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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 6 Depreciation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Section 6.1 General Guidance explains the key concepts of asset depreciation and then describes the three approaches with examples of when and why each may approach. Section 6.2 Recommended Steps Section 6.3 Examples Section 6.4 Practice Assessment 6-1 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Depreciation, or loss of value over time, represents the con- - most straightforward approach is to represent depreciation as a function of asset age using a simple linear relationship. Where condition data are available, it may be preferable to supplement - sumption to establish a non-linear calculation of depreciation. Chapter 6 Depreciation

Key Concepts (1) depreciation calculated over some period measures how much value of an asset a measure of how much closer an asset has moved toward the end of its useful life. Depreciation is calculated when it is necessary to adjust an asset’s value over in Chapter 4. for a new asset than an older one. Figure 6-1 further assumed that the asset is operated in the same manner over its entire Section 6.1 General Guidance Chapter 6. Depreciation 6-2 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 6. Depreciation / Section 6.1 General Guidance pattern of deterioration and a approach is best suited. Depreciation may incorpo rate other factors beyond key issue is technical obso lescence. Estimates of asset useful life typically incorpo a factor incorporated into de terioration estimates. Assets can become obsolete due to controller may be in excellent be considered to be obsolete cally once an asset is obsolete it assumed to be fully depreciated. Table 6-1 lists the basic types of dep 6-3 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Figure 6-1. and Deterioration

Chapter 6. Depreciation / Section 6.1 General Guidance approach. asset value without any additional assumptions. value. This approach can be applied to assets for which limited inventory data cal condition. 6-4 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Approaches for Calculating Depreciation Approach Description Strengths Weaknesses Actual Age Depreciation increases linearly as a function of actual age Straightforward to calculate for new assets Requires few additional assumptions Historic data may not be available, particularly for asset components Data on last treatment may be needed estab- lish age Depreciation increases linearly as a function of age adjusted for condition Accommodates consid- eration of a wide range of treatments Can be calculated without historic data Supports evaluation of treatment selection and timing for TAM Requires collecting con- dition data, frequently at a component level Can be a challenge to relate condition to re- maining life, particularly for assets in very good or very poor condition Consumption Pattern of depreciation is determined based on a tailored analysis of how Flexible approach Consistent with U.S. and international accounting standards Best approach for matching actual pattern of use of an asset Involves supplemental analysis Results may be depen- dent on parameters and discount rate which are outside the control of an asset manager

Chapter 6. Depreciation / Section 6.1 General Guidance and what treatments may be needed. Technical obsolescence can be a major 6-5 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 6. Depreciation / Section 6.1 General Guidance proach is not recommended unless supported by additional analysis to verify next section. condition data to provide a better estimate of how much of an asset’s value an asset. Depreciation Approach linear model should be assumed for depreciation unless there is evidence to late depreciation. Figure 6-2 es more of its value initially and less towards the end of its useful life. This curve 6-6 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 6. Depreciation / Section 6.1 General Guidance where V(t0 ) = value at time t0 treatment was performed) RV = residual value r = depreciation rate This pattern of depreciation is applicable if the use of an asset decreases as it (35) N where N N. where c1 and c2 are constants. This functional form may be applicable in cases where use of an asset is increas mentin the case of pavement index that is inversely propor tional to road user costs. depreciation curve to match the pattern of consumption compatible with the eco nomic perspective of asset value. If one has calculated initial asset value based on 6-7 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Figure 6-2. Examples of Non-Linear

Chapter 6. Depreciation / Section 6.1 General Guidance compiled to calculate initial value. approach. Choosing an Approach data one has available. Figure 6-3 supplemental analysis to establish the depreciation pattern if there is reason to 6-8 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Figure 6-3. Approach for Calculating Depreciation No No Yes Yes Yes Yes Yes Yes No No No No End Start Is it necessary to maintain consistency with the agency’s GASB34 calc. of asset value? Can the calculation of depreciation be avoided through using an economic value, market value or the GASB34 Modified Approach? Is the consup- tion of benefits expected to be non-linear? Are condition data available? Is it feasible to obtain a market value adjusted for externalities? Does the GASB34 calculation include depreci- ation based on actual age? Depreciate linearly based on age Depreciate based on supplemental analysis of benefit consumption patterns Depreciate linearly based on condition

Chapter 6. Depreciation / Section 6.1 General Guidance or market value – then additional calculation of depreciation is not needed. In replacement cost at the end of the asset’s life. In cases where depreciation is calculated and consistency with the approach tend to be replaced due to obsolescence). (17) (5) (36) all are valuable references for further discussion of this topic. 6-9 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Note that the steps presented here describe the case in which depreciation is calculated for an individual asset or component since the point at which the if a treatment was performed more recently than the time of the initial value an individual asset. scribed below. The steps describe the case where depreciation is calculated rel and value lost from depreciation. The overall calculation process is discussed Any calculation of depreciation should be capped at the asset’s value to avoid a Section 6.2 Recommended Steps Chapter 6. Depreciation 6-10 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 6. Depreciation / Section 6.2 Recommended Steps 6-11 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Age-Based Depreciation Compile Data For each asset class and type of component being valued, compile the avail- able data on the asset inventory and its age. Also compile the key parameters established through prior steps, such as useful life and residual value. If treat- ments other than asset purchase, construction/reconstruction are included, compile the available data on asset treatment history. The assumptions de- veloped previously regarding the level of detail in the analysis and treatments Determine Asset Age Specify age at the level of detail established for the calculation – e.g., by indi- vidual asset or as a distribution of ages for the inventory. Refer to Chapter 13 of Measuring Capital (11) for guidance on estimating age distributions based on useful life if age data are unavailable. Calculate Depreciation V(t ) = value at time t0 (typically initial value) RV = residual value UL = useful life A(t) t A(t ) t0

Chapter 6. Depreciation / Section 6.2 Recommended Steps 6-12 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Condition-Based Depreciation - set condition relates to age. If condition is the best predictor of remaining life, based on condition, actual age and/or other variables. Refer to NCHRP Report 713 (18) for detailed guidance on modeling asset life. Note that once condition has been mapped to age one can then determine the percent of value remaining as a function of condition, simplifying the depreciation calculation. Compile Data For each asset class and type of component being valued, compile the avail- able data on the asset inventory and its condition. If the calculation of ef- age and prior treatments that impact age. Also compile the key parameters established through prior steps, such as useful life and residual value. The assumptions developed previously regarding the level of detail in the analysis available. Determine Asset Age the approach established in Step 1. Calculate Depreciation V(t0) = value at time t0 (typically initial value) RV = residual value UL = useful life E(t) t E(t ) t0

Chapter 6. Depreciation / Section 6.2 Recommended Steps strictly upon an asset’s condition then historic asset data is technically not parameters such as unit costs and useful lives). Asset failure – as an asset deteriorates it is more likely that the asset will complete closure. Where the likelihood of asset failure can be related to asset condition these costs tend to increase over time. pattern. 6-13 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 6. Depreciation / Section 6.2 Recommended Steps 6-14 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Depreciation - Establish the Depreciation Curve Determine the functional form of the depreciation curve based on the results linear depreciation. - tion rate can be used, resulting in use of an exponential curve as described in Section 6.1. If the depreciation pattern is decelerated related to linear depre- Compile Data For each asset class and type of component being valued, compile the avail- - oped previously regarding the level of detail in the analysis and treatments to Calculate Depreciation data compiled in Step 3.

where V(t ) RV = residual value UL = useful life A(t) A(t ) to apply this approach to a case where a rehabilitation is performed that im deteriorated condition. Section 6.3 Examples Chapter 6. Depreciation 6-15 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 6. Depreciation / Section 6.3 Examples Based on these assumptions the agency determines that a farebox depreciates by $5,000/15 = $333.33 per year until it reaches 15 years. The table below shows a set of example calculations assuming fareboxes of varying age. Based on the table, the initial value of the 100 fareboxes is $500,000. Depreciation totals $265,000, resulting in a current value of $235,000. Example 6-3. Con- dition Based The Kentucky Transportation Cabinet (KYTC) uses a con- dition-based depreciation approach for valuing assets in its TAMP (37). For bridges KYTC bases depreciation on the NBI condition ratings for the deck, superstructure, and substructure of each bridge. 6-16 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 6-2. Example Calculation of Asset Value for an Inventory of Fareboxes Age (years) Count Initial Value ($) Depreciation ($) Current Value ($) 0 5 25,000.00 0.00 25,000.00 1 6 30,000.00 2,000.00 28,000.00 2 5 25,000.00 3,333.33 21,666.67 3 4 20,000.00 4,000.00 16,000.00 4 3 15,000.00 4,000.00 11,000.00 5 0 0.00 0.00 0.00 6 11 55,000.00 22,000.00 33,000.00 7 10 50,000.00 23,333.33 26,666.67 8 13 65,000.00 34,666.67 30,333.33 9 9 45,000.00 27,000.00 18,000.00 10 5 25,000.00 16,666.67 8,333.33 11 4 20,000.00 14,666.67 5,333.33 12 7 35,000.00 28,000.00 7,000.00 13 4 20,000.00 17,333.33 2,666.67 14 6 30,000.00 28,000.00 2,000.00 >15 8 40,000.00 40,000.00 0.00 Total 100 500,000.00 265,000.00 235,000.00 Source: KYTC (37) Figure 6-4. Predicted Depreciation Versus Condition Rating 100% 90% 75% 50% 25% 10% 5% 0% Depreciated Value vs. Rating D ep re ci at e Va lu e NBI Rating 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9 8 7 6 5 4 3 2 1 0

Chapter 6. Depreciation / Section 6.3 Examples Figure 6-4. In Table 6-2 depreciation in dollars as a function of condition. The ta ble shows an example of the calculations for a component million. Example 6-4. De- on the Pattern of - tion 6-17 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Condition Rating Depreciated Value (see Figure 6-4) Remaining Useful Life (years) Depreciation Given Initial Value of $10M ($) Current Value Given Initial Value of $10M ($M) 9 100% 75.00 0.0 10.0 8 90% 67.50 1.0 9.0 7 75% 56.25 2.5 7.5 6 50% 37.50 5.0 5.0 5 25% 18.75 7.5 2.5 4 10% 7.50 9.0 1.0 3 5% 3.75 9.5 0.5 2 0% 0.00 10.0 0.0 1 0% 0.00 10.0 0.0 Figure 6-5. Example Excess User Costs as a Function of IRI

Chapter 6. Depreciation / Section 6.3 Examples pavement. (38) sections. Figure 6-5 model. report to estimate the bene section over time. This is then used to estimate the depre ciation curve for pavement. Figure 6-6 shows an example 6-18 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Figure 6-6. Example Custom Deterioration Function

between these two levels. Section 6.4 Practice Assessment Chapter 6. Depreciation 6-19 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Maturity Level Description Calculating Depreciation for Age Data Only Emerging Asset age is not well established. Costs by asset class are calculated by year and depreciated without associating costs to Strengthening Asset or component age is known or can be estimated based on inventory and treatment data, supporting calculation of depreci- ation at an asset class, asset and/or component level. Advanced Asset age or component age is known or can be estimated based on inventory and treatment data. An analysis is performed of consumption is used if supported by the analysis. Depreciation is calculated based on the selected approach by asset class, asset and/or component. Calculating Depreciation for Condition Data Emerging - and depreciation is calculated by asset class based on current condition. Strengthening An assessment is performed to determine how best to calculate asset and/or component. Advanced the analysis. Otherwise, an assessment is performed to deter- age and/or condition. Depreciation is calculated based on the selected approach by asset class, asset and/or component.

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Determining the value of a transportation organization's physical assets is important for both financial reporting and transportation asset management (TAM).

The TRB National Cooperative Highway Research Program's NCHRP Web-Only Document 335: A Guide to Computation and Use of System-Level Valuation of Transportation Assets details how to calculate asset value and use it to support application in TAM.

Supplemental to the document are summary of the research project activities and recommendations for implementation.

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