has been appropriated in the capital budget referred to in
section 17 (2);
b) the project, including the total cost, has been approved by the council;

34
 c) section 33 has been complied with, to the extent that that section may be applicable
to the project; and
d) the sources of funding have been considered, are available and have not been
committed for other purposes.”

The sources of funding utilised to acquire assets should be in line with the funding segment on
version 6.2 of the mSCOA chart and the Budget Implementation and Management Funds and
Reserves and Virement Policies.

21 IMPAIRMENT LOSSES

21.1 Impairment

The carrying amount (book value) of an item or a group of identical items of property, plant
and equipment should be reviewed periodically in order to assess whether or not the
recoverable amount has declined below the carrying amount.

Recoverable amount is the amount that the municipality expects to recover from the future
use of an asset, including its residual value on disposal.

When such a decline has occurred, the carrying amount should be reduced to the
recoverable amount. The amount of the reduction should be recognized as an expense
immediately, unless it reverses a previous revaluation on properties in which case it should
be charged to the Revaluation Reserve.

The recoverable amount of individual assets, or groups of identical assets, is determined

separately and the carrying amount reduced to recoverable amount on an individual asset,
or group of identical assets, basis. However, there may be circumstances when it may not
be possible to assess the recoverable amount of an asset on this basis, for example when
all of the plant and equipment in a sewerage purification work is used for the same
purpose. In such circumstances, the carrying amount of each of the related assets is
reduced in proportion to the overall decline in recoverable amount of the smallest grouping
of assets for which it is possible to make an assessment of recoverable amount.

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 The following may be indicators that an asset has become impaired:
o The item has been damaged.
o The item has become technologically obsolete.
o The item remains idle for a considerable period either prior to it being put into use or
during its useful life.
o Land is purchased at market value and is to be utilised for subsidized housing
developments, where the subsidy is less than the purchase price.

Example:

An example of where the Municipality has suffered an impairment loss is the purchase of
land for an amount of R 5,000,000. The land will be utilised for new subsidized housing
developments. If at year end the expectation is that the Municipality will receive only R
1,000,000 by way of subsidies an impairment loss of R 4,000,000 needs to be recognized.
The recoverable amount (R 1,000,000) is calculated as being the larger of:

Net Selling Price of the land which is the amount obtainable from the sale of the market in
an arm’s length transaction between knowledgeable, willing parties, less the cost of
disposal.

Value in use of the land which is the present value of the estimated future net cash inflows
expected from the continuing use of the asset and from its disposal at the end of its useful
life.

20.2 Disclosure of impairment losses

All impairment losses must reflect on the Statement of Financial Performance.

The financial statements should also disclose, in the reconciliation of the carrying amount
at the beginning and end of the period for each class of property, plant and equipment
recognised in the financial statements any impairment losses recognised in the statement
of financial performance during the period and impairment losses reversed in the
statement of financial performance during the period.

Material impairment losses need to be disclosed in the notes to the income statement as
a separately disclosure item.

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20.3 Reversal of an Impairment Loss

The same procedures as for the identification of impaired assets are followed if there is an
indication that impairment may have been decreased or reversed. If so, the recoverable
amount must be added to the carrying value of the asset.

The life cycle must be adjusted.

The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognised.

Reversal of an impairment loss is recognised as income in the income statement.

Depreciation must be adjusted for the remaining life cycle.

22 INVESTMENT PROPERTY

22.1 Definition of Investment Property

Investment Property is defined as property (land or a building — or part of a building — or

both) held (by the owner or by the lessee under a finance lease) to earn rentals or for
capital appreciation or both, rather than for:
o Use in the production or supply of goods or services or for administrative purposes;
or
o Sale in the ordinary course of operations.

The following are examples of investment property:

o Land held for long-term capital appreciation rather than for disposal, eg through sale
or transfer, in the short-term in the ordinary course of operations;
o Land held for a currently undetermined future use. The municipality has not
determined that it will use the land as owner-occupied property; the municipality does
not hold the land for short-term sale in the ordinary course of operations; the
municipality has not determined that it holds the land for strategic purposes.

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o A building owned by the municipality (or held by the municipality under a finance
lease) and leased out under one or more operating leases on a commercial basis;
o A property owned by the municipality and leased out at a below market rental;
o Property that is being constructed for future use as investment property.

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 The following are examples of items that are not investment property:
o Property held for disposal, either through sale or transfer, in the ordinary course of
operations;
o Property being constructed or developed for third parties;
o Owner-occupied property, including
i. property held for future use as owner-occupied property;
ii. property held for future development and subsequent use as owner-occupied
property;
iii. property occupied by employees such as housing for military, official, or
similar personnel which are required as part of their employment to be
located in a specific area; and
iv. and owner-occupied property awaiting disposal.
o Property held to provide goods and services and which also generates revenue.
These properties are typically used to fulfil the municipality’s mandated function to
provide certain goods and/or services rather than for rentals or capital appreciation.
o Property held for strategic purposes which would be accounted for in accordance with
the Standard of GRAP on Property, Plant and Equipment.

22.2 Initial measurement of Investment Property

o Investment property is measured initially at its cost (including transaction costs).

Where an investment property is acquired at no cost (for example donated assets),
or for a nominal cost, its cost is its fair value as at the date of acquisition.
o The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure, such as, professional fees for legal services,
property transfer taxes and other transaction costs.
o The cost of a self-constructed investment property is its cost at the date when the
construction or development is complete. Until that date, the municipality applies the
GRAP standard on accounting for PPE (GRAP 17). At the completion date, the
property becomes investment property and the Standard on investment property
applies (GRAP 16).
o Investment property is only recognised as an asset when it is probable that the future
economic benefits or service potential that are associated with the investment
property will flow to the municipality and the cost or fair value of the investment
property can be measured reliably.

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22.3 Measurement of Investment Property subsequent to
initial measurement

Subsequent expenditure relating to an investment property that has already been

recognised should be added to the carrying amount of the investment property when it is
probable that future economic benefits or service potential over the total life of the
investment property, in excess of the most recently assessed standard of performance of
the existing investment property, will flow to the municipality. All other subsequent
expenditure should be recognized as an expense in the period in which it is incurred.

For example: If a municipality purchases a building as an investment property and will

incur renovation costs, the renovation cost may be capitalised if it improves the condition
of the asset over its most recently assessed standard of performance. Assume that before
the renovation the building can earn R5, 000 per month rental income, but after the
renovation it will earn R7, 000 per month rental income. In this case the renovation cost
will be added to the carrying amount of the investment property.

After initial recognition of the investment property the municipality may choose to reflect
the investment property at fair value or at cost less accumulated depreciation.

The fair value of investment property is usually its market value. Fair value is measured
as the most probable price reasonably obtainable in the market at the reporting date in
keeping with the fair value definition. It is the best price reasonably obtainable by the seller
and the most advantageous price reasonably obtainable by the buyer. After initial
recognition, a municipality that chooses the fair value model should measure all of its
investment property at its fair value at each Statement of Financial Position date. A gain
or loss arising from a change in the fair value of investment property should be included
in net surplus/deficit for the period in which it arises. No depreciation will be calculated on
this property.

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 Example:
The municipality purchases four houses at a cost of R200, 000 each for purposes of
leasing them out to senior managers of the municipality at market related rates. The legal
fees and transport duties relating to the transaction amount to R16, 000. At the end of the
financial year the fair value of the houses is determined to be R 900,000. This means that
the municipality will recognise a fair value gain in the Statement of Financial Performance
for the year of R 84 000. (R900,000 – R 816,000).

If, after initial recognition, the municipality chooses the cost model it should measure all of
its investment property using the guidelines for normal assets that is, at cost less any
accumulated depreciation and accumulated impairment losses.

22.4 Transfers and disposals of investment properties

Transfers

Transfers to, or from, investment property should be made when, and only when, there is
a change in use, evidenced by:

o Commencement of own-occupation, for a transfer from investment property to own-

occupied property;
o Commencement of development with a view to sale, for a transfer from investment
property to inventories;
o End of own-occupation, for a transfer from other classified property to investment
property;
o Commencement of an operating lease (on a commercial basis) to another party, for
a transfer from inventories to investment property; or
o End of construction or development, for a transfer from property in the course of
construction or development to investment property.

For a transfer from investment property carried at fair value to own-occupied property or
inventories, the property’s cost for subsequent accounting under the relevant GRAP on
PPE (GRAP 17) or inventories should be its fair value at the date of change in use.

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 If an own-occupied property becomes an investment property that will be carried at fair
value, a municipality should apply GRAP 17 up to the date of change in use. The
municipality should treat any difference at that date between the carrying amount of the
property and its fair value in the same way as a revaluation under GRAP 17 by crediting a
reserve.

For a transfer from inventory to investment property that will be carried at fair value, any
difference between the fair value of the property at that date and its previous carrying
amount should be recognized in net surplus/deficit for the period.

When the municipality completes the construction or development of a self-constructed

investment property that will be carried at fair value, any difference between the fair value
of the property at that date and its previous carrying amount should be recognized in net
surplus/deficit for the period.

Disposals

On disposal or permanent withdrawal from use of investment property:

o An investment property should be removed from the Statement of Financial Position;

o Gains or losses arising from the retirement or disposal of investment property should
be determined as the difference between the net disposal proceeds and the carrying
amount of the asset. For the purposes of display in the financial statements, the gain
or loss should be included in the Statement of Financial Performance as an item of
revenue or expense.

22.5 Budget implications relating to Investment Property

The following amounts will have to be budgeted for in the operating budget relating to
investment properties:

o Gains on the disposal of investment properties that are intended to be sold during the
next financial year.
o Fair value gains that are expected to be obtained on investment properties that will
be held during the next financial year.

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 o Depreciation on investment properties that are intended to be transferred to own-
occupied properties during the next financial year.
o The effect of reduced depreciation on own-occupied properties that are intended to
be transferred to investment properties during the next financial year.
o Revenue through operating lease income; and
o Fair value gains where the intention to sell a building (inventory) is changed and the
inventory is held as an investment property on which rental income and capital
appreciation will be earned by the municipality in the next financial year.

22.5 Disclosure

The disclosure requirements relating to information on investment property is to be done

in accordance with the requirements as per the relevant GRAP standard.

23 REPLACEMENT STRATEGY

The Accounting Officer, in consultation with the CFO and other directors of Departments
shall formulate strategies and standards for the replacement of all operational property,
plant and equipment. Such strategies and standards shall be incorporated in a formal
policy, which shall be submitted to the Council for approval. This policy shall cover the
replacement of infrastructure and operational movable vehicles and equipment.

This strategy should take into consideration:

o The nature of the asset
o The usage of the asset
o Priorities
o Available funding
o Operational and maintenance costs
o Operational skills
o Future expected developments
o Technology
o Outsourcing
o Private sector partnerships

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24 ASSET RISK MANAGEMENT

24.1 Insurance

Departments are responsible for managing the risks associated with their activities.

The ultimate decision taken by a municipality relating to appropriate risk management will
depend on the types of risks it is exposed to, the amount of excess it is willing to carry,
budgetary constraints and all relevant factors peculiar to the municipality.

Comprehensive property, plant and equipment identification and valuation may prevent
the municipality from being over or under insured. Specific supportable insurable values
as defined in the insurance policy of the municipality should be reviewed regularly. In some
instances, an in-house estimate of cost or insurable value may not be sufficient to
substantiate the amount of a loss and, an appraisal by an independent third party may be
required.

24.2 Other risk reducing methods

Department regulations or "operating policies" can also reduce risks. Department

managers should investigate their operations and set operating policies as to how
personnel should operate and use property, plant and equipment to minimise risk.
Examples are as follows:

o Only authorised personnel should be allowed in areas where expensive equipment is

kept;
o Only authorised personnel should be allowed to operate plant or vehicles;
o The keys for office vehicles should be controlled in a central office during the day,
and employees should sign when they take the keys;
o Ensure that drivers or operators have the necessary qualifications and licenses;
o It should be part of service conditions that employees incur personal liability if they
drive while under the influence of alcohol, drugs, medication, and so forth; or if they
leave the vehicle unattended and unlocked;
o Physical access to buildings, or areas within buildings, should be restricted,
especially after hours.

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25 MAINTENANCE OF ASSETS

25.1 Maintenance plans

Regular maintenance can prevent or minimize unplanned and expensive breakdowns.

Maintenance plans must therefore be drawn up to ensure minimum maintenance
standards and execution to achieve the optimum use of assets as planned.

Every director of a Department shall ensure that a maintenance plan in respect of

infrastructural assets is prepared and submitted to the Council of the municipality for
approval.

If so directed by the Accounting Officer, the maintenance plan shall be submitted to

Council prior to any approval being granted for the acquisition or construction of new
infrastructural assets.

The director of a Department controlling or using the infrastructure asset in question, shall
budget for the executing of the approved plan and will annually report to Council, not later
than 31 March, on the extent to which the relevant maintenance plan has been complied
with, and on the likely effect which any non-compliance and / or budgetary constraints may
have on the useful operating life of the asset concerned.

25.2 Deferred Maintenance

If there is material variation between the actual maintenance expenses incurred and the
expenses reasonably envisaged in the approved maintenance plan for any infrastructural
asset (see 18 above), the CFO shall disclose the extent of and possible implications of
such deferred maintenance in an appropriate note to the financial statements. Such note
shall also indicate any plans which the Council has approved in order to redress such
deferral of the maintenance requirements concerned.

If no such plans have been formulated or are likely to be implemented, the Director of a
Department controlling or using such asset shall redetermine the useful operating life of
the asset in question, if necessary, in consultation with the Asset Control Section, and the
latter shall recalculate the annual depreciation expenses accordingly.

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25.3 General maintenance

Every director of a Department shall be directly responsible for ensuring that all assets in
his/her care are properly maintained and in a manner which will ensure that such assets
attain their useful operating lives.

26 GENERAL REQUIREMENTS

26.1 Tagging

Tagging means to place a control number on a piece of equipment or property. All

movable assets must be tagged if at all possible. The primary purpose of tagging is to
maintain a positive identification of assets.

Tagging is important to:

o Provide an accurate method of identifying individual assets
o Aid in the annual taking of physical inventory
o Control the location of all physical assets
o Aid in maintenance of assets

Fixed property and plant is not tagged; such as:

o Buildings (record legal description in asset record)
o Land (record legal description in asset record)
o Infrastructural assets
o Computer software

Consistently place asset tags in the same location on each similar type asset. If possible,
the tags shall be accessible for viewing. Place the tag where the number can be seen
easily and identified without disturbing the operation of the item, which will aid in taking
inventory.

All moveable assets will be delivered to the municipal stores in the case of new
acquisitions in order for the Asset Section to barcode the items.

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 Moveable assets (smaller items) in respect of insurance claims will be delivered to the
Insurance/Asset Section for bar coding.

26.2 Physical verification of all movable assets

The Asset Control Section will conduct a physical verification of movable assets annually.
They will require the cooperation of departmental personnel in accomplishing the physical
verification task and will attempt to minimise the time demanded of them.

The designated officials in the different Departments within the Municipality must execute
the functions listed below.

o Ensure that the bar code number and location number are reflected on the asset
movement form by the relevant official on the receipt of the asset. Where applicable,
the serial number or registration number should be included.
o Complete the asset movement form when transfers occur and forward the completed
original form to Asset Control Section.
o Ensure that a completed asset disposal form is submitted when an asset item is
disposed of after the necessary approval has been obtained.
o Asset Control Section must be notified by the relevant Department within 14 days of
any of the following possible movements:
▪ Donations
▪ Additions / Improvements
▪ Departmentally manufactured items
▪ Loss or damage
▪ Transfers
▪ Terminations
▪ Land Sales

26.3 Acquisition

In making the decision to acquire an asset the following fundamental principles should be
carefully considered:
o The purpose for which the asset is required is in keeping with the objectives of the
municipality and will provide significant, direct and tangible benefit to it.

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 o The asset has been budgeted for.
o The purchase is absolutely necessary as there is no alternative municipality asset
that could be upgraded or adapted.
o The asset is appropriate to the task or requirement and is cost effective over the life
of the asset.
o The asset is compatible with existing equipment and will not result in unwarranted
additional expenditure on other assets or resources.
o Space and other necessary facilities to accommodate the asset are in place and
sufficient.
o The most suitable and appropriate type, brand, and model etc. has been selected.

26.4 Asset management responsibilities

o Utilisation - All assets should be used for the purposes they were acquired.
o Asset performance should be regularly reviewed to identify under-utilised and under-
performing assets. The reasons for this should be critically examined and appropriate
action taken.
o Disciplinary action must be taken against individuals if there is an indication of misuse
of the municipality’s assets.

26.5 Additions / Improvements

Depending upon the type of addition or improvement to a specific asset the responsible
official in the Department must notify the Asset Control Section of the change in status.
The asset master record will be amended on receipt of the required asset acquisition form
from the responsible Department.

When capital expenditure is incurred for any enhancement/improvement of an asset, the

Department shall complete the necessary asset acquisition form and forward it to the Asset
Control Section.

When any changes to vacant land or land and buildings are affected such as subdivision,
transfer to another Department, extent or holder’s title, the current custodian or department
must complete the relevant asset movement form and forward it to the Asset Control
Section.

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26.6 Termination of employee’s service

At the termination of an employee’s service, the applicable Department representative

must complete the asset resignation form and forward the original to the Asset Control
Section. This form is a statement that the inventory and assets entrusted to the employee
to execute his/her daily duties are in good order and handed in where necessary. A copy
of this form is forwarded to the HR Business Section concerned or its relevant Department
for further investigation in the case of missing assets.

26.7 Transfer of Assets

When a Department transfers an asset or inventory item within the Department, the asset
movement form must be completed (signed by both the transferor and the transferee) and
forwarded to the Asset Control Section. The copy of this form must be forwarded to the
party receiving the asset or inventory item.

When a Department transfers an asset or inventory item to another Department, the

transferring Department must approve the transfer. After approval has been granted the
asset movement form must be completed and forwarded to the Asset Control Section.

26.8 Disposal of assets

All Departments must submit the properly completed asset disposal forms together with
copies of all relevant approvals for the disposal of assets to the Asset Control Section.

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