GTZ Report on Guideline Asset Valuation - LGCDP

Urban Development through Local Efforts
Programme
A joint programme of the Ministry of Local Development (MLD) and
the German Technical Cooperation (<strong>GTZ</strong>)
Guideline: Asset Valuation for
Municipal Fixed Assets for Accrual
Accounting in Nepalese Municipalities
August 2009

Abbreviations and Acronyms
AAS Accrual Accounting System
CSC Current Standard Cost (method)
DRC Depreciated Replacement Cost
DSC Deflated Standard Cost (method)
GASB Governmental Accounting Standards Board India
GAVP Generally Accepted Valuation Principles
<strong>GTZ</strong> German Technical Cooperation
ICAI Chartered Accountants of India
ICAN Institute of Chartered Accountants of Nepal
IFAC International Federation of Accountants
IFRS International Financial <strong>Report</strong>ing Standards
IPSAS International Public Sector Accounting Standards
IPSASB International Public Sector Accounting Standards Board
IVA International Valuation Application
IVS International Valuation Standard
LBFC Local Bodies Fiscal Commission
LSGA Local Self Governance Act 1999
MLD Ministry for Local Development Nepal
MoUD Ministry of Urban Development India
MuAN Municipal Association of Nepal
NMAM National Municipal Accounting Manual India
NPSAS Nepal Public Sector Accounting Standards
UDLE Urban Development through Local Efforts Programme
ULB Urban Local Bodies India

Table of Contents
1. Introduction ....................................................................................................................... 1
1.1 Purpose ....................................................................................................................... 1
1.2 Definitions .................................................................................................................... 1
1.3 Classification of Assets ................................................................................................ 3
1.4 Status Quo in Nepalese Municipalities ......................................................................... 3
2. Valuation of Assets – General Principles ........................................................................ 4
2.1 Historical Cost .............................................................................................................. 4
2.2 Borrowing Cost ............................................................................................................ 4
2.3 Cost Model .................................................................................................................. 4
2.4 Revaluation Model ....................................................................................................... 4
2.5 Valuation Principles for Fixed Assets ........................................................................... 5
3. Valuation of Assets for Opening Balance Sheet ............................................................. 5
3.1 Historical Cost Based Model ........................................................................................ 5
3.2 Current Standard Cost Method .................................................................................... 6
3.3 Estimated Current Standard Cost Method .................................................................... 6
3.4 Case by Case Determination ....................................................................................... 6
3.5 Depreciated Replacement Cost (DRC) ........................................................................ 7
3.6 Valuation of Land ......................................................................................................... 8
3.7 Issues in Valuation ....................................................................................................... 8
4. Valuation of Assets – Ongoing ........................................................................................ 9
4.1 Team Valuation Committee .......................................................................................... 9
4.2 Straight Line Method ...................................................................................................10
4.3 Written Down Value Method .......................................................................................10
4.4 Revaluation of Assets .................................................................................................10
5. Legal Requirements .........................................................................................................11
5.1 Local Self Government Act 1999 and Local Self Government Regulations .................11
5.2 International Public Sector Accounting Standards .......................................................12
6. Best Practice ....................................................................................................................14
7. Conclusion .......................................................................................................................15
8. Annex ................................................................................................................................18
9. References .......................................................................................................................20

Introduction 1
1. Introduction
The Government of Nepal has decided to implement an Accrual Accounting System (AAS)
on municipal level which is laid down in the Local Self Governance Act (LSGA). Up to now
there exists no full-fledged accounting system for the public authorities and local bodies.
<strong>GTZ</strong> was requested by MLD/LBFC to support the development and implementation of a
standardized AAS for the Nepalese municipalities. One precondition for the full
implementation of AAS is a properly working Asset Valuation.
The following recommendations review the existing documentation and status quo of asset
valuation, relevant legal requirements, international best practices and experiences in some
Nepalese municipalities.
1.1 Purpose
The valuation of public sector assets may be undertaken for a range of purposes like
financial reporting, privatization planning, loan origination, bond issuance, cost benefit or
economic analysis. Aim is to determine whether a public asset is being used and managed
efficiently or to set pricing for monopoly services.
Main purpose of this guideline for asset valuation is to serve the staff of local bodies to
facilitate the valuation of municipal assets in the course of preparation of opening balance
sheet, with the aim to:
• Determine the appropriate value, useful life and depreciation of municipal fixed assets,
as well as the reporting in the financial statements
• Increase the effectiveness of control over fixed assets of the municipality
• Help local bodies to present its true and fair financial position, budgetary planning and
control over resources
Thus, this guideline for the municipalities should support them in the process of inventory
and set up of an asset register, which is a precondition for the implementation of an AAS.
1.2 Definitions
Considering the frameworks and needs in Nepalese municipalities, this guideline focuses
only on Capital Assets, including intangible assets, fixed assets and financial assets. It
does not deal with floating assets like stocks, receivables and liquid assets. As capital assets
are most of the time the biggest share of municipal assets, they are focused on first.
In the following section several terms will be defined, which are important in terms of working
in the field of asset valuation.
The International Public Sector Accounting Standards Board (IPSASB) defines Assets in its
Public Sector Accounting Standards (IPSAS) as “resources controlled by an entity as a

Introduction 2
result of past events and from which future economic benefits or service potential are
expected to flow to the entity.” 1
According to this definition on assets, the International Valuation Standards Committee
defines
Public Sector Asset, as “an asset, owned and/ or controlled by a governmental or quasigovernmental
entity, for the provision of some public service or good.” Different types of
2
assets can be described as public sector assets, such as conventional assets, heritage and
conservation assets, infrastructure assets, public utility plants, recreational assets and public
buildings. Following the International Valuation Application (IVA) public sector assets
include:
• Assets that are irreplaceable, non-cash generating and provide goods without any
market competition
• Land with sale or leasing restrictions
• Land designated for a specialized use that is not necessarily its best use
Whereas Fixed Assets are “assets held with the intention of being used for the purpose of
producing or providing goods or services and is not held for sale in the normal course of
business.” 3
The Fair Market Value is the price that would emerge out of an agreement between
knowledgeable and willing parties in an open and unrestricted market, who are fully informed
and not under any compulsion to transact.
The Gross Book Value is the historical cost of a fixed asset in the books of account or
financial statements. When this amount is given net of accumulated depreciation, it is termed
as net book value.
The Useful Life of an asset is the period over which an asset is expected to be of use by an
entity or the number of production units expected to be obtained from the asset by an entity.
In Nepal the Office of the Auditor General has defined a list of the expected useful life for
4
municipal assets and their applicable depreciation rate.
1 International Federation of Accounts, International Public Sector Accounting Standards Board: International
Public Sector Accounting Standards 1, paragraph 7.
2 International Valuation Standards Committee: Exposure Draft of proposed international valuation application –
valuation of public sector assets for financial reporting, p. 4.
3 Government of India, Accounting Standard (AS) 10: Accounting for fixed Assets, p. 98.
4 Urban Development through Local Efforts Programme, German Technical Cooperation: Inventory of Municipal
Fixed Assets and Development of a Fixed Asset Register, p. 14.

Introduction 3
1.3 Classification of Assets
A proposed categorization for Nepalese municipalities is a division of assets into:
Land
Buildings
Physical Infrastructure
Movable Assets
Intangible Assets
parks, playgrounds, parking places,
agricultural land, vacant site without
construction
office-buildings, schools, hospitals, fire
station, town hall building
roads and bridges, sewerage and drainage,
public lighting, plant and machinery
vehicles, furniture, fixtures, fittings and
electrical appliances, office and other
equipment
IT-software
Please refer to the UDLE report on “Inventory of municipal fixed assets and development of
a fixed asset register“ (section 5.2) for further information on the classification of assets.
1.4 Status Quo in Nepalese Municipalities
In Kathmandu Metropolitan City asset valuation is used since two years, but up to now it
was not carried away annually. The old assets are already valued and new assets, for which
price and age are known, have to be added on the balance sheet yet. No depreciation is
done, but a Chart of Accounts already exists, including depreciation methods, a list of
depreciation rates and a balance sheet standard form containing the cost or value of
assets. 5
In Pokhara Sub-Metropolitan City asset valuation has been introduced three years ago
and they are using a Valuation Committee consisting of seven experts from the public and
private sector for the valuation. Up to now they are using no depreciation and are valuing the
assets case by case.
Butwal and Dharan Municipality are used to asset management, including depreciations
and debt management. Concerning the asset valuation a committee was formed, but asset
valuation was not periodically updated due to the absence of local political representatives.
Smaller Municipalities (e.g. Lekhnath, Byas) are still using the modified cash accounting
system and therefore have not introduced a valuation of assets yet.
In the Proceeding <strong>Report</strong> of Information Sharing Programme on Corporate Accounting
System for Nepalese municipalities on 23rd March 2009 it was stated by some
municipalities, that asset valuation has been one of the most difficult parts in regards of AAS
implementation. For simplifying this process the following guidelines should be of help to the
municipalities.
5 Kathmandu Metropolitan City: Chart of Accounts, p. 25-27.

Valuation of Assets – General Principles 4
2. Valuation of Assets – General Principles
Underlying assumption of the following paragraphs is that investment (e.g. maintenance
costs) done by the municipality serves the purpose of public service delivery, it should not
have a pure commercial function.
2.1 Historical Cost
Historical cost of an asset do not only include the purchase price or construction cost, but
also costs for placing the asset in its intended location and condition for use, like import
duties, transportation cost, cost of site preparation, installation cost and professional fees for
engineers or architects.
In case the local body is constructing the asset itself, the construction and any constructionrelated
cost should be taken into account when valuing the asset.
2.2 Borrowing Cost
Borrowing cost (e.g. interest on loan) are developing when outlays for the asset incur, this is
valid for assets that necessarily take a substantial period of time to get ready for the
intended use. If the borrowing costs are directly attributable to the acquisition, construction
or production of a qualifying asset, they can be capitalized as part of the asset’s costs. 6
2.3 Cost Model
The Cost Model requires that, “after recognition as an asset, an item of property, plant and
equipment shall be carried at its cost less any accumulated depreciation and any
accumulated impairment losses.” 7
2.4 Revaluation Model
The Revaluation Model ensures that the valuation of assets is continually reviewed to reflect
the fair market value (see definition in section 1.2). In the IPSAS the Revaluation Model is
described as follows:
“After recognition as an asset, an item of property, plant and equipment 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.” 8
The fair value of the item can be usually determined from market-based evidence (by
appraisal).
If the asset has no market value, the fair value of the item can be assessed by reference to a
similar item concerning character, location and circumstances.
6 Government of India, Ministry of Urban Development: Model National Municipal Asset Valuation Methodology
Manual, p. 14-15.
7 International Federation of Accounts, International Public Sector Accounting Standards Board: International
Public Sector Accounting Standards 17, paragraph 43.
8 Ibid, paragraph 44.

Valuation of Assets for Opening Balance Sheet 5
2.5 Valuation Principles for Fixed Assets
• Fixed assets should be valued at historical cost paid to purchase them, which is the
most stable, reliable and secure method of valuation
• Fixed assets, for which no payment has been made, should be recorded at nominal
value (reminder value of assets) of 1 NPR. This does NOT mean that the maintenance
costs of such assets are lower than maintenance costs of assets, for which it has been
paid for
• Depreciations should be made periodically to know the written down value of the asset
Revaluation is permitted and useful under special circumstances, for further information
please refer to section 4.4.
The valuation process should begin when the first opening balance sheet is prepared and
when annual financial statements are being prepared.
3. Valuation of Assets for Opening Balance Sheet
There are several existing rules which should be applied when valuing assets for opening
balance sheet:
3.1 Historical Cost Based Model
• If the asset was received as a gift or for free, the asset should be valued at a
reminder value of 1 NPR. This has no impact on the amount of maintenance costs to
be paid, which is the same for paid and unpaid assets.
• If the cost of the asset and the date of purchase or construction are known or
available, the Historical Cost Based Model should be used.
Historical Cost Based Model
• Determine the historical cost of purchase or production
• Identify the depreciation from date of purchase until the valuation date
• Deduct the depreciation from the historical cost to get the book value on the date of
valuation
The historic approach is often referred to as a more objective approach, because it is based
on the amount actually paid for the asset and it is easy to handle.
On the other hand it is claimed that the values are out of date when a long time passed by
since the original acquisition and that inconsistencies in the treatment between and within
entities exists. If the records are insufficient, the original acquisition costs could not even be
known.
For the valuation of assets, the Historical Cost Based Approach should be used, because it is
the closest one can get to the historical cost of the asset. All of the following methods are
improvisations to overcome deficient information about the existing assets.

Valuation of Assets for Opening Balance Sheet 6
3.2 Current Standard Cost Method
The now following methods are to be used, when there is deficient information about existing
assets:
• If the cost of the asset is not available, but the date of purchase or construction, it
has to be figured out, if the asset is beyond useful life or not.
• If the asset is beyond useful life, it should be valued at a reminder value of 1 NPR.
• If the asset is not beyond useful life, it is necessary to estimate the current book
value of the asset. One standardized valuation to do this estimation is the Current
Standard Cost (CSC) method. Under the CSC method one estimates the current cost
of the asset on the date of valuation at which similar or equivalent (new) assets can
be purchased or constructed. The current cost should be estimated in appropriate
units of measurement, such as sq meters or running meters.
However this method requires that a standard list is available that determines the
costs of an asset in the specific measurements.
A list of CSC is provided by the Government of Nepal.
Current Standard Cost Method
• Collect information about the asset
• Categorize to appropriate head in the CSC list or use the most similar category
possible
• Calculate the CSC by multiplying the quantity with the individual price for one unit of
measurement (price of the asset on date of valuation)
• Deflate the price to the year of purchase of the asset, use the standard list of Deflated
Standard Cost (DSC)
• Calculate depreciation from the date of purchase until the date of valuation
3.3 Estimated Current Standard Cost Method
If the costs of the asset are known, but the year of purchase or construction cannot
be estimated, one should use the Estimated Current Standard Cost Method.
The Estimated Current Standard Cost method follows the same scheme as the CSC,
but before calculating the CSC it is essential to estimate the year of purchase.
The estimation of the year of purchase is a subjective method and it is permitted to
estimate the age of the asset in ranges from 10-15 years.
3.4 Case by Case Determination
• If as well the cost of the asset and the date of purchase or construction are not
known, the Case by Case Determination should be used.
• Again, as first thing, it has to be examined if the useful life of the asset is over, then it
should be valued at a reminder value of 1 NPR.

Valuation of Assets for Opening Balance Sheet 7
• If the useful life of the asset is not over, the book value of the asset should be
determined by members of a municipal valuation team (for further information see
section 4.1). The problem about this process is, that it requires a lot of resources and
tends to get highly political, so attention should be paid to ensure a transparent
valuation process.
• In this case use the rate of the asset similar in characteristics or properties to be able
to calculate the value of the asset with the deficient information.
Case by Case Determination
Aim is to determine the book value of the asset, by
• The valuation by a municipal valuation team
• Referring to other assets with same characteristics or properties
3.5 Depreciated Replacement Cost (DRC)
• With the help of this approach, the present value of the remaining useful
life/remaining service potential of an asset is determined as the DRC of the asset.
Thus, the replacement cost is replacing the asset’s gross service potential.
• These replacement costs are depreciated, so that they mirror the asset in its used
condition. Another process of replacement is by reproduction (replication) of the
existing asset.
• The DRC can be described as the current cost of reproduction/replacement of one
asset minus the deductions for deterioration and forms of obsolescence and
optimization. Obsolescence means a loss in value that is the result of a decrease of
usefulness of property, this can be due to decay, changes in technology,
environmental or user demand changes, whereas an optimization determines a least
cost replacement for the remaining service potential of the asset.
So most of the times the optimization minimizes the valuation where as well
alternative lower cost replacements are available. 9
Overview:
If the asset was received as a gift value at 1 NRP
If the asset was purchased/constructed
Both cost and date available Historical Cost Based Method
No cost, but date available Current Standard Cost Method
Neither cost nor date
No estimation of the date possible Case to Case Basis
Estimation of the date possible Estimated Current Standard Cost
Method/Depreciated Replacement Cost
Please refer to Annex 1 for a flowchart for the valuation of Fixed Assets.
9 International Valuation Standards Committee: Exposure Draft of proposed international valuation application –
valuation of public sector assets for financial reporting, p. 14.

Valuation of Assets for Opening Balance Sheet 8
3.6 Valuation of Land
For the valuation of land one of the following options should be chosen:
• To set the value of land, the valuation committee can correspond to the minimum
value set by the Land Revenue Office (for the purpose of land transaction).
• Otherwise the valuation committee can refer to the prevailing market value, the type
of road access or rental value, to name some examples.
• Another method is to use the minimum and maximum valuation rates, which are
proposed by the ward level committees. 10
3.7 Issues in Valuation
In the first place there are existing problems concerning the use of the Current Standard
Cost Method, because some assets do not have prescribed CSC. Other possibilities to
value these assets are to consider the recent purchase cost for similar assets. Afterwards
one has to depreciate to arrive at current book value.
Valuing Capital Work in Progress is another difficulty, the costs for the capital work in
progress should be known on the date of the opening balance sheet, so the information has
to be drawn from the records (e.g. Bills Register, Grants Register). Then the amounts have
to be booked according to the gross amount of bills received by the municipality. Borrowing
costs should as well be included.
Another difficulty is the valuation of Intangible Assets. Generally intangible assets are in the
nature of expenditure on software. The process of valuation can differ:
• If purchased, the costs of the asset include the purchase price, import duties and
other directly attributable expenditure, but it is important to deduct any trade
discounts and rebates.
• If internally generated (assets should be recognized as internally generated if they
will bring future economic benefit 11 ), the costs include every expenditure that is
directly related to the creation of the asset, e.g. expenditure on materials and
services used in developing the asset, salaries and wages, but expenditures like
administrative fees, operating losses and training the staff should be excluded.
• If gifted/donated, the asset should be valued at 1 NPR (reminder value).
• If acquired through exchange, the asset is exchanged for an old intangible asset. If
the assets are similar, the net book value of the exchanged asset should be taken
into account and any extra paid amount be added (or if a refund is involved,
necessary adjustments need to be done). For dissimilar assets the asset should be
recognized at its fair value.
10 Ibid, p. 22.
11 Accounting Standards 26, in: Government of India, Ministry of Urban Development: Model National Municipal
Asset Valuation Methodology Manual, p. 42.

Valuation of Assets – Ongoing 9
As well for Heritage Assets special valuation rules should be applied, because the cultural,
environmental, educational and historic value or importance is probably not fully reflected in
a financial value that is based on the market price. They have long life cycles and their value
does not diminish over time due to wear and tear, instead they are more likely to increase in
value over time. Heritage assets include historical buildings and monuments, archaeological
sites, conservation areas and nature reserves. 12
• For the valuation of heritage assets, the valuation committee should work case by
case.
• Only when the historic nature of the property itself is contributing to the provided
service, the cost of reproducing the asset can be reflected in the cost of the modern
equivalent (except the case that the original historic significance cannot be
recreated). 13
Valuation requirements for Leased Assets are laid down in IPSAS 13. Please refer to
Section 5 – Legal Requirements for further information.
• The fair value of the asset is needed to establish the cost of the asset, which is then
recorded by the entity on the balance sheet.
4. Valuation of Assets – Ongoing
When the asset has been valued and reported into the balance sheet, the carrying value
needs to be periodically depreciated.
The depreciation rates are given by the state, in Nepal a list of depreciation rates is provided
by the Office of the Auditor General. All fixed assets have to be depreciated consistently on
either Straight Line Method or Written down Value Method.
4.1 Team Valuation Committee
Following rule 144 (3) of the Local Self Governance Regulation a valuation committee is
supposed to be formed for the valuation of assets. The members of a municipal valuation
committee have to be appointed by the municipal steering committee. This valuation
committee should consist of municipal accounting experts and external engineers.
In advance of the actual valuation process they are asked to prepare a work plan, so that the
type of information to be collected and the format of forms and notices are already known at
a preliminary stage. 14
12 International Valuation Standards Committee: Exposure Draft of proposed international valuation application –
valuation of public sector assets for financial reporting, p. 6.
13 Government United Kingdom, Royal Institution of Chartered Surveyors, Public Sector Valuation Group:
Guidance on Asset Valuation, 1.19-1.23.
14 Municipal Association of Nepal: Municipal Integrated Property Tax Management Manual, Exposure Draft,
p. 21.

Valuation of Assets – Ongoing 10
4.2 Straight Line Method
Straight line depreciation is the most simple and most often used technique. This method
uses the date of purchase of the asset as starting point and subtracts the approximate
salvage value. The resulting amount is then divided by the useful life of the asset:
Purchase date of the asset – Approximate salvage value
Useful life of the asset
As result one gets the depreciation charge, which the municipality employs annually for one
specific asset.
All in all the Straight Line Method is recommendable for the depreciation process of
municipalities, which do not have a long going experience with the depreciation of assets.
4.3 Written Down Value Method
This method accelerates depreciation because it recognizes a higher depreciation cost
earlier in the asset’s lifetime. Like that, each year’s depreciation is applied to the opening net
book value of the asset and not to the original cost of the asset. This process is ongoing until
the residual or salvage value or the end of the asset’s useful life is reached.
If the fixed percentage depreciation rate would be 15 percent per year, the asset will be
depreciated by 15 percent of its historic cost in the first year. The following year, the asset
will again be depreciated by 15 percent, but not from its historic cost, but from the already
depreciated value of the asset.
The Written Down Value Method is especially important for the private sector, because it is
better displaying the market value of assets, while for the municipalities the market value is
of minor importance.
4.4 Revaluation of Assets
The recommended policies differ between an increasing or decreasing net book value.
• If an increase in net book value is taking place, the proposal is to credit the increase
on revaluation to a “revaluation reserve account”.
• If a decrease in net book value is taking place, it can be charged to the income and
expenditure account, except from the case, that the decrease is related to a previous
increase in revaluation. Then it should be treated like an increase in net book value.
• If one single asset is revalued, the entire category (e.g. land, buildings, vehicles) to
which the asset belongs has to be revalued.
• Attention has to be paid that the net book value after a revaluation of a class of
assets is not greater than the recoverable amount of this class’s assets itself.
• The revaluation reserve can be reduced by depreciation and charged on the revalued
asset.

Legal Requirements 11
5. Legal Requirements
For the case of Nepal the legal requirements given in the LSGA from 1999 and its’
Regulations and in the IPSAS are to be taken into account.
5.1 Local Self Government Act 1999 and Local Self Government Regulations
The problem concerning the valuation of assets is that the property rights of specific
municipal assets are not always clearly stated or have to be legally binding. The LSGA
defines the property rights of municipal assets in Section 134 as follows:
“(1) The Municipality shall have title over the following properties situated within the area of the
Municipality, and the Municipality shall have to supervise, repair, maintain and manage such
properties:
(a) Properties constructed and purchased from the fund of the Municipality or granted to it by
His Majesty’s Government or any organization or individual.
(b) Public properties not subject to any proprietary right of any individual and not within the
control of His Majesty’s Government or District Development Committee, such as public
drainage, sewerage, bridges, ponds, temples, public rest houses, inns, houses, water
springs, water-spouts, wells, grazing, fields, outlets, courtyards, alleys, roads, paths and
trees on either side of the roads.
(c) The houses, land, parks, gardens, bus-parks etc. under the ownership of the Municipality.
(d) Forests according to the prevailing forest laws or handed over by His Majesty’s
Government.
(e) Natural heritages.
(2) The Municipality shall not be allowed to sell and dispose of or otherwise relinquish its title and
possession on the properties as referred to in sub-section (1) without the approval of His Majesty’s
Government. […]”
The vagueness of the LSGA when describing property rights on certain assets leads to an
ongoing confusion in the municipalities if the asset belongs to the national government or to the
municipality. After different assets are identified by the municipality, more legal documents must
be provided to the municipalities so that they can legally claim their property or there must be
another legal procedure identifying property.
The Local Self Government Regulations contain an important legal framework:
• Rule 144 (3) on the provision of a Valuation Committee
• Rule 144 (5) Section A on the set of value of structure and methods by the Valuation
Committee on the basis of the prevailing market values 15
15 Government of Nepal, Ministry of Local Development: Local Self Government Regulation, 1999, rule 144.

Legal Requirements 12
5.2 International Public Sector Accounting Standards
The IPSAS are developed by the Public Sector Committee of the International Federation of
Accountants (IFAC), which is the international professional body of the accountancy
profession.
The most important valuation requirements can be found under IPSAS 17 – Property, Plant and
Equipment and IPSAS 21 – Impairment of Non-Cash-Generating Assets. But as well IPSAS 13
– Leases and IPSAS 16 – Investment Property contain some legal requirements for the
valuation process. 1
The IPSAS and their counterpart in the private sector, IFRS, adopt two models for the
recognition of property assets in the balance sheet, the first is the cost model and the other
one the revaluation model.
IPSAS 17, paragraph 43, deals with the cost model, while paragraph 44 deals with the
revaluation model (both models can be found in section 2, paragraph 2.2 and 2.3)
The assets are included in the balance sheet as follows:
• “The fair value of items of property is usually determined from market-based
evidence by appraisal. The fair value of items of plant and equipment is usually their
market value determined by appraisal.” 16
• “If no market evidence is available to determine the market value in an active and
liquid market, the fair value of the item may be established by reference to other
items with similar characteristics, in similar circumstances and location…” 17
• “If there is no market-based evidence of fair value because of the specialized nature
of the item of plant and equipment, an entity may need to estimate fair value…using
depreciated replacement cost (see section 3.6) or the restoration cost or service units
approaches” (further information under IPSAS 21).
As proposed by the International Valuation Standards Committee, a Professional Valuer
should be responsible for the appraisal and as well for the report of the market value of the
assets.
After IPSAS 17, paragraph 92, the Valuation <strong>Report</strong> has to contain specific information:
• The effective date of revaluation
• Whether an independent valuer was involved
• The methods applied and significant assumptions made
• The extent to which the asset’s fair values were determined directly by reference to
observable prices in an active market or were estimated using other valuation
techniques
The valuer has to ensure, that reports include these information to meet the requirements.
16 International Federation of Accounts, International Public Sector Accounting Standards Board: International
Public Sector Accounting Standards 17, paragraph 45.
17 Ibid, paragraph 47.

Legal Requirements 13
IPSAS 21 deals with the valuation of Impaired Non-Cash Generating Assets. It defines
impairment as the permanent decrease in the recoverable service amount of an asset that is
below its carrying amount. In IPSAS 21, paragraph 48 it is stated that the carrying amount of
the asset should be reduced to its recoverable service amount, if the recoverable service
amount of an asset is smaller than its carrying amount (impairment loss).
If the amount for such an impairment loss exceeds the carrying amount of the asset, the
entity has to accept a liability. It is the task of the entity to write down the carrying amount of
the impaired cash-generating assets to the higher of their value in use or fair value less the
cost to sell. 18
A special rule has to be applied to Surplus Assets, because they should be separately
identified, e.g. as “disposal group”. The assets are disposed of by sale or otherwise and the
liabilities associated with these assets will be transferred into the transaction.
They have to be accounted for at the lower of the carrying amount and the fair value less
cost to sell.
The valuers have to decide whether the assets are to be valued individually or as a group
that will be disposed of in a single transaction.
Aim is to determine the value in use (the asset’s remaining service potential) by one of the
approaches in paragraphs 41 to 45 in IPSAS 21:
• Depreciated Replacement Cost Approach
Often the depreciated replacement cost can be detected by referring to buying prices
of assets with a similar service potential in an active and liquid market. Sometimes an
asset’s reproduction cost will be the best indicator of its replacement cost.
For detailed information please refer to section 3.6.
• Restoration Cost Approach
Restoration costs are defined as costs of retracting the service potential of the
individual asset to its pre-impaired level. To get the present value of the remaining
service potential one has to subtract the estimated restoration cost of the asset from
the current cost of replacing the remaining service potential before any impairment
(depreciated reproduction or replacement cost). 19
• Service Units Approach
The present value of the remaining service potential of the asset is determined by
reducing the current cost of the remaining service potential before any impairment to
be consistent with the reduced number of service units in the impaired state. The
current cost of replacing the remaining service potential before impairment is
identified as depreciated reproduction or replacement cost, like in the Restoration
Cost Approach. 20
18 International Valuation Standards Committee: Exposure Draft of proposed international valuation application –
valuation of public sector assets for financial reporting, p. 10.
19 International Federation of Accounts, International Public Sector Accounting Standards Board: International
Public Sector Accounting Standards 21, paragraph 44.
20 Ibid, paragraph 45.

Best Practice 14
IPSAS 16 are about valuations concerning Investment Property and all public sector
investment property has to be valued in accordance with these standards.
IPSAS 13 present the valuation requirements for Leased Assets.
For finance leases, the fair value of the asset is needed to establish the cost of the asset and
liability and to report it on the balance sheet. For leases of land and buildings (other than
investment property), they have to be classified separately as a finance lease or an
operating lease. In each case the faire value of the leased asset has to be established. 21
The Nepal Public Sector Accounting Standards (NPSAS) have been developed in
accordance with the IPSAS and are still in their draft at the moment. They display the
financial reporting under the cash basis of accounting. Part 2 of the NPSAS contains
definitions of assets, the disclosure of assets and the reference to the related IPSAS 13 and
17. Nevertheless, standards for asset valuation are up to now not included in the NPSAS.
6. Best Practice
In order to create a best practice for asset valuation in the public sector it might be useful to
consider the situation in other countries or methods used by the private sector in Nepal.
Another important approach is the try to create Generally Accepted Valuation Principles
(GAVP) or International Valuation Standards (IVS) which then would be used all over the
world.
Up to now, the implementation of such international principles or standards in the public
sector has not shown much progress.
One country, where several actions towards an asset valuation in the public sector have
been started, is India.
Since 2003, the Municipal Corporation of Delhi forced the urban governments to implement
accrual accounting. Up to now Tamil Nadu, Maharashtra, Uttar Pradesh and Kamataka are
federal states introducing accrual based accounting.
In India the Ministry of Urban Development (MoUD) launched several initiatives towards
good urban governance and local self government.
After the Ministry introduced the National Municipal Accounting Manual (NMAM) (chapter 21,
fixed assets), it now developed a Model National Asset Valuation Methodology Manual,
which should be used by Urban Local Bodies (ULB) for the valuation of their assets and for
the reporting of financial statements. The manual is based on the existing methodologies
and bases used across India for determining the value of municipal assets and as well on
the valuation methodology recommended by the IVS of the International Valuation
Standards Committee.
While the Office of the Comptroller and Auditor General of India have overseen the project, it
was supported by Indo-USAID FIRE-D Project and the National Institute for Urban Affairs.
21 International Valuation Standards Committee: Exposure Draft of proposed international valuation application –
valuation of public sector assets for financial reporting, p. 10.

Conclusion 15
The Government of India as well released accounting standards issued by the Institute of
Chartered Accountants of India (ICAI) and Accounting Principles stated in the NMAM.
Delhi, Bangalore and some other ULB use the Statements issued by the Governmental
Accounting Standards Board (GASB) of the USA. Especially GASB Statement No. 34 deals
with accounting, valuation and treatment of fixed assets in Local Bodies of the USA. But
generally assets are valued based on the traditional “historical cost” model in India. 22
Regarding the Private Sector in Nepal, the Nepal Company Act from 1991 could offer
some ideas for practices in terms of asset valuation. Chapter six deals with accounts of the
company and especially the paragraphs 92, 93 and 94 contain rules and information on the
preparation of the balance sheet, the particulars to be indicated in the balance sheet and
finally the valuation of assets to be indicated in the balance sheet. Here the acquisition costs
shall be taken as basis for valuation, if prices rise the costs need to be changed and if prices
fall, the depreciation shall be deducted and only the remaining value shall be reported.
7. Conclusion
For the valuation of assets, the Historical Cost Based Approach should be used, because
with the help of this approach it is possible to get closest to the historical cost of the asset.
If the asset was received as a gift, it should be valued at 1 NRP, if the asset was purchased
or constructed and both cost and date are available, the historical cost based approach, as
stated above, should be used.
All the other methods are improvisations to overcome deficient information about the existing
assets.
If the cost is not available, whereas the date is, the Current Standard Cost Method should
be deployed.
If neither cost nor dates are available and an estimation of the date is not possible, the Case
to Case Method should be applied.
If an estimation of the date is possible, the Estimated Current Standard Cost Method
should be disposed by means of the Depreciated Replacement Cost.
For the Depreciation of assets the Office of the Auditor General has defined a list with
depreciation rates and expected useful life for municipal assets.
The depreciation should be based on the Straight-Line Method using annual rates of 5%
for the building and 20% for the equipment. 23
The Straight-Line Method is especially recommendable for the depreciation process of
municipalities, which do not have a long going experience with the depreciation of assets.
22 Government of India, Ministry of Urban Development: Model National Municipal Asset Valuation Methodology
Manual, p. 1-4.
23 Government of Nepal: Audit Guides and Tools.

Conclusion 16
Another important aspect of the valuation process is the Disclosure of an asset.
The valuers have to make sure that the reports contain all information that the entity needs
to meet the requirements of IPSAS 17, paragraph 92, like the effective date of the
revaluation, whether a valuer was involved, which methods and valuation techniques were
applied.
Except from that the gross and net book values of the assets at the beginning and end of an
accounting period and the expenditure incurred on account of fixed assets through
construction or acquisition should be part of the report.
Moreover the valuer has to disclose assets ensuring that standards are in compliance with
local legislation, regulation (including accounting rules) or custom.
Even if this manual is mainly intended to be of help in the valuations of fixed assets, a
reasonable consequence would be the maintenance of good Asset Management practices,
especially what is meant by “Asset Life Cycle Management”.
It consists of acquisition, operation, maintenance and disposal as stages in the life cycle of
the asset. After the assets have been identified, listed and valued by the municipality, the
records have to be maintained and updated, which could be done by the help a fixed asset
register.
In this context, asset life cycle management is a maintenance approach that includes all the
elements that affect the productive life of an asset, which is supposed to increase reliability,
overall productivity, length of an asset’s life cycle and to reduce the cost of asset ownership.
It might be helpful for the municipality to set up an Asset Management Unit to manage
aspects of asset life cycle properly. In the end there should be one unified department which
looks after all aspects of asset management like procurement planning, asset acquisition,
recording and reporting, maintenance and disposal of assets.
Procurement planning includes the preparation of short and medium term asset acquisition
plans and of a general procurement plan for fixed assets before the beginning of the fiscal
year to clarify necessary timelines, parameters and benchmarks.
Asset acquisition means to assist the Purchase Department in the process of acquisition of
assets or to help other execution departments to carry out the procurement plan.
Recording and <strong>Report</strong>ing contain the development of an asset tracking database, including
location, condition of the fixed assets, of a fixed asset register for the recording of all
transactions related to fixed assets and their change of net book-value, of a separated
register of impaired assets and assets scheduled for disposal, of evaluative reports for the
management and of depreciation schedules.
Maintenance comprises the preparation of planned maintenance schedules and to oversee
their implementation and, if necessary, the preparation of plans for important renovations,
repairs and modifications.
Disposal involves the preparation of an annual disposal plan for the fixed assets and of an
asset renewal plan, which will be part of the general procurement plan.
For the asset management unit it might be most helpful, depending on the size of the
municipality, to work with appropriate IT tools to have reports automated and schedules
generated through software. 24
24 Government of India, Ministry of Urban Development: Model National Municipal Asset Valuation Methodology
Manual, p. 34-38.

Conclusion 17
To ensure that human resources are available for the implementation of asset valuation in
the Nepalese municipalities, a sufficient and adequate Capacity Development has to be
introduced, which could be provided by training and general education.
A general training would help the municipal staff to understand the concept of asset
valuation and the methods related to it. For the organization of such a training (length,
content) the different starting points of the municipalities have to be taken into account (see
section 1.4).
UDLE (MLD-<strong>GTZ</strong>) is supporting this training. As incentive for the course participants a
certificate for the successful participation should be provided, possibly in cooperation with
the Chartered Accountants of Nepal.
Moreover, there should be the possibility of further training on demand by the municipalities
and refresher trainings, when there are significant changes of practices or municipal staff
members.
As well the knowledge transfer between the municipalities should be strongly advised by the
supporting entities.
If the implementation of asset valuation is closely connected to the introduction of new
software solutions (e.g. when a fixed asset register and asset valuation are introduced at
the same time), software training has to be conducted.
The necessity and length of the software training is dependent on the complexity of the
software. The software training should consist of an explanatory part of the functions of the
software and its modules, and a practical part offering the possibility to apply the abstract
knowledge to case studies from municipalities.
Ensuring capacity development in the Nepalese municipalities will facilitate the
implementation of a proper and extensive asset valuation.
Taking the growing municipal activities in a federal Nepal into account, more and more
investments by municipalities will be necessary. Thus, it is of great importance that the
municipalities do not invest too much into the valuation of already existing assets, but focus
on the complete and correct valuation of future assets.

Annex 18
8. Annex
Annex 1
Flowchart for valuation of fixed assets for opening balance sheet 25
25 Government of India, Ministry of Urban Development: Model National Municipal Asset Valuation Methodology
Manual, p. 21.

Annex 19
Annex 2
Depreciation Rates 26 NEA NTC
Rate in
%
1 Building 2
2.6 to
6.7
2 Hydro Electrical Structures 2 to 3
3 Hydro Electrical Plant & Machinery 3
4 Distribution System 3
5 Transmission Sub-stations 3
6 Solar Power 3
7 Meter & Mobile Plant Metering Equipment 10
8 Consumer Services 7
9 Public Lighting 3
10 Vehicles, tools & instruments, furniture & fixtures 20
11 Offfice Equipment 15 20
12 Misc. Properties 50
13 Plant & Machinery 4 to 20
14 Heating & Lighting 10
15 Vehicles 20
16 Furniture 20
As Per Income Tax Act
A Building,Structures,Other Works of Permanent Nature 5
B
Computers,other Data Handling
equipment,furniture,fixtures,office equipments 25
C Automobiles,bus & minibus 20
D
Production equipment,earthmoving
equipment,pollution control cost capitalized,R & D cost
capatilized,expenses incurred on natural resourcesand
other depreciable tangible assets not covered by above
blocks A,B,c 15
*
NEA
*
NTC
Nepal Electricity Authority
Nepal Telecom
26 Provided by the Chartered Accounts Nepal.

References 20
9. References
Accounting Standards Board: Nepal Public Sector Accounting Standard, Financial <strong>Report</strong>ing
under Cash Basis of Accounting, Exposure Draft, Babar Mahal, Kathamandu, Nepal.
Bloendal, Jon: Accrual Accounting and Budgeting: Key Issues and Recent Developments, in:
OECD Journal on Budgeting Vol.3, No.1, OECD 2003.
Government of India, Ministry of Urban Development: Model National Municipal Asset
Valuation Methodology Manual, January 2009.
http://www.niua.org/projects/fire/asset%20valuation%20manual%20final.pdf
Government of India, Accounting Standard (AS) 10: Accounting for fixed Assets.
http://www.mca.gov.in/MinistryWebsite/dca/notification/pdf/AS_10.pdf
Government United Kingdom, Royal Institution of Chartered Surveyors, Public Sector
Valuation Group: Guidance on Asset Valuation.
http://www.financialreporting.gov.uk/documents/2008/GUIDANCE%20ON%20ASSET%20V
ALUATION.pdf
Government of Nepal, Ministry of Local Development: Local Self Government Act, 1999.
http://mld.gov.np/acts_reg/acts_2008-08-03_08_29_48_eng.pdf
Government of Nepal, Ministry of Local Development: Local Self Government Regulation,
1999.
http://mld.gov.np/acts_reg/regulations_2008-08-03_08_49_07_eng.pdf
Government of Nepal: Audit Guides and Tools.
http://www.oagnep.gov.np/Audit_guides_&_tools.htm
Government of Nepal: Accounting Standards Nepal.
http://www.standards.org.np/nasdownload.php
International Federation of Accounts, International Public Sector Accounting Standards
Board: International Public Sector Accounting Standards.
http://www.ipsas.org/PDF_ipsas_standards_ifac/2006_A17_IPSAS_13.pdf
htp://www.ipsas.org/PDF_ipsas_standards_ifac/2006_A20_IPSAS_16.pdf
http://www.ipsas.org/PDF_ipsas_standards_ifac/2006_A21_IPSAS_17.pdf
http://www.ipsas.org/PDF_ipsas_standards_ifac/IPSAS21-Final.pdf
International Valuation Standards Committee: Exposure Draft of proposed international
valuation application – valuation of public sector assets for financial reporting, March 2006.
http://www.ivsc.org/pubs/exp_drafts/iva3.pdf
International Valuation Standards Committee: International Valuation Standards.

References 21
Kathmandu Metropolitan City: Chart of Accounts.
Municipal Association of Nepal: Municipal Integrated Property Tax Management Manual,
Exposure Draft.
Nepal Company Act, 1991.
Urban Development through Local Efforts Programme, German Technical Cooperation:
Inventory of Municipal Fixed Assets and Development of a Fixed Asset Register, April 2009.
Urban Development through Local Efforts Programme, German Technical Cooperation:
Roadmap for the Implementation of Corporate Accounting System in Nepalese
Municipalities, April 2009.
Urban Development through Local Efforts Programme, German Technical Cooperation:
Accrual Accounting in the Nepalese Municipal Public Sector, December 2008.
Urban Development through Local Efforts Programme, German Technical Cooperation:
Proceeding <strong>Report</strong> of Information Sharing Programme on Corporate Accounting System for
Nepalese Municipalities, March 2009.
Worldbank: Financial Management Nepal, 2005-2006.
http://siteresources.worldbank.org/INTNEPAL/Resources/Nepal_PEFA_(FY_2005-06).pdf
Worldbank: Nepal. Public Sector Accounting and Auditing. Executive Summary 2007.
http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/Publications/448813-
1195243379044/sar_report-nepal-summary.pdf 27
27 Concerning all links: Last review on 30.07.2009.