For ‘cash’ appropriations, the full purchase price or development cost of an asset is charged to an appropriation in the year of expenditure. Under full accrual, the costs of developing or acquiring the asset are allocated to the periods over which the asset will be used through amortization. Exhibit 6 illustrates a costing process for the annual accrual expenses of a capital asset acquisition proposal.

Exhibit 6. Example method for calculating annual accrual expense for capital proposals

- **Step 1. Cost – Determine the sum of all costs required to make a capital asset operational** • In the case of acquisition, this can include the purchase price, transportation costs, legal fees, installation costs

- • In the case of developed or constructed assets, this includes direct material and labour costs, as well as overhead costs directly attributable to the construction or development activity.

- **Step 2. Amortization (depreciation) Period – Determine the useful life of the asset** • Useful life is the estimate of either the period over which a tangible capital asset is expected to be used or the number of production or similar units that can be obtained from the tangible capital asset. The estimate of useful life should take into account such factors as expected future usage, effects of technological obsolescence, expected wear and tear from use or the passage of time, the maintenance program, studies of similar items retired, and the condition of existing comparable items.

- • Since the estimate of the life of an asset is extended into the future, it becomes increasingly difficult to identify a reasonable basis for estimating the useful life. As a result, the maximum amortization period of tangible capital assets other than land is restricted to 40 years except where the federal organization can demonstrate clearly that a longer useful life is expected. Some complex network assets such as water or sewer systems likely have useful lives in excess of 40 years. Indicating a longer useful life for such assets may thus be justified.

- **Step 3. Amortization Expense – Allocate the cost of the asset over its useful life** • The federal government generally uses straight-line amortization, where the cost of the asset is divided evenly by the number of years of useful life to determine the annual amortization expense.

- • This amount plus operating costs for the year will be the annual accrual expense. • This amount will be recorded in each year of the asset’s useful life, starting when the asset is put into use. Since amortization is recorded monthly, annual amortization may be reduced in the first and last years of the asset’s useful life.

Source: Treasury Board of Canada Secretariat 2007, 66-67.

# **5. MTEF budget and forward year cost estimates practices**

This part reports the distinguishing characteristics of MTEF budget and forward years cost estimates practices operating across the four survey jurisdictions. The purpose is to isolate the key themes arising from the case studies and to help differentiate the application of costing guidelines for specified types of programs, relevant variations in their application in the budget and forward years, and the application of costing approaches in the context of forecasting methodologies. The method is to compare and contrast costing and forecasting methodologies practices using the survey questions, and to identify instructive examples of costing methods 28