The continuing rise in house prices is constantly in the headlines. So a requirement to value what, for most of us, is our single-biggest asset at the price at which we bought it would be laughed at. But this is exactly the way in which local authorities value their roads. Let's imagine, for a moment the unthinkable, and the Forth Road bridge collapses. What would you estimate the replacement cost to be – £10m, £100m or £500m? In the relevant 2004/05 financial statements you can find the bridge valued at £38m. Intuitively, this feels wrong. It must cost more than £38m to replace such a vast and complex structure. Current accounting policies require roads, including bridges, to be valued in local authorities' accounts at their historical cost, ie, their original cost of construction. But the weakness of this is that, over time, the values shown in the financial statements diverge from their true value to the business. Current replacement cost is an alternative valuation method, ie the cost of replacing it in its current condition at today's prices. The need to replace the bridge at some point in the future is as certain as the fact that children cost money. And while you may well be creating trust funds to cope with future liabilities, such as university fees and weddings, the equivalent is not happening for public assets. If we want the same guarantee of cash in the bank to cope with future financial liabilities arising from replacing public assets as we want with our own domestic finances, then we need to plan how to fund their replacement now. Governments, just as much as each of us, individually, must allocate limited resources against a number of competing demands. Knowing what your assets are truly worth must be the starting point. n Ian Carruthers is director of policy and technical at the Chartered Institute of Public Finance and Accountancy
