Asset Management for NFPs

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1 Asset Management for NFPs September 2012 Presented by Rosemary Campbell, Director Merit Partners Pty Ltd Aim of this session What are assets and why manage them Considerations at each lifecycle stage Acquisition Use Disposal 2 Merit Partners Pty Limited 1

2 Our aim is to help you better manage the assets you are responsible for Understand and use financial terms and concepts Plan, control, record, report Answer your questions 3 Systematic process of acquiring, operating, maintaining and disposing of assets cost effectively and in accordance with your strategic goals Limited resources Control Accountable Good governance Disposal Planning Strategic Goals Acquisition Operations & Maintenance 4 Merit Partners Pty Limited 2

3 Strategic Plan Document in an Asset Management Plan Identify program delivery needs (what you want) Analyse the gap Identify optimal asset mix (what you need) Review the existing asset portfolio (what you have) 5 To continue to provide benefits to the program Expensive Exist for a long time Part of strategic and business plans 6 Merit Partners Pty Limited 3

4 Future economic benefits controlled by an entity as a result of past transactions or events Something that contributes to your programs and services beyond the current financial year Recorded on the Balance Sheet Current (<12 months) v. Non-Current (>12 months) Land, buildings, vehicles, plant & equipment, IT & communication infrastructure, software 7 Depreciation and amortisation Expenses Allocate the depreciable value over the useful life Depreciable value = cost minus residual value Accumulated depreciation is the portion of the asset s cost that has been transferred to the depreciation expense account since the asset was acquired (how much of the asset s cost has been used up by its use) 8 Merit Partners Pty Limited 4

5 E.g. Cost = $200, Depreciation Expense = $20 Debits Credits Depreciation Expense $20 Accumulated Depreciation $20 Balance Sheet shows: Asset, at cost $200 less Accumulated Depreciation ($120) Carrying value $80 9 Residual Value Useful Life Depreciation methods Prime Cost Diminishing Value 10 Merit Partners Pty Limited 5

6 Choice of method = your accounting policy Prime Cost Straight line Same amount each period Easy calculation, less errors in calculation Diminishing value Decreasing amount each period Usually more reflective of economic life 11 Asset cost $1,000 with useful life of 5 years PC depreciation expense = $1,000/5 = $200/year DV depreciation expense Yr 1 = $300 = $1,000 x 150%/5 Yr 2 = $210 = ($1,000 - $300) = $700, $700 x 150%/5 12 Merit Partners Pty Limited 6

7 Revaluations Instead of reporting at historical cost Revalue to market value Frequency usually depends on market volatility Documentation Qualified Professional Impairment The asset is not worth the value at which it is recorded Obsolescence, law changes, physical damage, no longer fit for purpose Asset Management Plan 2. Policies & procedures 3. Asset Register 14 Merit Partners Pty Limited 7

8 Acquisition, disposal and lifecycle management decisions need to be integrated with your strategic planning Plan how and when to acquire assets Plan how to operate and control assets Plan how and when to dispose of assets Reduce the adverse effects of unexpected events Identify and prioritise critical assets 15 Fundamental good governance tool Control the use of assets 16 Merit Partners Pty Limited 8

9 Fundamental irrespective of size of asset portfolio Contains current and historical, financial and non-financial information 17 Asset information Accounting information Accountability Asset Performance Unique asset number Barcode number Asset description Serial number Model Manufacturer Supplier Invoice Number Purchase Order number Insurer Insurance policy number Insurance policy expiry date Date purchased Date available for use Asset class Acquisition Cost Gross amount at valuation Valuation basis Date of last valuation Depreciation method Depreciation rate Accumulated depreciation Net book value Estimated useful life Custodian Location Program/activity Cost Centre Last stocktake/inspection Next stocktake/inspection Licence number Licence expiry date Functionality Operational importance Use Maintenance criteria Current condition Warranty end date Warranty conditions Lifecycle costs Asset Register 18 Merit Partners Pty Limited 9

10 Advantage: correct calculations and accurate information = better reporting and more informed decisions Disadvantage: cost Format depends on importance of asset management in your organisation Basic spreadsheets Off-the-shelf software More sophisticated software Complex integrated asset management system 19 What do you use now? Good points? Bad points? Commercial businesses generally don t maintain their own asset register! Processing is outsourced to accountants Cost effective no outlay on software, no training, no support costs Auditors have more comfort Large organisations use expensive, integrated, customised software 20 Merit Partners Pty Limited 10

11 If you want your own software Determine the scope (what do you want the software to do/to give you) Evaluate the options, considering: Costs License Support Reputation of supplier and product Staff Testimonials Trial Sustainability Useability Maintainability 21 Irrespective of its format, your input is critical Record all assets, regardless of funding source Record each asset separately Except aggregated assets e.g. sets Record each category separately Record owned and leased assets Regular reviews & updates acquisitions, disposals, accounting transactions (e.g. depreciation expense, loss on sale), stocktakes and condition inspections Reconcile the register to the general ledger 22 Merit Partners Pty Limited 11

12 Asset recognition Past event gave ability to control Future economic benefits Asset Value exceeds asset threshold Reliable measurement 23 Cost Asset Capitalisation Threshold Donated Assets Portable & Attractive Items 24 Merit Partners Pty Limited 12

13 Reserves (saving) Mainstream financing options Loan Leases HPs and Chattel Mortgages Grants Receiving donated assets 25 Physical asset management input; managing the lifecycle Financial asset management output accounting process to track, record and report Integration Knowledge is power Understand your assets Develop a system to get the most out of your assets & have financial resources ready to repair & replace 26 Merit Partners Pty Limited 13

14 The realities of assets Assets are not built to last forever Different assets have different probabilities and rates of failure You need to manage the failure rates Know the asset s demand, use, condition, age, risk & consequence of failure, renewal options Know which are your critical assets 27 For own use / use in service delivery or held as investment Land is not depreciable Buildings are measured at cost or fair value Disclose the fair value of investment properties in the financial statements Buildings measured at cost can be revalued Revaluation increment to Asset Revaluation Reserve Revaluation decrement to P&L Make good provisions 28 Merit Partners Pty Limited 14

15 Used in daily operations Consider Identification Storage Portable & attractive item Responsibility Protection Insurance Maintenance Controls over use Disposal and replacement 29 Owned or leased Assets under a novated lease do not belong to the NFP Budget for operating costs and replacement Policies critical to control use and costs Authorisation Storage Responsibility Coordinator Safety Emergency Response Private Use (home garaging) FBT Employee Contributions Prohibitiions 30 Merit Partners Pty Limited 15

16 To maximise the return you get from the asset and its prolong its useful life Should be proactive and preventative Maintenance plan/schedule Regular inspections to monitor age and condition; profile reports Know the lifecycle costs Know the costs and benefits of repair v replace; How much can we justifiably spend on repairing the asset before replacing it? Know the risks: operational, safety, legal, environmental 31 $1,200 Cumulative Costs v Age $1,000 $800 $600 $400 $200 $ Merit Partners Pty Limited 16

17 Adequate and current coverage to protect the organisation Could include details in Fixed Asset Register Insurance payouts are income Separately record: Disposal or repair of old asset Insurance payout Acquisition of new replacement asset 33 Asset Disposal Plan Procedures Approval Security & confidentiality considerations (remove ID and cleansing electronic information) Environmental considerations Assign responsibilities Valuations 34 Merit Partners Pty Limited 17

18 Expected Direct sale Auction Exchanged Traded in Sale by tender Expressions of interest Scrap Salvage Donate Unexpected Destroyed by accident/damaged beyond repair Destroyed by cyclone, flood, fire Stolen Lost 35 Calculate depreciation expense up until the disposal date (the end of the asset s useful life to the organisation) Then, record proceeds received if any, $100 Remove asset, original cost $200 Remove accumulated depreciation $80 Debits Cash at bank $100 Credits Asset $200 Accumulated Depreciation $120 Balance = gain (credit) or loss (debit) on sale $20 36 Merit Partners Pty Limited 18

19 Sale proceeds received from buyer $100 Less: costs to sell ($nil) $100 Less: written down value of asset at disposal ($80) Gain/(loss) on sale $20 37 Delete the asset from the Fixed Asset Register in the year after the disposal FBT obligations from disposals to employees or their associates GST considerations Charge GST on sale to third party if you are registered for GST even if buyer is not registered Non-monetary transactions (e.g. barter or exchange) can have GST issues 38 Merit Partners Pty Limited 19

20 Governance & control Existence Asset register complete and accurate Valuations Depreciation Assumptions & evidence Assets materially affect the financial reports 39 Asset Management Plan Policies & Procedures Fixed Asset Register Portable & Attractive Items Register Asset Identification Stocktakes and condition inspections Update the Fixed Asset Register Budgets Accounting calculations, recording & reporting 40 Merit Partners Pty Limited 20