Over the past number of years increased focus has been placed on the accuracy of an organisation’s asset register. Traditionally the asset register and the use of it as a business tool were simply to manage the tax burden of the company through successive financial periods. However, more and more emphasis is being placed on the use of the asset register to measure how efficiently an organisation manages its capital investments. Investors and financial asset managers compare organisations according to their capital base and use of capital investment. Scandals such as WorldCom and Enron highlighted to the investment community a weakness in that these measures were being used to determine the relative value of organisations by analysts, yet the controls in place and the emphasis that was being placed upon the asset register by auditors were not at the same level.
Internationally the accounting standards around asset registers have been tightened and the spin-off benefit for investors and public sector donors is that they can investigate the organisation’s track record with regard to audit findings. Where there are clean audits (including asset register compliance to recognised accounting standards) the risk associated with these investments or donations is significantly reduced. For the organisations this control of the risks means that the interest rates they are charged by lenders (banks or investors) are reduced, ensuring that they can do more with the money they have than just service their debts.
Yet for many organisations managing the asset register and ensuring that it is accurate remain a major headache. Why? One theory is that organisations still operate in silos – the accountants count the beans and the technical teams must just make the machines work that create the beans!! The current accounting standards require the input of both the technical teams and the accountants to ensure that the asset register accurately reflects the potential of the organisation. To do this certain measures and processes must be put in place.
What are the essential elements required to make the asset register work?
- Know where your assets are. Hey – I didn’t say it was difficult, but you need to know where each and every asset is and who is responsible for it.
- Know the condition of your assets. To model an asset financially the asset is assumed to be active for a certain number of years, but as we all know, it’s dangerous to assume. Instead of assuming, every year the organisation needs to look at the actual condition of the asset (its service potential) and compare this to the number of years the asset will remain in service (usually called ‘remaining useful life’). Where the remaining useful life differs significantly from the service potential of the asset a financial adjustment must be made to the asset register.
- Increasing the remaining useful life: When assets have been well maintained, lubrication routines maintained and proactive adjustments made to minimise wear and tear on the asset, the useful life could well be extended beyond the original financial model. This will result in lower depreciation charges for the organisation which will represent a cost saving to the organisation.
- Decreasing the remaining useful life: When assets have been neglected, abused or the routine preventative maintenance work has been allowed to slip, the useful life could be reduced. This indicates that the asset is not expected to last as long as the original financial model. This will result in increased depreciation charges for the organisation which will represent a cost to the organisation.
To expect an accountant to intuitively know what condition the assets are in would be unrealistic, hence the technical team is required to continually assess the condition of the assets and to advise the accountants at least annually on the condition of the assets.
These financial models also help justify the cost of an effective, proactive asset management programme. With such a programme, not only does the organisation delay the cost of replacing assets (and hence delay more capital expenditure) but also the asset value of the organisation is better preserved.
- Know what is happening to your assets. Vehicles (for example) can be involved in accidents, fires or floods, or some other catastrophe can occur. These events have a significant impact on the value of the organisation’s assets. How do we manage this?
Impairment is the permanent decline in the value of an asset and is usually as a result of a specific event. At the end of the financial reporting period the accountants will invariably request that the technical team look for ‘indicators of impairment’ on the assets that are being used by the organisation. These indicators of impairment can include:
- a specific event eg vandalism, accident, fire, flood;
- a technical event eg obsolescence, realisation that an asset will not perform to desired specifcation;
- a socio-economic event eg community growth/decline not in line with projected expectations;
- a legal event eg changes in environmental legislation;
- an internal event eg change in function, discontinuation of operations.
An impairment means that the value of the asset being impaired is reduced, and reduces the value of the assets being used in the organisation. This essentially means that you are telling people who would read/interpret your financial results that you expect less value (reduced throughput, reduced efficiency, etc) from the asset(s) as a result of the event.
- Know the value of your assets. It happens that organisations can acquire more assets through mergers, takeovers or donations. Because these assets add to the ability of the organisation to perform they must accurately be reflected on the asset register at fair value. Fair value is the value at which the asset can be traded on an open market between a willing buyer and a willing seller. It can also happen that assets that have been in use for an extended period of time have exceeded the original financial life and the value at which they are being reflected on the asset register is inconsistent with the value they represent to the organisation. Hence organisations are periodically required to review the fair value of those asset classes where this is probable. Good examples of this are infrastructure assets for water supply, electricity, roads and stormwater; often these assets do not adequately reflect their actual value to the organisation on the asset register and need to be revalued.
- Know what needs to be done, by whom and when. Sometimes we make our lives very complicated by not clearly documenting and explaining to staff what is required by whom and when. Specifically with the asset register we typically have a culture of buying, moving, changing and discarding assets without seeing the whole picture and informing other people about these changes. Having business processes, communicating business processes and adhering to business processes are the greatest challenges facing organisations. The biggest and the best computer systems in the world with RFID tags and all sorts of fancy technology are redundant in the face of the human being’s failure to have a clear business process, communicate the business process and be disciplined enough to follow the business process. And this cannot be emphasised enough.