GASB 34: Implications For Asset Management

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GASB 34: IMPLICATIONS FOR ASSET MANAGEMENT

“Capital assets should be reported at historical cost.”

Paragraph 18, Statement No. 34, Governmental Accounting Standards Board

With these few words, the nature of asset accounting for most government organizations using fund accounting suddenly changed. Depreciation of assets becomes required. Greater disclosure is mandatory as early as June 2001. Any agency requiring audited statements, considering outside funding or expecting to do so, must implement a system capable of providing adequate controls to track, assess the condition and calculate the depreciation on assets. A formal means of control is no longer optional.

As with most such statements, GASB properly focused on the outcome – disclosure requirements and financial statement presentation – rather than the constitution of acceptable controls. Though an implementation guide was published by GASB in June of 2000, considerable latitude remains for those tasked with conforming to the new requirements. Many are not conversant in current systems for asset management and depreciation that are available and have been used in the private sector for years. Not only is research needed as to what systems are available, the time, effort and cost to implement these solutions must be determined and programs must be deployed all before the immutable deadlines contained in the Statement.

Our purpose is simple. The remainder of this paper will discuss the systems that are available for managing and depreciating assets, how they are implemented and the implications under GASB 34 compliance.

THE LANDSCAPE
The reality of asset management and financial accounting is that the two domains remain largely separate. Systems developed for accounting have specialized in the requirements of financial and tax reporting. Asset management systems automate the tracking, control and management of assets as required by those having custodial responsibilities for them. The underlying system architecture, database design, data collection methods and reporting of each focus on application specific requirements. Indeed, it is commonplace for organizations in the private sector to have separate systems operating in parallel. While the wisdom and necessity of this is debatable, the reality is not.

Fixed Asset Accounting
Fixed asset accounting systems are designed to provide information for book and tax reporting. Most feature a variety of depreciation methods with various useful lives, period accounting entries, various tax reports, and transaction activity.   Each asset purchased is added to the ledger and depreciated over its useful life. Asset definition (capitalization limit, aggregate purchases and intangibles) are defined based on organizational policy and are not restricted by the program.

Such systems can loosely be grouped into three segments. Low cost or budget systems will provide a simple approach, friendly interface and a basic collection of depreciation methods. All operate on a PC and are suitable for a few hundred assets sharing common ownership. Expect to pay under $1,500. Full function packages provide a wealth of asset definitions, depreciation techniques, capital lease support, reporting tools, network capabilities and data import/export. Available vender support is extensive and annual updates include changes in tax codes. These mid range systems operate in a PC, network and, usually, client server environments. Prices range from $1,500 and up, though most are less than $10,000. The final group is integrated products. Most integrated financial management systems and ERP systems include a fixed asset module. Because they are subsystems, their real advantage is that data is ported between applications with little, if any, user action.   However, they are only a choice if the whole system is implemented and cannot be considered on a standalone basis.

All levels of fixed asset accounting systems include a simple straight-line depreciation. In most cases, this method will be sufficient for GASB 34 compliance.

Asset Management
Asset management systems provide the means to identify and control assets in much greater detail than fixed asset accounting systems. Generally, all provide the means to individually identify assets, easily relocate or transfer them, assign them to employees or departments and issue various reports. Asset definitions (individual or grouped) are applied consistently and universally based on management’s information requirements. Often asset management databases are created based on a comprehensive inventory of the organization’s assets.

Asset management solutions, sometimes improperly called asset tracking applications, can also be grouped in three sets. Budget systems typically provide a user-friendly interface to a simple database with modest functional capabilities. Such systems provide some functional advantage over spreadsheet approaches, mostly in that the application is systematized. Little user definition is available and often only specific identification of assets is supported. Such systems are suitable only for a few hundred assets. The chief advantage is price as these systems can be purchased for under $2,000.

Complete asset management systems offer relational databases, extensive user definition, automated data collection (bar coding), export/import capabilities, management tools, comprehensive reporting and multi-company support. These systems operate in a full range of environments from single user to client server. In some cases, venders will supply complete turnkey implementation including asset identification, labeling and on site training. Expect to pay from $3,000 to $15,000 to implement excluding inventory services.

The highest priced systems are hybrids which are a part of a larger system. Some CAFM, IT tracking, equipment maintenance and warehouse systems provide asset management capabilities imbedded in the core application. The weakness, in addition to cost, is that the approach presumes the core application which may or may not be integral to the solution. Because of this dependency, functional gaps may exist within asset management.

IMPLEMENTATION HISTORY
Each organization has implemented asset controls differently. While all private sector organizations have some fixed asset accounting system, albeit as simple as a spreadsheet, only about 20% have a comprehensive asset management capability. Examining the history of each provides a useful insight.

Fixed Asset Ledgers
Every organization covered by the tax code must have some means to account for assets. Traditionally, the accounting department added assets to their ledgers as assets were purchased and depreciated them over their useful lives. As assets moved or were retired, written notice was sent to the accounting department and records were updated. As tax accounting became more complex and computers more available, these systems and the underlying methods were automated. Because accounting principles permit numerous approaches to capitalization, asset ledgers have a mixture of information and a wide variety of detail. The sheer volume growth in assets due to technology, modular furniture and merger/acquisition activity has forced accounting departments to capitalize groups rather than individual assets and/or raise capitalization limits significantly. Physical labeling of assets has become an anachronism for most accounting departments. While most internal control guides require a periodic inventory of fixed assets, few organizations actually conduct them because the asset ledgers do not contain enough information to reconcile.

Despite this, many other departments within the organization need detailed, current information about assets. For example, the IT department needs to know the make, model, serial number and location of each IT asset to properly support and plan the migrations of technology. The facilities area needs to know quantities of furniture, office equipment and artwork in a high level of detail in order to provide appropriate, aesthetic work locations to all employees. The extent of this information and the detail required eclipse both the knowledge and resources of the accounting department. Hence, the demand for asset management.

Asset Management Controls
Generally, asset management systems are installed to meet the unique needs of one area of the organization. Freed of the constraints of accounting principles, these systems identify assets in the way they are managed, not based on accounting expediency. Most rely on specific asset identification and labeling and use bar code identification to some extent. Managing assets is a far different activity than accounting for them and asset management naturally provides the means to do this easily. Generally, little, if any, financial capability is provided. Indeed, the chief weakness of asset management systems is that due to this ‘closed’ nature and department specific implementation, yet another island of automation may be created.

GASB 34 IMPLICATIONS
For most governments, the opportunities implicit in GASB 34 to implement a truly state of the art capability are exciting. Both internal controls and accounting techniques must change. Therein exists a unique opportunity to take advantage of available systems and create to best possible solution unencumbered by historical practice.

Asset Classes
The Statement groups all capital assets into infrastructure and non-infrastructure assets. All must be depreciated with the exception of a modified approach for qualifying infrastructure assets. GASB 34 defines capital assets as “land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period.” (Paragraph 19) Infrastructure assets, such as roads, sewer systems, dams and bridges, have unique and specific reporting requirements under the statement. While the cost or value of these assets will be material in most cases, their number will be comparatively small and historical records available. Non-infrastructure assets will not share these characteristics. The remainder of this discussion will focus on non-infrastructure assets.

Non-infrastructure assets
Non-infrastructure assets cover everything from buildings to computers; backhoes to copiers. Potentially, these assets represent a more burdensome management problem than infrastructure assets. There are several obvious differences:

·         They will be more numerous and of greater variety.

·         Because of small unit costs, they likely have been recorded as a group with no specific identification of assets.

·         Adequate historical information may not be available.

·         They will be moveable and, thus, more susceptible to misappropriation.

·         There may be significant inconsistencies in the application of historic practices.

Accounting practices may have limited the usefulness of historic records to comply with GASB 34. The typical practice of capitalizing based on aggregate cost (invoice amount) rather than item unit cost creates a data base where identical units may or may not be capitalized based solely upon the size of the purchase under which they were originally made! There is no common agreement on an acceptable capital limit. (For example, a survey of 14 state governments discloses capitalization limits from $0 to $50,000 for capital assets with no majority consensus within this range.) Couple this with gradual increases in the limit within each entity and it is obvious that historic records will yield only a casual relationship to the actual underlying asset base.

Moreover, the ability to audit these records has been compromised over time. Most governments have (or had) a policy of placing property tags on items as they are (were) purchased. However, many of these systems have broken down due to lack of maintenance, confusion over or inconsistent application of coverage and failure to properly identify audit trails. Others do not take advantage of current technology and are prohibitively expensive to operate.

The Clean Slate
Clearly, GASB 34 is a unique opportunity to cure these ills should they be present. Rather than carrying forward historical records, an accurate data base can be created and procedures established to maintain it in the future. To do so will require a disciplined approach and, in most cases, one or more of the following professionals may be required.

·         Accounting firm to design, review or evaluate process issues to assure compliance with the Statement.

·         Fixed asset accounting software firm to provide tools to implement depreciation schedules.

·         Asset management company to create an accurate data base and provide software to maintain it.

·         A valuation advisor may be needed to aid in establishing historic cost.

Even with the best professional advice, the ultimate responsibility falls to the agency to provide reasonable assurance that assets are safeguarded. To achieve this goal, requires a disciplined approach and a realistic timetable.

THE PROCESS
The following are several steps used in the private sector to create an accurate and manageable asset database.

1.       Define Requirements – The first step is to evaluate the condition of the existing records to determine their accuracy, level of detail and ability to be audited. Creating estimates of the type, quantity and general location of assets during this review will be valuable later in the process. Next, determine the information needs for accounting and management needs. It is useful to solicit input from users, custodial managers, systems personnel and the accounting department. Assistance of the outside auditors may be useful at this point.

2.       Determine Action Steps – Once requirements are understood, define the major project steps and the timetable for each. Typical steps may include:

·         Project scope definition

·         Review of commercially available products

·         Preparation of RFP

·         Solicitation of venders

·         Vender selection

·         Project initialization

·         Field inventory (if necessary)

·         Data base creation (or conversion)

·         System installation

·         System training

·         Procedures development

3.       Prepare RFP – The RFP must contain two crucial components. First, the project scope must be clearly defined for both products and services.   If an asset inventory is required, the scope must define locations, asset categories, asset counts and information requirements. Second, a clear description of the software functionality is needed. A summary of major capabilities is important, but avoid too much specific detail. Insufficient detail may result in critical capabilities being missed and too much will result in custom programming which probably is not necessary with the number of programs available today.

4.       Select venders – A wide choice of firms is available for various components (asset management and accounting software, inventory services, procedure development, bar code labels). However, a single firm may provide an integrated solution. Be certain that each vender has experience in the specific scope of work required. Check references for each.

5.       System implementation – Before any processing can begin, the database must be created. This will be the result of either a conversion of existing data or a comprehensive inventory. If an inventory is required, it likely will take several weeks or months to complete depending on the size of the database. Armed with the data, the software can be installed and staff trained on its use.

6.       Asset valuation – To comply with GASB 34, each asset must have an historical cost. Historical records may be adequate to assign this cost. Absent this, the inventory service or a valuation advisor may be needed to provide a formal estimate.

7.       Procedures development – As a final step, procedures need to be defined to assure that the database is maintained with continuing accuracy and asset audits are conducted as required.

CONCLUSION
Complying with the new reporting requirements of GASB 34 is a daunting challenge for virtually any agency.   For better or worse, it is a reporting change that rarely occurs. Properly approached, it can provide the impetus to introduce a new generation of management practices and the opportunity to cleanse historical records. Expedient compliance may further out-moded procedures and continue creating ledgers which cannot be audited.

Improvements, however, will come with a cost. Each authority must determine from their unique circumstances the magnitude of the issues and their threshold for cost to correct them.