The article published in the Spring 2014 edition of the FMI Journal was largely the full article on the IAEA PP+E Lifecycle Model. I have reproduced the article below but have also included a bit more detail where I have it. As well, be sure to take a read of the additional details on Attractive Assets and the Asset Verification Model.
- Overview and Introduction
- Overview PP+E Lifecycle Model
- Steps 1 to 2 Business Need, Budget Review and Approval
- Steps 3 to 8 Buying and Paying for the Asset
- Steps 9 to 10 the IPSAS Years
- Steps 11 to 12 Asset Management and Depreciation
- Step 13 Kicking and Improving Assets
- Steps 14 to 16 Can We Start Again, Please
- Governance, Systems and Audit
- Everyday Uses for a PP+E Framework
- An Audit of a Thousand Assets Starts with a Single Framework
Some sidebar information
Overview and Introduction
It is 10am; do you know where your assets are? Do you have attractive assets that tend to ‘grow-legs’? Do you have distinct capital and operating budgets and do you have even more distinct activities to acquire, manage and dispose of your assets? How about the accounting; are you comfortable with why and how your assets are depreciated? Would you like to make improvements to how you manage assets but the whole thing seems too big and involves too many people?
You are not alone in these challenges. In 2011, the International Atomic Energy Agency (IAEA or the Agency) adopted International Public Sector Accounting Standards (IPSAS). Like similar Canadian or international standards, IPSAS 17: Property, Plant and Equipment (PP+E), requires adherents to depreciate the cost of capital assets over their economic or useful life. Prior to adopting IPSAS, the IAEA used a modified cash basis of accounting. With IPSAS came capitalization and other accounting challenges. To manage this change, the IAEA formed an IPSAS implementation team that included the author as the PP+E specialist. The team developed and implemented the IAEA PP+E Asset Lifecycle Framework (PP+E Framework).
This framework considers the activities, actors and information flows during the life of an asset. For-profit companies constantly weigh the merits of holding versus liquidating assets to maximize shareholder value. In the public sector, this cash-flow discipline is not always present. As well, the organization may disperse the functions of the lifecycle (e.g. acquisition, use, and disposal) across multiple departments. Although focused on tangible assets, the framework can be adapted to intangible assets such as software or computer systems.
First, some context about the IAEA; it has two broad functions that both employ assets:
- Promoting the safe use of atomic energy, and
- Verifying that member states are compliant with their treaty obligations.
Nuclear facilities across the globe are the focus of the second function. There Agency inspectors install cameras, seals and other measuring equipment (all potential assets) in member state facilities. Both of the IAEA’s functions employ other assets such as laboratories and communication equipment. The Agency defines an asset as an individual item or pool of items having an economic life greater than one year and an individual value more than 3,000EUR (note 30 of the Agency’s 2012 financial statements).
Figure 1: 2012 & 2011 PP+E (IAEA’s 2012 financial statements, p. 10)
Overview PP+E Lifecycle Model
The lifecycle model follows an asset from its initial need to its eventual disposal. The model touches nearly all aspects of finance and four key functions of an organization’s Enterprise Resource Planning (ERP) system. The descriptions within the brackets are typical ERP activities that support the asset lifecycle:
- Budgeting: the planning, monitoring and resource allocation functions.
- Procure to Pay: from requisition to payment including the treasury management functions.
- Asset management: the receipt, installation, maintenance, tracking and disposal of assets.
- Accounting to Reporting: the proper accounting, record keeping and reporting (internal and external) of assets.
The four horizontal bands identify the main parties involved in the PP+E Framework. These are the
- Supplier of the goods or services for the tangible asset
- Corporate functions of the organization, for example the finance or procurement functions
- Program or business area requesting the asset; in some cases this may be the corporate function doing so
- Governance or executive functions.
For brevity and clarity, the original IAEA model has been reconfigured slightly. Generally, an asset will proceed in a sequential manner from left to right across the model.
Step 1 – Business Need and Step 2 – Budget Review and Approval
- Step 1, The need to acquire or re-invest in an asset.
- Step 2, Budgeting request and approval.
Steps 1 and 2 represent central resourcing and funding questions within an organization. The IAEA has both an operating and a capital budget. Given the specialized and technical nature of the Agency, the IAEA sometimes needs to consider whether to build or buy an asset. For Public Sector organizations, there is also a temptation to have ‘Year-End Madness’ at this step; buying frenzies to soak up end of year budget lapses.
By the completion of Step 2, an organization knows it needs to buy or acquire ‘something’ and it has the money or resources to do so.
Steps 3 – 8 Buying and Paying for the Asset
- Step 3, refinement of what needs to be built or purchased.
Whether buying pens or new jet fighters, most organizations have a procurement process represented in Steps 3 through to 8. The specifications of Step 2 are refined turning the business need into approved Step 3 requirements. Buy decisions continue to Step 4 while build decisions jump to Step 9.
- Step 4, communication of the intent to purchase
- Step 5, Vendors respond to the above request.
Typically after steps 3-5 a Purchase Order or Contract for goods/services is created. The successful vendor may require more (or less) organizational staff involvement than originally anticipated. This may change the expected Direct Attribute Costs of the asset (more on this in Step 9).
- Step 6, paying the vendor.
Step(s) 6 are Finance Department focused. We first encounter Step 6 if a pre-payment, deposit or retainer is required. The procure to pay functions of most organizations are mature and don’t warrant too much further discussion. Nevertheless, this is also the point where the finance department, audits and accounting standards primarily intersect with the lifecycle of a tangible asset.
- Step 7; the vendor provides the goods (or services).
Author’s note, while this may involve a capital lease from the vendor, for brevity, this is beyond the scope of the article.
- Step 8, the organization receives the asset (or services)
Under IPSAS, and with Step 8, the vendor transfers ownership of the asset to the organization. Previously, Steps 6 and 8 were the end of the IAEA accounting treatment using a modified cash basis – and thus begins the IPSAS years.
By volume, Steps 7 and 8 will be virtually simultaneous for most assets. Because of the unique and technical nature of some of the assets purchased by the IAEA, it was important to break out Step 8. For example, an asset may be shipped from one country to another without it ever actually passing through the hands of the Agency. The exact point when custody was transferred was sometimes an important consideration for larger value assets for the IAEA.
Steps 9 – 10 the IPSAS Years
While there are accounting implications with the previous activities, Step 9 was the big change for the IAEA, as it became IPSAS (17.30-36) compliant. Costs that are ‘directly attributable’ to the implementation of the asset need to be considered as part of the cost of the asset; examples provided by the standard include:
1. Purchase Price less discounts and rebates.
2. Duties, non-refundable taxes, other purchase price related fees or charges.
3. Estimated costs to dismantle, remove the item and restore the site (funding for these estimates are another matter).
4. Costs directly attributable to the acquisition of the asset, for example:
- Staff Costs: asset construction or acquisition employee benefit costs;
- Non-Staff Costs: site preparation, delivery, installation, testing and fees.
Collecting the above costs within the IAEA is an ongoing effort. To assess which costs contribute the most important information, the Agency uses the IAEA Materiality Framework. For more on this, please see FMI*IGF Spring/Summer 2013 edition, p.5.
Beyond simply being compliant with accounting standards, direct attribute costs provide invaluable management information for an organization. This information can ask (and hopefully answer):
- What is the staff doing and should we be doing that?
- Over time, are we getting better, worse or status quo at what we are doing?
- Who will do this after I am gone?
- How much does something REALLY cost (beyond the invoice price)?
But back to the PP+E Model and Step 9…
- Step 9 – Installation has two special mentions.
This step deals with the activities that result in ‘any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management’ (IPSAS 17.30(a)). For smaller assets, the receipt and installation steps may occur concurrently. For larger, more complex assets, or those which are components of a larger system, this phase may span days, months, or in exceptional cases, years (and thus be recorded via other means such as construction in progress). If you go back to the above excerpt from the Financial Statements (Figure 1), you can see how the Agency has improved the collection of this information since 2011.
The second special mention to be aware of is the tension between capital and operating budgets and Step 9. Resource strapped program managers may see the capitalization of assets as a way to preserve depleted operating budgets by moving costs to the balance sheet. The next year the same program manager with a looming budget lapse may want to expense instead of capitalize the same asset. Mature and thoughtful accounting policies, systems and controls can help to manage this tension (more on this in Governance).
Steps 11 – 12 Asset Management and Depreciation
- Step 11, Asset Recognition and Cost Adjustments
Step 11 is when the asset is recognized and entered into a Fixed Assets system. Other operational information is typically collected at this point:
- Asset Category (e.g. used to determine its useful life and depreciation rates)
- Vendor information (e.g. Make, Model, Serial Number)
- Asset Parent to Child relationships (e.g. to help with componentization or tracking)
- Custodian, asset location (e.g. Asset X is held by person Y in room Z).
The above information can be a gold mine in understanding how PP+E is used in the organization. While it takes time and effort to verify the information, the result can be a deeper understanding of the organization’s business processes. For more on this, see the Side Bar on Asset Verification and the Data Mining Quadrant.
- Step 12, Depreciation
For Step 12, the organization’s Fixed Asset system typically calculates Depreciation. Capturing the cost of depreciation and calculating the gains and losses on asset disposal (Step 14) are both central IPSAS requirements. Two years after adopting IPSAS, the Agency discovered that many of its assets were in use for much longer periods than originally estimated. As a result, in 2012, the Agency’s depreciation rates were adjusted accordingly.
Step 13, Kicking and Improving Assets
- Step 13, Kicking and Improving Assets
Step 13 examines both the verification and the need to impair assets. IPSAS is silent on how and when to verify an asset because the standard imposes strict requirements for impairment:
Adapted from IPSAS 21.14-Definitions; An Asset is impaired if ‘there is a material loss in the future economic benefits or service potential of an asset … beyond normal depreciation’.
Thus, a missing or unused asset is an impaired asset. Also part of Step 13 is the ongoing challenge of whether to capitalize or expense an asset upgrade. If capitalized, the upgrade costs follow the arrow from Step 13 back to Step 10 so the costs are recognized and the depreciation schedule adjusted accordingly. Non-capitalized work is simply expensed and not necessarily recorded against the asset.
The IAEA is like many organizations, the verification and inspection functions of Step 13 places considerable demands on its central asset management groups. To make this effort as efficient and effective as possible, an Asset Verification Framework is presented in a sidebar. On a related note on the challenges of asset verification, see the sidebar on how to define an Attractive Asset.
Steps 14 – 16 Can We Start Again, Please
- Step 14, De-recognition
Removing an asset from the registry is done through Step 14 – De-recognition – the negative doppelgänger to Step 11 – Recognition. The drive to de-recognize maybe influenced by:
- An organizational business need (Step 15)
- A vendor offering favourable trade-in terms (Step 15 or 16)
- The asset may be beyond repair and needing to be scrapped (Step 16).
One of the reasons I like IPSAS 17 is because it heavily focuses on the business need for assets. In accounting education, I think there is too much emphasis placed on the mechanics of managing assets and too little (or lip-service) given to WHY an organization has an asset.
- Step 15, Business Need
- Step 16, Asset Salvage and Trade-In
From Step 16, the asset exits the PP+E Framework and its replacement starts the cycle from the beginning. As discussed above in the IAEA context, fully depreciated assets that linger on the asset-register should raise a red flag for the organization. If still in use, was the depreciation rate reasonable? If not in use, are there opportunities to monetize these assets through disposal or re-purposing within the organization (or sister organizations). Thus, the PP+E Framework and a good Fixed Asset system can help to bring some of the private sector cash-flow discipline of asset management to the public sector.
Governance, Systems and Audit
- Step 0, Governance, System and Audit Functions
The framework rests on good organizational governance. This includes executive championship, systems to support the information, effective internal controls and trained individuals who support each step. The PP+E Framework provides a structure so organizational metrics can identify what is working well and what needs improvement.
5. Everyday Uses for a PP+E Framework
In 2011, the PP+E Framework allowed the Agency to see a distributed and technical set of activities from a lifecycle and holistic perspective. The framework and systems the Agency implemented provide the basis to not only meet its IPSAS reporting obligations but also provide useful operational information to review and improve how assets are used in the IAEA’s two core mandates. Beyond the IAEA, public-sector organizations can adapt the framework to manage their assets, the benefits of doing so include:
- Oversight and Governance: Because no one is responsible for all the steps of the lifecycle, the PP+E Framework allows the organization to see the various processes from a holistic perspective.
- Existing metrics can be used (e.g. time to ‘Procure to Pay) or new ones established (e.g. percentage of assets not used in the past 12 months).
- Silo-Reduction: One man’s output is another’s input; effective and efficient asset management relies on this maxim.
- For example, can the time to receive, tag and deploy assets be reduced by capturing better information on a purchase order?
- Training and New Staff: With a few exceptions, IAEA recruits Professional staff for a maximum of seven years. After this time, an individual must leave the Agency.
- Because of this rule, a portion of the Agency staff turns over each year.
- Even without a seven-year rule, most Canadian public sector organizations are facing a looming retirement bubble.
- The PP+E Framework can help to structure the asset related knowledge of your greying workforce before they leave.
- Documentation of Process: Like training, documentation works best when it is placed and managed in context.
- The PP+E Framework does this by organizing and sequencing process and procedure documentation.
- Once organized, the entity can focus on identifying and filling documentation gaps.
6. An Audit of a Thousand Assets Starts with a Single Framework
It is 10am and with the PP+E Framework you can know where your assets are! Before implementing the framework, here are some important lessons from the IAEA:
- Ensure you have good executive level support for using a lifecycle and holistic methodology
- Create your own PP+E Framework by seeking the input and buy-in of the individuals involved in the day-to-day assets management functions
- The framework will evolve as technology, people, assets and business imperatives change. Be flexible and proactive in managing these changes.
Sidebar: A List of Relevant IPSAS Standards
Information about IPSAS is available from the International Federation of Accountants (IFAC) website. While many of the standards are relevant, particular note is drawn to the following standards directly or influencing this document.
The following IPSAS standards directly influence this document:
- IPSAS 17 – Property, Plant and Equipment
- IPSAS 21 – Impairment of Non-Cash-Generating Assets
The following is a partial list of IPSAS standards influencing this document:
- IPSAS 01 – Presentation of Financial Statements
- IPSAS 04 – Effects of changes in Foreign Exchange Rates
- IPSAS 12 – Inventories
- IPSAS 24 – Presentation of Budget Information
- IPSAS 31 – Intangible Assets