9.4 Depreciated Replacement Cost
The DRC is defined as the current replacement cost after deductions for wear and tear or consumption to reflect remaining service life or future economic benefits of the asset (IPWEA 2015b).
The current replacement cost for the component may be determined by using the prevailing market costs for construction of a similar component in similar condition.
The gross replacement cost1 needs to be related to the common components and adjusted for the difference in service potential of the existing asset and the modern equivalent asset. Different material types providing the same function are likely to have different costs and service potential.
Identifying components for grouping in the gross replacement cost should take into account factors affecting the valuation including (IPWEA 2015b):
- capacity/dimension of the asset
- location of the asset and type of settlement
- terrain/topography of the area
- ground/soil conditions in the area
- material of which the asset is constructed.
Applying standardised replacement costs involves the following procedure (IPWEA 2015b):
- replacement costs should include all costs directly attributable to bringing the asset to working condition for its intended use
- assets should be normalised to estimate standard replacement cost to components on a ‘modern equivalent asset’ basis, with adjustments for any difference in service potential
- costs should be in line with replacing the asset in its current environment
- overhead costs should be spread over all assets affected
- design costs should be based on reproducing the asset rather than creating it as new
- external borrowing costs incurred during construction are to be included if the asset meets the criteria of a qualifying asset
- materials pricing and labour rates should reflect typical and sustainable market conditions
- exchange rate and interest rate fluctuations may need to be considered if significant
- residual value should be assigned (IPWEA 2015b).
The modern equivalent asset is defined as an asset that replicates what is in existence with the most cost‑effective asset performing the same level of service.
The replacement cost should incorporate ownership and compensation issues, policies and practices adopted by the entity to replace assets in their AMPs as these can have quite significant cost implications.