module public asset pa
DESCRIPTION
asset managementTRANSCRIPT
Chapter One
An Overview of Public Asset
After successfully completing this chapter, you should be able to:
o Understand what public asset is
o Understand the what Public Inventory is
o Tell the constituents of public assets
o Describe the difference between fixed asset and stock
o Explain the difference between tangible and intangible assets
o Explain the importance of having organizational placement and policy in managing
public asset
o Describe major issues that should be considered in public asset management policy
an procedures
1.1. Definition of Public Asset
According to the Financial Accounting Standards Board Concepts Statement 6, assets are
probable future economic benefits obtained or controlled by a particular entity as a result of past
transactions or events. The Institute of Management Accountants’ Accounting Glossary adds a
second definition as any owned physical object (tangible) or right (intangible) having economic
value to its owners; an item or source of wealth with continuing benefits for future periods,
expressed, for accounting purposes, in terms of its cost, or other value, such as current
replacement cost.
In its broadest sense, an asset is anything that will probably bring future economic benefit. In
looking at assets, the focus will be on long- lived tangible assets, sometimes referred to as fixed
assets or property, plant, and equipment. The term ‘asset’ can be used to describe many different
types of assets; for example, road infrastructure, plant and machinery, equipment and property.
More specifically, “Public Asset” is a property functioning as a store of value over which
ownership rights are enforced by institutional units, individually or collectively, and from which
economic benefits may be derived by holding them or using them over a period of time.
“Tangible” assets may either be financial (e.g. cash or government securities) or physical (e.g.
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building, roads, national parks, and so on). Assets may also be “intangible such as copy right or
mineral exploitation rights and others”.
According to Federal Government of Ethiopian Accounting system manual 3, volume 1 chart of
accounts, the assets of the Ethiopian Government constitute cash and cash equivalents,
receivables, goods in transit, stocks, fixed assets (construction in progress, and property and
equipment), and investments.
The Public Procurement and Property Administration Proclamation No. 649/2009 of Ethiopia
define public property as all public properties other than public fund and land. Supplies and
materials include all public property other than fixed assets, which can be consumed within one
year. Supplies immediately not consumed shall form part of supply inventories and presence of
custodial responsibilities. Whereas, fixed assets are tangible assets that have a useful economic
life of more than one year. As it is stated in Federal government of Ethiopia stock management
manual (2010), stock (inventory) represents items that are purchased or produced or donated and
are not immediately consumed, which is temporally kept in a storehouse until needed for use.
1.2. Classification of Public Assets
Asset classification within the public asset registry is crucial to establishing a manageable public
asset portfolio. Such a portfolio would be a solid base for implementing the valuation methods
necessary for efficient utilization of public assets. Just as with private sector assets, all public
assets can be referred to simply as either tangible or intangible. All public assets need to be
accounted for in the central public asset registry, regardless of who has been in charge of them
and regardless of what the possibilities and ways to determine their real value may be. Taking
the stance that it is preferable for each country’s public asset database to include at least the most
important public assets, various asset classifications are possible. The variety of classifications
across countries exists because certain countries are in doubt what types of public assets to
include in their public asset portfolios and how to value them. Assets are classified into two
categories: tangible and intangible as discussed hereunder.
1.2.1.Tangible/Physical Assets
Tangible assets are assets that one can touch, hold, or feel. Typically called fixed assets in
accounting literature, tangible assets are the physical things that a business/government uses in
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the production of goods and services. They constitute the production facilities, buildings,
equipment, and vehicles and operational assets of a business/government that constitute
furniture, computers, and similar items not used up within a year.
Assets that are consumed during the normal operation are current. Current physical assets are
referred to as financial assets. These are physical assets such as raw materials, work-in-progress
inventories, finished goods, and goods held for resale. Physical items can be financial assets,
held in inventory, in one business/government, whereas in other businesses/governments or
applications they may be fixed assets. An example of such a financial asset would be real estate
held in inventory by a real estate investment and sales organization or builder, which would be a
fixed asset for everyone else. Equipment manufacturers have financial assets in finished goods or
inventory held for sale, as well as plant and equipment that will be sold to other
businesses/governments. The inventory is a financial asset; when sold for use in a production
line it becomes a fixed asset to the purchaser.
Fixed assets are physical or tangible assets in nature. They can be any items costing over a
certain dollar/birr amount, large or small, to an item that has a certain useful life. A public sector
organization's assets represent a substantial financial investment. They will be discussed in detail
in chapter three and four of this module.
The costs of acquiring, maintaining, insuring, and replacing these assets have a considerable
impact on the operations of the entity. Fixed assets are not always found in one place and, in fact,
are more commonly thought of as movable assets, property, or equipment. As movable assets,
they get transferred from place to place creating a management challenge. Assets also tend to be
used up or expended over time and their value declines to the point where they are no longer
thought of as assets and can be thought of as a burden on the organization. At the end of their
useful life, most assets are apt to have some scrap or salvage value depending on the asset and,
therefore, become an interesting challenge for the fixed assets manager.
1.2.2. Supplies and Inventories
The dictionary meaning of the inventory is stock of goods or a list of goods. In accounting
language, inventory means stock of finished goods. In a manufacturing point of view, inventory
includes, raw material, work in process, stores, etc.
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Inventories constitute the most significant part of current assets of the business concern. It is also
essential for smooth running of the business activities.
Inventories can be classified into five major categories.
i. Raw Material
It is basic and important part of inventories. These are goods which have not yet been committed
to production in a manufacturing business concern.
ii. Work-in-Progress
These include those materials which have been committed to production process but have not yet
been completed.
iii. Consumables
These are the materials which are needed to smooth running of the manufacturing process.
iv. Finished Goods
These are the final output of the production process of the business concern. It is ready for
consumers.
v. Spares
It is also a part of inventories, which includes small spares and parts.
It should be emphasized that the General Fund and all other funds classified as governmental
funds account for only current financial resources (cash, receivables, marketable securities, and,
if material, prepaid items and inventories). Economic resources, such as land, buildings, and
equipment utilized in fund operations, are not recorded by these funds because they are not
normally converted into cash. Similarly, governmental funds account for only those liabilities
incurred for normal operations that will be liquidated by use of fund assets.
If a government is large enough to have sizeable inventories of consumable supplies that are
used by a number of departments, it is generally recommended that the purchasing, warehousing,
and distribution functions be centralized and managed by an internal service fund.
In fund accounting perspective, Governments that account for their supplies within the General
Fund can use either the purchases method or the consumption method. Using the purchases
method, expenditures for supplies equals the total amount purchased for the year, even if the
amount of supplies consumed is less than or greater than the amount purchased.
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Thus, the purchases method is consistent with the modified accrual basis of accounting used by
the General Fund and other governmental funds. The purchases method is generally associated
with a periodic inventory system, so the balance of the Inventory of Supplies account is
increased or decreased as necessary at year-end to agree with the valuation based on a physical
count. In addition, a Reserve for Inventory of Supplies account, having a credit balance equal in
amount to the balance of the inventory account, is required to indicate that the inventory reported
on the balance sheet is not available for spending.
The consumption method is consistent with the accrual basis of accounting, as resources (i.e.,
supplies) consumed in providing services is the essence of an expense. Thus, GASB standards
require the use of the consumption method for government-wide and proprietary fund reporting.
Using this method, the General Fund recognizes expenditures equal to the amount of supplies
consumed during the year rather than the amount purchased. Accordingly, budgetary
appropriations for supplies are based on estimated consumption rather than estimated purchases.
When using the consumption method, reporting of a reservation of fund balance is optional,
though recommended.
Inventory items, such as materials and supplies, may be considered expenditures when purchased
(referred to as the purchase method) or when used (referred to as the consumption method).
However, when a government has significant amounts of inventory, it should be reported on the
balance sheet.
Inventories are most often associated with manufacturing and retail operations, rather than not-
for-profit organizations. Many not-for-profit organizations do maintain inventories, however. In
other words, supplies that are expected to be used by the not-for-profit organization in its
operations should not be reported as inventories.
In general, an inventory is classified under a current in generally accepted accounting principle.
A current asset is one that will be converted to cash or used in the business within one year.
Examples include cash, short-term investments, contributions and other receivables, inventories,
and prepaid expenses. Current assets would not include those assets restricted for use in the
operation of the organization, meaning that many assets that carry donor restrictions would not
be considered current assets. All assets that are not current are considered noncurrent assets.
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Assets held in inventory are generally required to ensure production or service delivery can
continue as planned without interruption. Like any asset, decisions need to be made whether they
should be held, and how much to hold, and they need to be efficiently managed. Often the level
of effort dedicated to inventory management will depend on the level of inventory investment.
One of the key challenges in inventory management is to hold the minimum level of stock, tying
up minimum cash resources, while ensuring delivery continues uninterrupted.
Managing inventory assets can be seen from two perspectives:
• optimal planning in terms of levels of inventory required to be held, timing of
acquisition, and order sizes; and
• Physical and process control over inventory to ensure efficient handling and
prevention of losses (includes proper record keeping of transactions and stock on
hand).
Inventory management records, procedures and systems (whether manual or computerized) may
vary significantly from one entity to the next depending on the size and nature of the entity.
1.2.2.1. Objectives of Inventory Management
Inventory occupies 30–80% of the total current assets of the business concern. It is also very
essential part not only in the field of Financial Management but also it is closely associated with
production management. Hence, in any working capital decision regarding the inventories, it will
affect both financial and production function of the concern. Hence, efficient management of
inventories is an essential part of any kind of manufacturing process concern.
The major objectives of the inventory management are as follows:
• To efficient and smooth production process;
• To maintain optimum inventory to maximize the profitability;
• To meet the seasonal demand of the products;
• To avoid price increase in future;
• To ensure the level and site of inventories required;
• To plan when to purchase and where to purchase;
• To avoid both over stock and under stock of inventory.
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1.3. Asset Management Organization and Policies
1.3.1. Organizational Placement for Public Asset Management
There is a need of standard organizational placement for the asset management function in the
public sector. To understand the enormity of the task, one must gain insight to the organizing
function. Increasing specialization of activities, projects, and skills demand that managers look to
elements within their control for gaining coordination by designing, mapping out, and
deliberately planning the duties and relationships of people in the organization. In summary, the
organizing function seeks:
• To establish efficient and logical patterns of interrelationships among members of the
organization.
• To secure advantages of specialization whereby the optimum utilization of talents can be
realized.
• To coordinate activities of the component parts in order to facilitate the realization of the
goals of the organization.
In some organizations, the assets manager is responsible for the inventory and tracking of assets,
as well as, the assets accounting functions.
Regardless of the organizational placement of the asset management function, there should be an
organization chart that accurately shows the lines of authority, responsibility, and accountability
for the function. The primary purposes to chart the organization structure are to show the
hierarchical way functions and individuals have been grouped together, including the authority
and responsibility lines that connect them. Organizational charts, to be useful, must show "what
is" as opposed to "what should be."
1.3.2. Public Asset Management Policies
It is recommended that a suite of policies covering overall asset management function be
developed to facilitate internal control of the entire asset management function. The asset
management policy should cover the asset life-cycle, management processes, and procedures.
The asset management policy should cover the following (but not limited to the points indicated
below):
• Authority, purpose and scope;
• Asset definition; ``
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• Asset categories (classes);
• Single asset versus component approach (segmentation);
• Asset valuation (cost, contributed or donated assets, grants or donations, so on);
• Capitalization policies (buildings i.e. more than one building on a land parcel or one
building on several land parcels), library books;
• Capitalization thresholds;
• Capitalization of subsequent costs;
• Enhancements (rehabilitation) versus maintenance;
• Depreciation methodology and rates;
• Reviews of estimated useful life and write-down for impairment;
• Capital leases (finance leases);
• Asset registers (content, maintenance of the register-updating, physical verification,
register content (periodic));
• Control (asset base, maintaining records and documentation);
• Construction work-in-progress (when to start capitalizing, and when to stop capitalizing
and start depreciating);
• Surplus assets;
• Asset disposal (sale, abandonment, demolition, trade-in); risk management, health and
safety issues and environmental issues.
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Chapter Two
Public Stock Management
After successfully completing this chapter, you should be able to:
o Understand the concept of inventory management
o Understand store functions and activities
o Describe the need for inventory management policies and procedures
o Explain the significance of inventory management
o Appreciate how to classify and code inventory
o Explain the objective of classifying and coding inventory
o Identify the procedures of coding inventory
o State inventory holding and ordering costs and their effects
o Describe the reasons for holding inventory
o Explain economic order quantity, lead time and safety stock
o Explain techniques necessary for inventory management
o Explain the benefit of stock taking
o Describe the need for stock recording and accounting
o Explain the significance of reporting stock on hand at year end
o Tell the benefit of inventory management performance evaluation
1.1. Overview of Inventories and Supplies
A private sector entity is interested in inventory management to ensure the most efficient
investment of resources in the pursuit of profit maximization and therefore return on investment,
whereas in a public sector the objective differs from profit or wealth maximization. The
importance of inventory management in the public sector is based on the need to:
• Demonstrate accountability for public resources;
• Improve transparency and credibility of information used for making policy
choices; and
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• Improve efficiency.
A public sector entity is looking to maximize return on investment to deliver more services or a
higher level of service to the community and other stakeholders. Where services are paid for by
taxes, tariffs or service charges, the question of accountability for public funds arises.
Inventories are assets:
a. In the form of materials or supplies to be consumed in the production process,
b. In the form of materials or supplies to be consumed or distributed in the rendering
of services,
c. Held for sale or distribution in the ordinary course of operations, or
d. In the process of production for sale or distribution.
Inventories generally include:
• Materials and supplies awaiting use in the production process or provision of a
service;
• Work in progress (in terms of materials and supplies currently in use in the
production process or provision of the service where the production process or
service provision is not yet complete);
• Finished goods not yet sold or otherwise distributed;
• Goods purchased and held for resale; and
• Goods purchased for distribution at no charge or nominal charge.
Assets classified as inventory are current assets which are often held in a warehouse or
stockroom and issued to jobs or projects or otherwise utilized as required. Examples might
include such items as spare parts for specialized machinery held a warehouse.
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Public sectors must progressively improve planning and budgeting for inventory. This must
include the following for all inventory operations:
• An assessment of cash flow implications of holding inventory;
• A review of items required to be held as inventory;
• An efficiency review of inventory operations;
• Detailed operational plans or material requirement plans which indicate
requirements for holding inventory;
• A review of inventory management policies and procedures.
1.2. Inventory Management Techniques
Public organizations must progressively review inventory management techniques to minimize
holding cost while ensuring uninterrupted service. This may be done in conjunction with
reviewing policies and procedures. The management techniques considered must include:
• ABC inventory control to classify items for differential management;
• Just-in-time inventory control;
• Stock take;
• Physical protection from theft, damage, and abuse;
• Warehouse and stockroom organization;
• Competencies and training of staff;
• Determining quantities to be held, order size and order frequency – economic
order quantity model;
Quantity discount model; and
Reorder point model.
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Financial management and related governance reforms being introduced in the public sector are
seeking to improve service delivery to all through securing sound and sustainable management
of the financial affairs of government. That is, improved financial management will lead to:
• Improved information for making policy choices (allocation of resources to programs);
• More efficient use of resources in delivering the chosen programs;
• Increasing the rate of delivery of basic services and associated elimination of backlogs.
This is achieved primarily through:
• Enhancing transparency and credibility of information contained in budgets, in-year reports
and end of year reports such as the annual financial statements and annual reports; and
• Improving financial management and internal controls.
Transparency and credibility supports the concept of accountability such that information with
these attributes can be more reliably used to hold government accountable for delivering on
promised service delivery within approved budgets. It is critical to note the increased focus on
measuring outputs and outcomes and not just what was spent and what was received.
Improved inventory management in the public sector in terms of financial management and
internal controls can, for example, lead to:
• Increases in investment revenue or freeing up of resources to be used elsewhere
due to reductions in stock held in inventory; and
• A reduction in losses due to theft, wastage, damage, spoilage or misuse.
Reductions in losses or otherwise freeing up resources to be utilized in other areas may lead to
increasing the rate of delivery of basic services and associated elimination of backlogs.
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1.3. Accounting for Inventories and Supplies
Manual III, of the EFG accounting system, volume III, accounting for other assets and liabilities
specify whenever the value of stock cannot be determined; the value of the good is estimated
based on the identical or similar good value at the time of acquiring the good.8 This manual
also required to report the value of ending stock to the accounts unit.
Adequate store accounts are necessary for a variety of reasons, of which the following are the
most important to:
a) Indicate the value of goods in stock.
b) Provide a basis for material costing.
c) Provide the means of operating stock control by value.
Material costing is done at the receipt of materials, issue of materials and the stocks held at the
end of the fiscal year.
According to the Financial Accounting Standard Board, the primary basis of accounting for
inventories is cost. This cost is the sum of expenditures incurred to bring an item to its existing
condition and location according to Financial Accounting Standards Board issued FASB
Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.
The factors that are to be included in the cost of materials received are material price, freight
charges insurance and taxes. Price usually refers to the price quoted and accepted in the purchase
order prices may be often stated in various ways, such as net prices, price with discount terms,
free on boards, cost insurance and freight.
For costing purposes we have to work out the actual cost incurred by taking price quoted by the
supplier as the basis, subtracting the discounts and adding freight, insurance duties taxed and
package charges.
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Stock accounting is important in terms of:
o The valuation of the cost of materials consumed by production and other
departments.
o Estimation of the value of materials held in stock.
1.3.1. Procedures and records for Stock Accounting
The main records involved in stock accounting are:
a) stock record for individual item
b) stock control account for classification of items
c) main stock account for the total stock
Stock record for individual item shows the quantity, unit price, value of each transaction and
total value of the balance on hand. Receipts are treated as debit entries and issues as credits, and
the value of stock on hand is, therefore, debit balance. Stock increases as a result of goods
received and goods returns to store. Stock decreases as a result of issue. The store clerk should
obtain a source document before the recording the increase (debit) and the decrease (credit) of
each transaction.
For stock control accounts, the stock records should be kept in classification order in accordance
with the coding system, i.e., from 4400 to 4499 and for each classification there should be a
control account like for food one control account, for office supplies another control account and
so on.
Receipts documents are summarized at interval, say weekly or monthly and one total posting is
made to each control account. Similarly, issues are aggregated each week or month and posted to
each control account.
The main stock account shows for the whole public body the total value of receipts, the total
value of issues and the value of the balance of stock on hand. In the same way the stock controls
account-controls the stock records, the main stock account-controls the stock control accounts.
Its balance should, therefore, equal the sum of the balance of the stock control accounts.
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Periodical check, preferably monthly should be made to verify that there is no discrepancy.
1.4. Warehouse/Store Function
The primary objective of store is providing service to operating functions and controlling
materials. The services provided by store may include the following.
• Making available and balancing the flow of materials;
• Receiving and issuing materials;
• Accepting and storing scrap;
• Accounting for all receipts, issues and keeping goods in stock.
The store functions are usually associated with Inspection, Receiving, Storage and Preservation.
Inspecting is uploading and checking for quality, quantity and delivery as per specification of the
purchaser. Here the question is who should inspect? Is that team or from technical staff or
storekeeper, and how to inspect? No inspection if the purchaser has confidence of supplier but
when the inspection is required, each and every item (time, cost) delivered should be inspected
and cross checked against the sample. After inspection duty is completed, items are received and
stored in their proper location. Receiving is the process of accepting from all sources materials
and equipment used by the organization. The receiving procedures of the items may be checking
the shipment against freight bill and material against the packing slip and against the purchase
order (correct items and quantity); checking the general condition of the material. Subsequently,
the receiving report will be prepared. Then after, the materials need to be properly stored and
preserved.
When the required materials are requested by user(s), through proper authorization of issue
(including names and signature, forms-stores requisition) they are issued and dispatched. Issue
and dispatch is the process of receiving approved request, selecting the items required, and hand
over them to user(s).
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Stock records and recording systems are necessary for accurate recording of stock movements.
The purpose is to:
• Indicate the amount/balance of stock without counting;
• Link the physical stock with the stores account;
• Provide a means of provisioning;
• Supply information for stocktaking or inspector.
Both Bin Card and Store Ledger Card in addition to other records may be used in stock
recording system. Bin card shows the level of stock of an item at a particular stores location and
kept with the actual stock, and updates by the storekeeper; whereas store ledger shows the value
of stock.
Store accounting is the process of recording stock movements and balances in value. Its purpose
is to value the materials consumed and materials held in stock, and costing of issue may be
FIFO, LIFO, WA, standard cost method. However, FIFO method is preferable in public
organizations.
The store functions may also focus on minimizing obsolescence, scrap, surplus through proper
codification and preservation; and highlighting stock accumulation, discrepancies, abnormal
consumption and efficient control.
Its objective of identification of materials is to develop unambiguous identification system, with
adequate item description, that facilitates clear communication among users. Materials are coded
through symbolic system, either numerical or alpha-numeric or physical identification (stores
location). The method of coding is by the nature of the item bought (parts, tools, machinery and
so on), and end use electrical, mechanical plumbing. Coding materials/items is useful for/to:
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• Avoidance of long description,
• Accurate identification,
• Prevent duplication of items,
• Provide efficient purchasing,
• Simplifying mechanical recording.
Stocktaking /Stock Verification
It is the process of physically counting, measuring or weighing the entire range of items in the
stores. Its purpose is to:
o reconcile the stock records and documents for the accuracy and usefulness
o identify areas which require more disciplined document control
o back up the stock figures and minimize pilferage and fraudulent practice ,and to
know the condition of goods
Stocktaking could be taken through periodically (at the end of the year), or continuous
verification is done throughout the year), or low point inventory (when the stock reaches to
lowest level, irregular time) system.
Inventory/stock is idle goods in stores waiting to be used. Inventory classification or types or
forms of inventory depend on the organization (raw materials, in process inventories, finished
goods and MRO (maintenance, repair and operating supplies). The purpose of maintaining
inventory in stock may be to meet variation in product demand or protect suppliers’ error and
shortages and take advantage of economic purchase.
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Inventory Costs
One thing that needs to be considered in handling inventory within store is inventory costs. They
include purchase price of the item, carrying/holding/costs (storage facilities, handling,
insurance, breakage, obsolescence, deterioration, and opportunity cost of capital), and ordering
costs-managerial and clerical cost to prepare the purchase order.
Layout of Stores
Layout of stores also matters for proper handling of materials. Even if it is based on the
requirements of an entity, the following issues should be considered:
• Construction- single store is usually preferable due to construction cost;
• Ventilation: allow easy circulation of air;
• Doors-wide and high enough;
• Structures- able to carry cranes, minimum height for receipt & dispatch docks;
• Lighting- natural light;
• Efficient space utilization and flexibility of arrangements.
In relation to organization of stores, many sections may exist depending on the size and number
and quantity of items held. It is highly related with purchasing, and stock control. If integrated
under one department/section, it is good for better accountability, and control, and have
relationship with other departments.
Safety and Security for Store Function
Store function should consider safety measures that enable to prevent danger that may face store
men/women during carrying out store functions. So, in order to curtail risks that may face, some
of the issues that should be considered are as follows:
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o Safety appliance such as goggles, gloves;
o Good housekeeping- gangway are clean, wide and so on;
o Safety signs;
o Equipments for use in accident like first aid kit, gas mask, high volume shower;
o Custody of key - keys must be registered and numbered, off-duty to be kept in a locked
key safe;
o Access to premises;
o Fire precautions - smoking is prohibited, fire prevention equipment, fire drill, fire
fighting training, calling fire brigade, inflammable stores to be isolated;
o Minimum number of doors.
Stocking Positions and Heights
As it is already mentioned, stock should be arranged to use the oldest first ("first in first out"
principle) and to prevent obsolete stock from accumulating; containers should be arranged to
minimize handling problems and thus avoid mechanical damage giving rise to leaks; and floor
spaces should be neat, with marked, may be 1-m wide gangways between shelves or stacks.
1.5. Inventorying and Reporting Non-Fixed Assets
Stock take is the process of counting physical stock present in the warehouse or other locations,
comparing it to the manual or computer records and making adjustments where necessary. It
verifies inventory records supporting the value in the financial accounts; reduces the possibility
of theft and fraud; and reveals any weaknesses in inventory management.
Stock take could involve staff working from shelf location to shelf location in a systematic
manner and physically counting each item. Technology could be used in various ways. A
barcode scanner could be used to identify the location and stock item and each item is still
physically counted. A RFID reader could be used to actually count the stock present with one
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pass of the reader over the general area. This would require the RFID tag to be mounted in such a
way that it could not be removed and its presence actually truly indicates that the stock is
present. Moreover, a variety of stock taking methods could be employed depending on the
nature of the item and how it has been classified for inventory management purposes.
Stock take is a check to ensure accuracy of inventory management and can highlight a number of
issues including:
• inaccuracies in the inventory management software being used;
• errors made by warehouse staff and need for training;
• theft and need for tighter controls; and
• changes required in procedures.
It should be seen as an opportunity to continuously improve the accuracy and efficiency of the
warehouse operation.
Periodic stock take
Periodic stock take refers to performing the stock take on a periodic basis, for example, annually,
semi annually or quarterly. In many cases stock take is only done annually near the end of the
financial year to satisfy audit requirements. Best practice in inventory management suggests that
some items may need to be physically verified more often.
Continuous stock take
At the other end of the scale from a single annual stock take is the continuous stock take. In a
system where the entire warehouse is subject to a continuous stock take, once all items in the
warehouse have been counted, the stock take process begins again from the beginning. Fuel is an
example of an item which requires very frequent confirmation of actual physical stock because
of its physical nature: tendency to evaporate, contract and expand; and potential issues with
measurement and delivery systems.
Hybrid stock take
Different items may require closer management attention in the form of more frequent stock
takes. Remember the example of critical, short life, drugs requiring refrigeration in the hospital
pharmacy. These may be identified as requiring a continuous stocktake. Perhaps the stock levels
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are small and it is decided that stock levels, expiry dates and storage equipment operation should
be verified each day. It may be decided that certain non-controlled drugs can be subject to a
monthly cycle count where at the beginning of each month a count is started and is completed
within a few days. And there may be other items which only require verification once or twice a
year.
Hybrid stock takes are recommended for all warehouse environments. The inventory controller
should determine a stock take plan which groups items based on their stock take frequency
requirements. Taking into account resources available (usually staff and technology), the plan
will provide a schedule for stock take for the entire warehouse. Coupled with this should be a
focus on continuously improving inventory accuracy with a view to optimizing efficiency and
effectiveness in inventory management.
Manual III of the Ethiopian Federal Government accounting system volume III, accounting for
other assets and liabilities set that at the end of the fiscal year, the ending balance of the stock
items should be reported to the finance and account unit in terms of value (EFG House of
Peoples Representative, The Ethiopian Government Procurement and Property Administration
Proclamation No. 649/2009).
The store clerk should report totals of values of stock on hand at the end of each accounting
period, by each categories of classification using the account code of 4400 - 4499 for the account
unit. The stock clerk should produce the following report from the control account for each
major classification of stock. The balance indicates the value of stock held at the end of the
budget year.
The account unit of each public body uses this report to pass entry of the opening and ending
stock balance as given in the Manual III of federal government of Ethiopia accounting system.
In case, there are fixed assets in the store house at the end of the accounting period, the value of
the assets should be reported to the accounts unit of the public body using the Fixed Asset Report
Part I of government owned fixed asset management manual. Note that; new fixed assets that are
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not put into use will not have depreciation value.
The stock clerks are also expected to produce periodic report, preferably at each quarter,
indicating the movement of each stock. This report will serve management to take action on dead
and slow moving items as well as provisioning.
Stock management Performance Evaluation
Performance evaluation can be seen from two perspectives, evaluation of the performance of the
inventory operations and secondly, evaluation of suppliers. As part of the annual review of
inventory management policies, the performance of each warehouse, stockroom or other
inventory operation must be reviewed. The internal audit function is ideally placed to conduct an
independent review. Performance should be measured in terms of at least the following:
o Efficiencies achieved in reducing total annual inventory costs;
o Obsolete, damaged and spoiled items or otherwise no longer required to be held in
store;
o Stock outs during the year, especially whereservice has been disrupted;
o Direct and indirect administrative overheads applicable to the store;
o Stock take discrepancies;
o Breaches of restricted areas;
o Lossesincurred and efforts torecover losses;
o Safety breaches;
o Accuracy and timeliness in recording and filing documentation fororders, receipts,
issues, returns and disposals;
o Correct operation of computerized systems;
o Accuracy and timeliness of inventory management reports;
o Compliance with procedures; and
o Retraining and/ or removal of staff due to procedural breaches.
At the same time, supplier performance must also be reviewed in terms of at least the following:
o Timeliness - lead time achieved versus stated lead time in contracts; and
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o Accuracy - quantity and quality delivered matching quantity and quality ordered.
A strong focuson this area can lead to significant improvements in efficiencies in inventory
management. It is widely recognized that supplier agreements should specifically state the level
of timeliness and accuracy which must be sustained in order for the contractual relationship to
continue. Some entities state that they will only accept a delivery that matches the order exactly.
That is, they will refuse a part delivery. This may not be practical in every case but is worth
considering as it simplifies the tasks of tracking receipts into store and paying accounts.
Chapter Three
Public Fixed Asset
After successfully completing this chapter, you should be able to:
o Understand what public fixed asset is
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o Tell the components of public fixed asset
o State what should be considered as a part of the cost of public fixed asset
o Tell the Life Cycle of public Fixed Assets
o Tell why the valuation of public fixed assets is important
o Tell how the accounting of public fixed assets can be carried out
o Explain what fixed asset depreciation methods are and which of them are preferable
for public fixed assets and why
Governments are accountable for providing quality public services to their citizens’ at the most
favorable terms. They are, among other issues, responsible for managing a diversified public
asset portfolio. Since the 1980s, many developed and developing countries have been embarking
on public sector management reforms. The main reasons for commencing public sector reforms
were public sector inefficiency and ineffectiveness. Governments have been constantly under
pressure to improve public services quality while containing costs and enhancing public
accountability at the same time. Overall, those reforms, widely recognized under the concepts
New Public Management (NPM) and New Public Financial Management (NPFM), were directed
at improving efficiency, effectiveness and accountability in the public sector. Encouraging
efficient public sector management has become one of the prevailing issues in international
literature and public sector practice.
The public sector financial management reform implications refer to encouraging efficient
control over public resources and expenses and to strengthening the level of accountability for
managing public resources proactively.
The government financial management system should not only be stringent to financial assets
alone but also has to be equally strict to non-financial or fixed assets as fixed assets are
investments and consume considerable financial resources during the acquisition of these assets.
Fixed asset management means the safeguarding of the government's interest in property in an
efficient and economical manner consistent with the best business practices. It will be discussed
in the subsequent chapter in detail.
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1.1. Definition of Fixed Asset
The method of acquisition is not a determining factor in classifying an item as a fixed asset.
Items acquired by any means, including regular purchase, lease/purchase, donation, annexation,
trade or barter, transfer from another department annexation, construction by public sector
workforce, construction by outside contractor, or addition to an existing asset that are long-lived
have to be subject to the capital asset policy. These assets are mostly used in the day to day
operation of the government.
To define fixed assets one must look at a number of definitions and combine the definitions to
form one meaningful definition that will apply to the particular circumstances of the public
sector. The Merriam-Webster Dictionary defines property as something owned or possessed, a
piece of real estate; the exclusive right to possess, enjoy, and dispose of a thing; something to
which a person or business has a legal title. Personal property is defined as property other than
real property consisting of things temporary or movable. The dictionary further defines
equipment as the implements used in the operation or activity; all the fixed assets other than land
and buildings of a business enterprise.
Fixed assets, from the definitions above, can be thought of as something owned or possessed,
something to which the public organization has legal title is other than real property consisting of
things temporary or movable, and all the property other than land and buildings of a public
organization. It is those assets that are movable or used temporarily that lend themselves to being
managed. Examples of fixed assets include computers, furniture, printers, vehicles, boats,
motors, analyzers, microscopes, medical equipment, education equipment, athletic equipment,
roadway equipment, etc. Expendable supplies that are expended upon use, such as, pens,
pencils, nuts, bolts, pipe, oil, gas, and valves are not fixed assets.
Fixed assets are tangible in nature and have a useful life longer than one year. They are classified
as land, improvements other than buildings, buildings, operating plants, equipment, vehicles, and
construction in progress. Fixed assets can be both movable and immovable. Items of
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insignificant value, while they may meet the above criteria, are normally expensed instead of
being considered fixed assets.
There are three major characteristics of fixed assets. These characteristics are:
• They are acquired for use in operations and not for resale. Only assets used in normal
business operations should be classified as fixed assets.
• They are long-term in nature. Fixed assets yield services over a number of years.
• They possess physical substance. Fixed assets are characterized by physical existence or
substance and thus are differentiated from intangible assets, such as patents and goodwill.
Capital assets are all assets with a life cycle of greater than one year and above the capitalization
threshold (where applicable). For example, this would include property, plant and equipment
(infrastructure network, furniture, motor vehicles, computer equipment, etc.), intangible assets,
and investment property. Fixed Assets are Physical resources that are owned and used by a
business and permanent or have a long life. They are owned and used by the business and are not
offered for sale as part of normal operations. The descriptive little for these assets includes:
equipments, furniture, tools, machinery, buildings, land, and stand by equipment for use in the
event of breakdown of regular equipment or during peak period is also included in fixed Assets.
The Procurement and Property Administration Proclamation of the Federal Democratic Republic
of Ethiopia (Proc. 649/2009) also defines public fixed asset as:
“Fixed asset means a tangible asset a value of which is determined by the directive to be
issued by the Minister, that is in operational use and that has a useful economic life of
more than one year, such as furniture, computers, heavy equipments, vehicles, ships and
aircraft, buildings, roads, sewers, bridges, irrigation systems, dam and the like.”
The value determined by the Minister (MoFED) indicates that the asset has to be a fixed asset
if:
i. Its useful economic life exceeds one year; and
ii. Its value equals or exceeds Birr 1,000.
The above two criteria should be satisfied at the same time to consider the asset as a fixed
asset in Ethiopia.
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But those assets that worth less than Birr 1000 but have a useful life of more than a year such
as paper punchers, staplers, pocket calculators, paper try, chairs, and so on are not considered
under the definition of fixed asset; however require due attention even if they are not fall
under the definition.
These assets definitely serve for more than a year but have a value of less than Birr 1000. If
such assets are not considered as fixed assets and are not controlled like the other fixed assets,
there could be misuse of the asset. For example, a stapler could be considered a stationery
item and a new one could be requested whenever stationery is requested. To avoid such
misunderstandings and to make the control over assets of permanent nature complete, an
internal control system with the necessary records need to be designed.
In general, fixed assets of the Ethiopian government are physical assets that have a useful
economic life of one year or more and have a monetary value of Birr 1000.00 and more that
are owned by the government and its public bodies. As per Proc. No. 57 /1997 and 649/2009,
and Fixed Asset Management Manual (MOFED, 2007), the assets are as follows:
• Furnishings and Fixtures- Exterior and Interior Fixtures of Buildings, Furniture,
Carpets and Rapes, Fixtures and Photo Frames, Filing Cabinets, Shelves and so on;
• Vehicles and Vehicular Transport – Motor Vehicles, Motor Cycles, Bicycles, Trailers,
Cars and so on;
• Ships and Aircrafts;
• Residential or Non-Residential Buildings – purchase or construction of houses in the
country or abroad of Administrative Offices, Warehouses, Museums, Monuments,
Dormitories, Personal residences, Camps and so on which are in domestic or abroad;
• Dams;
• Infrastructure–Roads, Bridges, Airfields, Canals, Irrigation Systems, Sewerage
Systems, Parks, Sport Fields and so on;
• Office Equipments–Computers, Typewriters, Photocopiers, Calculators, Fax Machines,
Scanners, Tape Recorders Television, refrigerators, Heaters, Telephone Apparatus,
Chairs, Tables and so on;
• Live Stock and Transport Animals–Live Stock for breeding and research purpose and
Transport Animals for government purpose;
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• Military Equipments–Military Air Crafts and Boats, Artillery, Tanks, Trucks and so on;
• Books– reference books in hands of users excluding those for resale;
• Plant and Machinery–generators, heavy construction equipments, survey equipments,
medical equipments, education equipments and so on.
1.2. Fixed Asset Life Cycle
Fixed assets have a useful life, which is also referred to as lifecycle. The asset lifecycle is a key
concept underpinning asset management. An asset lifecycle covers all phases of an asset’s life
starting with planning, through its acquisition, operation, maintenance and eventual disposal.
Management of these phases should be aligned to the public agency’s planning, budgeting,
monitoring and reporting processes. In summary, the phases are as follows:
a. The planning phase deals with the planning for service delivery that drives the need for
assets. Various acquisition options should be considered during this phase.
b. The acquisition phase deals with the purchase, construction or manufacture of new assets.
c. The operation and maintenance phase deals with the operation of the assets,
maintenance/refurbishment, enhancement/rehabilitation, depreciation and impairment. This
phase includes activities of a capital and current nature.
d. The disposal phase deals with the timing of and disposal of the assets including the disposal
costs and specific requirements for the assets, e.g. dismantling costs, medical equipment
legal requirements, etc.
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Figure 3.1: Fixed Asset Lifecycle
The above diagram illustrates the interaction and constant updating of the life-cycle information
throughout the life of an asset.
An asset’s life-cycle is determined by its useful life to the organization. This useful life is often
shorter than its economic life. For example, an organization may decide (as part of its asset
management policy) to dispose of traffic police cars after five years because they have become
too costly to maintain through extensive usage. However, such cars may continue to operate in
another environment for many years.
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Planning
AcquisitionDisposal
Operation & Maintenanc
1.2.1. Asset Life-Cycle Costs
A clear understanding of asset life-cycle costs is crucial for the development of cost-effective
asset management plans and options. Knowledge of these asset life-cycle costs is also a
legislative requirement. The analysis of life-cycle costs should cover the four broad phases, thus
covering the entire life of the asset, including any environmental rehabilitation at the end of its
life.
This analysis will be based upon estimates and include all cash flows such as operation,
maintenance, administration, capital, and financing costs. The budget should have a split
between capital and operational costs including depreciation. These are typical asset life-cycle
costs:
Planning-phase costs - concept design costs, scientific studies, environmental impact studies
and feasibility studies. These costs are usually incurred when weighing up the different options,
before deciding on the best option, and are excluded from the cost of an asset.
Acquisition-phase costs and benefits - special levies, purchase price/construction costs (labor,
materials, and components), detailed design costs (not feasibility analysis), transportation costs,
installation and commissioning cost, use of own assets in construction (limited to depreciation
over duration of use), freight, legal fees, warehousing costs, initial consumables (e.g. initial set of
tires for a vehicle) and all other costs required to bring that asset to its proper working condition
and location for intended use (excluding training on use of the new asset, should this be
required).
Operation and maintenance-phase costs – include:
• Operation - fuel or energy costs, operational labor, security costs, safety costs, training
costs, performance monitoring costs, cleaning costs and consumables.
• Maintenance - spare parts and repair labor.
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• Administration (asset specific) - insurance, rates and taxes, management fees, and so
forth.
• Rehabilitation and renewal – cost of upgrading, modification costs if these improve
asset life (capital), re-training costs (current), and so on.
• Asset-related receipts – tariff rates and equitable share (only to the extent that it relates
to this asset acquisition).
• Disposal-phase costs – disposal costs like auctioneer fees, storage costs, environmental
rehabilitation costs, decommissioning costs, demolition costs, and so on.
1.2.2. Fixed Assets Acquisition, Usage and Valuation
Valuation of fixed asset means finding the cost of the asset and assigning that value to it. The
cost at which fixed assets should normally be valued is the historical cost – the cost incurred at
the time the fixed asset was purchased or constructed. The single entry accounting system that
was in use in public bodies and the current modified cash basis of accounting treat the cost of
fixed assets as periodic cost, i.e., the cost that relates to the current accounting period only.
However, the fixed assets serve for more than one accounting period. Hence obtaining the value
of fixed assets from the accounting records might be possible for the recently purchased fixed
assets but might not be easy for assets purchased years ago.
Fixed assets owned by the government where so far controlled mainly physically. The cost data
were not seriously kept. In addition, fixed assets under the custody of one public body might not
be obtained for cash. They might have been obtained in donation, through transfer from other
public bodies, confiscated or through any other ways. Finding documentations to arrive at the
cost of such assets is unthinkable. The best way to go round the problem is to identify all fixed
assets under the custody of the public body, to register them and then to assign value using
various methods. The Council of Ministers Financial Regulations No 17/1997, Article 61 (6)
provides that “where the actual cost of public property is not determinable, its cost has to be
estimated in accordance with the directives from the Minister of Finance.”
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Considering the problems associated with valuation, very accurate valuation of fixed assets is not
expected. What the public bodies are encouraged to do is to assign value to all assets under their
custody rather than accurate value to some assets. As we shall see in the subsequent sections,
after valuations are attached to fixed assets, depreciation will be calculated reducing the value to
book value. As times elapse, the effect of incorrect values attached to fixed assets now becomes
lesser and lesser. Finally, the value of assets that are obtained from now on dominates the value
of the old assets and the total valuation becomes correct.
As discussed earlier to some extent, based on the categories of fixed assets identified in the chart
of account of the federal government of Ethiopia, the following groups of assets could be
established.
1. Livestock and transport animals;
2. Military equipment, Military purpose buildings, Aircraft;
3. Vehicle and other vehicular transport;
4. Boats;
5. Plant and machinery, Furnishings and fixtures, Office equipments;
6. Buildings -residential, Buildings - non residential, Infrastructure.
The possible source of values could also be the following:
• Industrial Project Studies (government owned enterprise),
• Ministry of Defense,
• Ethiopian Building Design Enterprise,
• Ministry of Infrastructure,
• Road Transport Authority, and
• Public Bodies.
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You can find the values of from the manual of government owned fixed asset that is prepared by
MOFED (in 2007) of Ethiopia.
Fixed Asset Valuation Process
The main steps in logical sequence that need to be followed in the execution of the fixed asset
valuation as per Municipal Development Lending Fund Org. (2010) are as follows:
1. Determining and Assigning Local Government Unit (LGU) staff for the implementation
of the valuation process. LGU staff should be carefully selected so that at least it makes
the assessment required on the asset registry forms.
2. Preparing LGUs for the valuation process (defining and explaining the methodology to
LGUs staff assigned to get them ready). LGU staff should be advised of the task they are
expected to carry out and should have a clear understanding of the nature of the
information they must record.
3. Identification of assets (Determining types of Assets).
4. Organizing Assets.
5. Preparation of registration sheets.
6. Physical visits.
7. Recording assets (Registration of data).
8. Valuation of assets (Establishing replacement costs & determining assets’ remaining
useful lives).
9. Reviewing Asset Register by LGU after the recording is completed so that any missing or
inconsistent data is captured or clarified quickly. Review the asset register to identify any
anomalies, such as:
• Serviceable assets with nil values;
• Unusually high or low valuations;
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• Whether significant assets have been omitted or overlooked;
• Double counting of asset;
• Inconsistent determination of (units of measure, valuations, residual life...)
10.Amending (Correcting) asset register upon organization’s reasonable comments.
1.2.3. Disposal of Fixed Assets
A fixed asset is considered to be impaired if the asset experiences a significant and unexpected
decline in its service utility. The service utility of a fixed asset is the expected usable capacity at
acquisition. A fixed asset may be impaired due to events or changes in circumstances, such as
physical damage, obsolescence or changes in technology, enactment or approval of laws or
regulations or other changes in environmental factors, a change in manner or duration of use, or a
construction stoppage. A fixed asset that becomes impaired is to be devalued to reflect its decline
in service utility.
Fixed Assets that are no longer useful may be discarded, sold or traded in for other fixed assets.
The details of the entry to record a disposal will vary in all causes, however, the book value of
the assets must be removed from the accounts. The entry will be debit the asset’s accumulated
depreciation account for its balance on the due date of disposal and credit the assets. When fixed
assets are no longer useful to an organization and have no residual value or market value, they
are discarded.
Materials may become scrap (salvage after giving service for ample period), surplus (excess over
organization’s requirement), and obsolete (are not damaged, but no longer useful due to change
in product line, technology, and so on). The general reasons for their generation could be change
in product design, faulty planning, faulty purchasing practice, poor storekeeping/preservation,
and so on. The asset could be disposed of through either using within the entity (by changing into
another form), or return to suppliers, or sale to another firm or employees through auction, or
donation to another public organization, or burying or burning, provided that it has to be
approved by the head of the organization.
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Selling Fixed Assets
In selling an asset, the cash paid for purchasing asset, the cost of asset, accumulated depreciation
and any gain or loss on selling need to be recorded. By doing so, the asset should be removed
from the record of an organization. For example, assume that the equipment is acquired at cost of
Br. 10,000 and is depreciated at annual straight-line rate of 10%. The equipment is sold for cash
on October 12 of the eight year of use. The balance of accumulated depreciation account as of
the preceding December 31 is Br. 7,000. Thus, the depreciation expense of equipment for the
nine months is Br. 750. Assume that the equipment is sold at 3 different prices.
When sold at Birr 2,250.00:
Cash...........................................2,250.00
Accumulated depreciation...........7,750.00
Equipment...................................10,000.00
Sold at Birr...................................1,000.00
Cash.............................................1,000.00
Accumulated depreciation...........7,750.00
Loss and disposal fixes................1,250.00
Equipment...................................10,000.00When sold at Birr 2,800.00:
Cash.................................... 2,800.00
Accumulated depreciation.... 7,800.00
Equipment ..................................10,000.00
Gain on fixed Assets.................... 550.00
NB: When the asset is sold on its book value, there is no gain or no loss.
Exchanging Similar Fixed Assets
Used equipment can often be traded in for new equipment having similar use. This is called the
trade-in allowance, may be either greater or less than the book value of the old equipment. The
remaining balance (the amount owed) is either paid in cash or recorded as a liability. Gain on
exchanges of similar fixed Assets is not recognized for financial reporting purpose. This is based
on the theory that revenue occurs from the production and sale of goods produced by fixed asset
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and not from the exchange of similar fixed assets. When the trade-in allowance exceeds the book
value of asset traded in and no gain is recognized, the cost recorded for the new asset can be
determined in either of the two ways. Cost of a new Assets = List price of new assets -
unrecognized gain or; Cost of new Assets = Cash given or (liability assumed) + book value of
old asset.
For financial reporting purposes, losses on exchanges are recognized on exchange of similar
fixed Assets. If the traded -in allowance is less than the book value of the old equipment.
When there is a loss, the cost recorded for the new asset should be the market price.
1.3. Accounting for Fixed Assets
All fixed assets must be accounted for at all times. If an asset is damaged, lost, transferred,
stolen, or has just outlived its usefulness, it must be reported.
Asset register is a record of information on each asset that supports the effective financial and
technical management of the assets, and meets statutory requirements. Appropriate records must
be established to provide information on location, maintenance history, and future usefulness of
assets.
1.3.1. Cost of Fixed Assets
Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction or, where applicable, the
amount attributed to that asset when construction or, where applicable, the amount attributed to
that asset when initially recognized in accordance with the specific requirements, and then to
put the asset in to use.
The costs recorded for each asset acquired include the purchase price and anything necessary to
make it ready for production. All expenditures involved in the acquisition of an asset and getting
it ready for use are capitalized as part of original cost. Included are the invoice price for the asset,
transportation charges, and installation costs, including any construction or changes to the
building necessary to house it. Other incidental costs are use tax, duties on imported items, and
testing and initial setup costs. The total costs of acquiring and putting the asset into actual
production use should be capitalized. The use in production at a reasonable production rate (as
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opposed to limited use during testing) is also the point where capitalization stops on the new
asset and depreciation begins. The cost of an asset must be spread on a rational, systematic basis
over the periods of its useful life.
The cost of acquiring fixed assets includes all amounts spent to get it in place and ready for use,
e.g., freight cost and the costs of installing equipment are included as part of asset’s total Costs.
For instance, the cost of acquiring building includes (engineers fee, insurance costs incurred
during constructions, interest on money borrowed to finance construction, walk ways to and
around the building, sale taxes, repairs (purchase of existing building), reconditioning (purchase
of existing building), modifying for use, permits from governments agencies, architects fees, and
so on), and that of machinery and equipment contains (sale taxes, frights, installation, repair
(purchase of used equipment), reconditioning (purchase of used equipment), insurance while in
transit, assembly, modifying for use, testing for use, and permits from government agencies). A
cost of small item like a calculator is the amount paid to purchase it and Value Added Tax paid
on it. On the other hand, the cost of a vehicle includes the amount paid to the suppler, the
custom duty paid on it, transportation of the vehicle from the supplier, Value Added Tax paid,
title transfer cost paid to the Ministry of Transport and Communication and other costs that
are necessary to put the vehicle in to use. Similarly the cost of machinery is the cost paid to the
supplier, the custom duty paid, the Value Added Tax paid, installation costs paid, other costs to
bring the machinery to the place where it gives service, and so on.
Capitalization of Expenditure
Capital expenditures are costs that add to the usefulness of assets more than one accounting
periods. Cost of acquiring fixed assets, addition to a fixed assets improving fixed assets or
extending a fixed asset’s useful life are called capital expenditures. Such expenditures are
recorded by either debiting the asset account or its related accumulated depreciation account.
Types of capital expenditures are additions, betterments and extraordinary repairs.
Major maintenances that are capitalized include the cost of major overhauls to machinery or
vehicles should be capitalized; the effect of which being to significantly extend the useful life of
the asset. For example, if the engine of a vehicle is completely changed; the cost of major
maintenance can be related to the initial cost of the asset to determine whether the cost is to be
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capitalized or not; maintenance paid on a fully depreciated asset, even if it is major, is not
capitalized; and it is considered as expense in the year in which the amount is paid.
The cost of addition to fixed assets is debit to the related fixed assets, and the cost of adding a
new wing to a building should be debited to the building account. This cost should then be
depreciated over its estimated useful or the remaining useful life of the building whichever is
shorter.
An expenditure that increases operation efficiency or capacity for the remaining useful life of a
plant asset, betterment, and such expenditures should be debited to the related fixed asset
accounts. For example, if the power unit attached to a machine is replaced by one of greater
capacity, its costs should be debited to the machine account. The cost of the old machine is
removed from the account and replaced by the new one. The cost of the new power unit should
then be depreciated over its estimated useful life or the remaining useful life of the machine,
whichever is shorter.
Extraordinary repair is an expenditure that increases the useful life of assets beyond the original
estimate. Such expenditures should be debited to the related accumulated depreciation. The
depreciation for the future period should be computed on the basis of the revised book value
of the assets and the revised estimate of the remaining useful life.
Depreciation of Fixed Assets
It is not necessary that an organization uses a single method all the time for computing
depreciation for all its depreciation Assets. There are some methods according to Generally
Accepted Accounting Principle (GAAP). They include straight-line method, declining balance
method, units of production method, and sum-of -year’s digit method. Initial costs, expected
useful life, and estimated value at the end of assets useful life (salvage value) are factors
considered to determine the amount of depreciation. Depreciation is the systematic allocation of
the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset,
or other amount substituted for cost, less its residual value.
Useful life is the period over which an asset is expected to be available for use by an entity; or
the number of production or similar units expected to be obtained from the asset by the entity.
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Remaining Useful Life is the time remaining (of the total estimated useful life) until an asset
ceases to provide the required service level or economic usefulness.
Economic Life is either (a) the period over which an asset is expected to yield economic benefits
or service potential to one or more users, or (b) the number of production or similar units
expected to be obtained from the asset by one or more users. Economic useful life generally
means the period (years) during which the asset is providing benefit to the government. The
physical life of an asset is the period (years) in which the asset is able to perform as originally
designed, built and maintained. The economic useful life of an asset may be the same as the
physical life, or it may be shorter.
It is a general policy to assign asset lives based on an estimate of the period of productive benefit
to the government; that is, the economic useful life of the asset. If an asset is no longer providing
productive benefit to the government, its economic useful life has ended even though its physical
life may continue. As a general rule, expected useful life is normally the shortest of the assets
physical, technological, commercial and legal life. An asset’s useful life is based on its use by
the local government.
Other factors to be considered in estimating the useful life of a capital asset include:
o Expected future usage;
o Effects of technological obsolescence;
o Expected wear and tear from use or the passage of time;
o The maintenance program;
o Geological conditions;
o Studies of similar items retired;
o Changes in demand for services; and
o Condition of existing comparable items.
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It may be necessary to review the useful life of assets as the original estimate of useful life may
become inappropriate. If expectations are significantly different from previous estimates,
adjustments are deemed necessary in estimates and the depreciation charge for the current
(period of revision) and future periods should be adjusted.
The deferral of maintenance can shorten an assets estimated useful life. For example, deferral of
annual pavement crack filing programs could allow water to infiltrate the road bed, causing
deterioration and shortening of the life of the road. Many long-lived assets, such as water mains
and pipes, often need replacing well within their physical life due to road repairs, corrosion and
basic weather conditions. All of these factors need to be considered when determining the
estimated useful life of infrastructure.
The Residual Value of an asset is the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life. The Value is the net
amount that the organization expects to obtain for an asset at the end of its useful life after
deducting the expected costs of disposal.
A salvage value does not need to be estimated when recording and depreciating fixed assets.
However, if the organization has historically estimated salvage value on capital assets or believes
not estimating a salvage value would have a material impact on the annual depreciation
calculation, it is permissible to include a salvage value when recording and depreciating capital
assets. When the normal useful life of an asset is ended the asset will be held in the organization
books with its salvage value.
Depreciation allocates the original cost of an asset to expense in the periods in which the asset is
consumed. Depreciation is calculated whether the asset is in use or idle. Furthermore,
accumulated depreciation is the portion of an asset’s original cost that has already been written
off as a depreciation expense in prior periods – it is not a sum of cash waiting to be used.
The depreciation charge for each period is recognized as an expense unless it is included in the
carrying amount of another asset, i.e. depreciation included in the capital costs of another asset.
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The calculation of future funding requirements for asset replacement should be part of the asset
management planning processes that should feed into the annual budget.
The depreciation method used should reflect the pattern in which economic benefits or service
potential is consumed by the government. The following are the depreciation methods that can
be applied.
Starlight-Line Method (SLM)
Straight-line method depreciation is a depreciation method that provides for equal periodic
depreciation expense over the estimated life of an asset. It is computed as:
However, when an asset is used for part of a year, the annual depreciation is prorated.
Advantages of using SLM
o It is simple and widely used;
o It provides a reasonable transfer of costs to periodic expenses when the asset is used and
related revenues from its use are most probably the same from period to period.
Illustration:
Assume that the cost of a depreciable asset is $ 35,000 and its estimated residual value is $5000
and its estimated life is 5 years. What is the amount of annual depreciation?
Units of Production Method
A unit of Production Depreciation Method is a method of depreciation that provides depreciation
expense based on the expected productive capacity of an asset. When the use of a fixed asset
varies from year to year, the unit of production method is more appropriate than the straight line
method. In such causes, the unit of production method better matches the production expense
41
with the related revenues. The unit of production method provides for the same amount of
depreciation expense for each unit produced or each unit of capacity used by the assets, i.e., the
use life of the assets is expressed in terms of units of productive capacity such as hours or
miles. It is computed as:
Illustration:
Assume that a machine with a cost of $35,000 and estimated residual value of $ 5000 is expected
to have an estimated life of 10,000 operation hours.
The Decline Balance Method
It provides for a higher depreciation amount in the first year of the asset’s use, followed by a
gradually decline amount so that the method is called an accelerated depreciation method.
It is most appropriate when the decline in an asset’s productivity or earning power is greater in
the early years of its use than in the latter years. Using this method is often justified because
repairs tend to increase with the age of an asset. The depreciation for the year is computed by
multiplying cost with depreciation rate:
Or
The book value at the end of the year is the difference between cost and depreciation of the year
and the book value at the beginning of the succeeding year. The book value decreases from year
to year and thus depreciation also decreases. It should be noted that when the declining balance
method is used, the estimated residual value is not considered in the determining the depreciation
rate. However, the asset should not be depreciated below its estimated residual value.
Illustration:
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The annual declining balance depreciation for an asset with an estimated 5 year-life and cost of $
24,000 & a book value of $2000 is shown as follows.Y
ear
Costs
Accumulated
depreciation of the
beginning of the year
Book Value at
the beginning of
the year
Depreciation
for the year
Book Value
At the beginning of the
year1 24,000 24,000 9600.00 14400.002 24,000 9600.00 14400.00 5760.00 8640.003 24,000 15360.00 8640.00 3456.00 5184.004 24,000 18816.00 5184.00 2073.60 3110.405 24,000 20889.60 3110.40 1110.40 2000.00
Sum-of-Year-Digits Depreciation Method
Sum-of-years-digits depreciation method is a method of depreciation that provides decline of
depreciation expense over estimate life of the assets. Under the sum-of-years-digits methods,
depreciation expense is determined by multiplying original costs of the assets less its estimated
residual value by a smaller fraction each year. Thus, the sum of the year’s digit method is similar
to decline balance method, in that the depreciation expenses
decline each year. The denominator of the fraction used in determining the depreciation
expenses is the sum of the digits of the years of the asset’s useful life. For example, assets
with a useful life of 5 years would have a denominator of 15, (i.e. 5+4+3+2+1) or where n is
number of years. What if the plant asset is not placed in a service at the beginning of the year?
When the date an asset is first put into services is not the beginning of a fiscal year, each full-
year depreciation must be allocated between the two fiscal years benefited.
Revising the estimates of the residual value and the useful life is normal. When these estimates
are revised, they are used to determine the depreciation expenses in the future periods and they
do not affect the amounts of depreciation expenses recorded in the earlier years.
Illustration
Assume that the original costs of the assets + 16,000 book value of the asset at the end of the 5th
year are Birr 1000 useful life is 5 years.
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Year
Cost less
residual valueRate
Depreciation
for the year
Accumulated
depreciation at the
end of the year
Book Value at the
end of the year
1 15,000 5/15 5,000.00 5,000.00 11,000.00
2 15,000 4/15 4,000.00 9,000.00 7,000.00
3 15,000 3/15 3,000.00 12,000.00 4,000.00
4 15,000 2/15 2,000.00 14,000.00 2,000.00
5 15,000 1/15 1,000.00 15,000.00 1,000.00
As it is already mentioned, depreciation is a systematic allocation of the depreciable amount of
an asset over its useful life. An entity is required to depreciate an item of property, plant and
equipment when it is available for use and to continue depreciating it until it is derecognized.
If the cost is included and no depreciation is calculated, the financial information that is obtained
as a result will be distorted. The value of fixed asset becomes ever increasing even after the asset
stops being used. There needs to be a way of depreciating the value of assets.
Unlike business enterprises or the full-fledged accrual basis of accounting, the purpose of the
depreciation that is explained in the manual of MOFED of Ethiopia is not to charge the portion
of the cost to the income and expenditure account. It is just an attempt to report a fair value of
the fixed asset from time to time.
The depreciation system that is employed must be simple and taking into account the following
points in the form of summary:
1. The purpose of depreciation is not to calculate the accurate value of use that is derived out
of the fixed assets;
2. The purpose of the deprecation calculated is not to charge it to the income and expenditure
statements and hence to calculate the result of operation;
3. Depreciation calculation is a new phenomenon in the Government Accounting System.
There is no practice of calculating depreciation in almost all PBs. If the depreciation
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system is complicated, the rate of error could be high and the rate of reception of the
method among the employees would be low;
4. The effort is to arrive at the fair value of total assets owned by PBs and not to calculate the
correct book value.
There are various methods of depreciation as mentioned above. The simplest of all is the
straight-line method of depreciation. Straight-line method of depreciation assumes that the
usefulness of the asset is the same over the entire life of the asset. The cost of the asset is
distributed evenly over the useful economic life of the asset.
Straight-line method had been used in Ethiopian in the past many years, as it was the method
proposed by the income tax proclamation to calculate depreciation for tax purpose. Currently the
Income Tax Proclamation No 286/2002 has proposed pooling method of depreciation for tax
purpose. This method is more complicated than the straight-line method.
Straight-line depreciation method has to be used in this manual. All PBs have to use this method
of depreciation unless they have valid reason to employ another method of depreciation and get
the permission of government property administration to use a different method.
The following depreciation rates are used for depreciating Government Owned Fixed Assets.
The rates are developed on the basis of the rates that had been widely used in Ethiopian in the
past many years with some modifications. The rates are:
Category Depreciation Rate
Vehicle and other vehicular transport 20%
Aircraft, boats, and so on 20%
Plant and machinery 12.5%
Military equipment 20%
Buildings – residential 5%
Buildings – non residential 5%
Infrastructure 5%
Military purpose buildings 5%
Furnishings and fixtures 10%
Livestock and transport animals 20%
Office equipments 10%
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Books 25%
Source: GOFAMM Manual of MOFED, 2007
Applying these rates on the cost of fixed assets enables getting of a fair amount of book value at
the end of each year. The following rules are applied when calculating the depreciation:
1. Depreciation has to be calculated on each and every asset, which has fixed asset
register.
2. The fixed asset management unit is responsible for calculating the depreciation and
posting it to the fixed asset register.
3. Depreciation on assets purchased in the middle of the year is calculated
proportionally.
4. In the last year of depreciation of an asset, the amount of depreciation has to be
reduced by Birr 10 so that the book value becomes Birr 10. A fully depreciated asset
has a book value of Birr 10.
5. Maintenance on fully depreciated asset is not capitalized. It is treated as expense of
the year in which it is paid.
Accounting for Fixed Assets
i. Recording Fixed Assets
A public asset registry can either be centralized or decentralized. The level of centralization
depends on the organizational structure of the general government that is closely related to the
size of a particular country. Regardless of the degree of centralization and practical usage of
public assets, the public asset registry is supposed to represent an accurate database of all public
assets and the related liabilities. New Zealand, Australia, the United Kingdom and France are
known for the establishment of fairly complete public asset databases. The public asset registries
in Australia and New Zealand were developed in the course of the public sector reform. The
National Asset Register that represents a comprehensive list of assets owned by UK Government
departments and governmentally sponsored bodies is considered to be an international landmark
in transparency and accountability. The role of the National Asset Register has been to achieve
greater transparency and better decision-making in managing public resources, maintenance and
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opportunity costs of public assets, making the best use of everything the nation owns, and
controlling plans to dispose of non-cash generating assets by ensuring that resources are
allocated to where they can be used most productively.
Fixed assets owned by the governmental unit should be recorded in the accounting records.
Accounting classifications of fixed assets are:
Improvements Other than Buildings: A fixed assets account that reflects the acquisition value
of permanent improvements (other than buildings) that add value to the land or improve the use
of the land. Examples of such improvements are: fences, retaining walls, drainage systems,
sidewalks, parking lots, and driveways. Note that when used with fixed assets, the terms
improvement and betterment have different meanings. Improvements are fixed assets
permanently attached to land. Betterments are additions to or changes in existing depreciable
assets intended to increase their efficiency or prolong their useful lives.
Recording of public domain or infrastructure type fixed assets in the accounting records is
optional. This category of fixed assets includes roads, bridges, curbs and gutters, streets and
sidewalks, drainage systems, and similar assets that are immovable and of value only to the
governmental unit.
Buildings: A fixed assets account that reflects the acquisition value of permanent structures
owned by the governmental unit used to house persons and property. Permanently installed
fixtures to or within these structures are considered parts of the structures. The costs of major
improvements to structures are included in this account.
ii. Purchased Vs Donated Assets
When an item is donated to a public agency, it becomes the property of that agency. If it meets
the requirements of a fixed asset, it should be recorded as a fixed asset for that agency. When a
donated item is received, the item has to be recorded at its current value if known or an estimated
value if not known.
Government Fixed Asset Management Manual (2007) explains, fixed assets are purchased like
any other stock item following the Government purchase policy. This is part of the purchasing
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activity of the PBs. Purchased fixed assets are taken to store. It does not matter how the fixed
asset is acquired; be it using the government budget of donors money, be it purchased for normal
government activity or for projects run by government, be it in donation or transfer, all fixed
assets newly obtained should go through the store system. No one should be allowed to use fixed
asset that has not gone through the store system.
When the store receives the asset the storekeeper issues Receipt for Fixed Assets Received
(RFAR). The format (See sample in Annex V) is developed to be used only for fixed assets. This
form is not used to receive consumable stocks. The distribution shall be:
• Original to deliverer,
• 2nd copy to finance department,
• 3rd copy to fixed asset management unit (FAMU),
• 4th copy to store,
• 5th remains in the pad.
The history of the asset should be kept with the FAMU. As the store is getting copy of all
documents like the copy of the supplier invoice, copy of the contract, copy of the packing list,
copy of tax declarations, those copy are copied and attached with the third copy of the RFAR.
This Model together with the supporting documents shall be filed in box files in the FAMU.
When one wants to refer to the history of the asset, it can easily be obtained in those files.
When assets are obtained in donation, the store section should attempt to get the copy of the gift
certificate. This is usually available as it is the basis for custom clearing. If not, the donor should
be approached timely to provide cost of the asset donated. That is the amount to be filled in the
Model 19, Model 22 and hence in the Fixed Asset Register.
iii. Lease Vs Purchase of Fixed Assets
Fixed assets do not always have to be constructed or purchased outright in order to be of benefit
to a local government. Fixed assets may be temporarily utilized through a rental agreement,
known as an operating lease. In other situations, the utilization of leased fixed assets may be such
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that the unit has in effect purchased the asset by virtue of the length of its use of the asset, or the
amount of payments it has made to use the asset. This type of lease is known as a capital lease.
A lease is an operating lease if it does not transfer the benefits and risks of ownership to the local
governmental unit. Operating lease payments are recognized as expenses/expenditures to the
local governmental unit when they become payable. The fixed assets leased through operating
leases are not capitalized; however, they should be inventoried and tagged for control purposes.
According to Governmental Accounting Standards Board Statement 13, lease payments will
generally be recognized as expenditures/expenses as specified in the lease contract unless the
lease terms are designed so that the lessor is subsidizing the lessee and part of the lease payments
are actually interest charges. This will usually be indicated by rent holidays or below market
payments at the beginning of the lease term.
A lease is a capital lease if at the inception of the lease it meets any one of the following criteria:
a. The lease transfers ownership of the property to the governmental unit by the end of
the lease term.
b. The lease contains a bargain purchase option (an option extending to the lessee the
right to purchase the leased property at a price so favorable that the exercise of the
option appears, at the inception of the lease, to be reasonably assured).
c. The lease term is 75% or more of the estimated economic life of the leased property.
d. The present value, at the beginning of the lease term, of the minimum lease
payments is at least 90 percent of the fair value of the leased property to the lessor.
If the beginning of the term falls within the last 25 percent of the total estimated life of the leased
property, criteria (c) and (d) are not used for classifying the lease. For leases involving land,
either conditions (a) or (b) must be met. If title to the land will not be transferred to the lessee at
some point, the lease is not a capital lease.
Once a lease has been determined to be a capital lease, the governmental unit should record the
asset acquired and the corresponding obligation at the present value of the minimum lease
payments minus any portion representing executory costs and related profit. However, if the fair
market value of the leased property is lower than the present value of the net lease payments, the
49
asset and obligation should be recorded at the fair market value of the leased property. To
determine the present value of the net lease payments, the local governmental unit must use the
lower of its incremental borrowing rate (the rate, that at the inception of the lease, the lessee
would have incurred to borrow, over a similar term, the funds necessary to purchase the leased
property) or the implicit rate computed by the lessor, if available.
Property that is leased is also considered to be an asset, because it does hold value during the
term of the lease. The decision to lease or buy an asset is where the market can provide generic
assets to meet a government’s service needs. Where an asset is leased, it is necessary to record
the details in an appropriate register. Additional details, which should also be recorded, include:
• Lease start and completion dates;
• First installment date;
• Asset fair-value;
• Implicit interest rate; and
• Lease payments.
Leases have a built-in interest cost which should be considered when evaluating whether to lease
or buy (cash) an asset. Information in the register should be reviewed annually to confirm that
the decision remains the most economical one.
The advantages of leasing include:
• Increased flexibility to change 'asset solutions' (with an operating lease);
• Reduced need for large capital outlays; and
• Isolation from short -term fluctuations in market supply and values.
Disadvantages can include:
• Penalty clauses for the early termination of leases;
• Higher implicit interest costs in leases compared to cost of funds available to the
municipality; and
• Dependence on the market to supply assets leading to long-term exposure to market
risk.
The advantages and disadvantages of buying and leasing options are summarized below:
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Table 3.1: Advantages and disadvantages of leasing and buying
Buying LeasingAdvantage Disadvantage Advantage DisadvantageOutright asset
ownership
Assets can be
modified at any
stage to suit
changing business
requirements
Assets can be
replaced or
disposed of at any
time
Major capital
outlay upfront
Entity incurs
maintenance and
repairs costs
which typically
increase as assets
age
Entity incurs
costs for the
replacement or
disposal of assets
at the end of
their useful lives
Cash-flow effective method
for gaining access to assets as
no major capital outlay upfront
Entity may not incur repair
and maintenance costs as
assets may fall under the
warranty of the lessor over the
term of the lease
The entity may not incur
costs associated with disposal
and replacement of assets at
the end of their useful lives
Assets may be replaced
more frequently, allowing the
entity access to latest
technology for no additional
cost
Possible access to
knowledge, purchasing power
and discounts offered by the
lessor
No asset ownership
Assets may not be able to
be modified to suit changing
business replacements without
lessor approval and attracting
fees
Lease terms are generally
fixed so asset replacements
and early terminations at the
request of the entity may
attract penalties and fees
Potential capital outlay at
the end of the lease term if
purchasing the asset at the end
of the lease
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Chapter Four
Management of Public Fixed Asset
After successfully completing this chapter, you should be able to:
o Understand what public fixed asset management is
o Tell the significance of managing public fixed assets
o Tell what strategic versus operational fixed asset management are
o Tell what should be the role of asset manager in managing fixed assets
o Describe the functions that should be carried out by asset manager
o Tell the necessity of having asset management plan
o Tell the benefit of considering risk management in relation to asset management
o Describe the significance of performance measurement in asset management
o Describe public fixed asset disposal methods and why
o Explain what matters should be considered to invest on fixed assets
4.1. Introduction
Fixed assets management activities are a meaningful part of the public sector functions. Good
fixed assets management establishes and maintains a current inventory of personal property used
within the organization. In so doing, responsibility and accountability for personal property is
52
established to ensure effective and efficient usage of the property. Additionally, a good fixed
assets management program will facilitate the physical inventory of fixed assets, advance the
establishment of insurance conditions, and comply with federal, state, or local policy.
Another point of view that commands serious attention of fixed assets is the importance of an
accurate fixed asset management program to meet the growing demands from federal and state-
funding sources for improved control and accountability over fixed assets. It is important that the
worth of the accountability over assets does not become the basis for the rejection of government
grants, contracts, and appropriations.
Fixed assets management is not the only name for this segment of the materials management
area. It has had a number of titles through the years. Property management is a common title
used in the public sector. Other names used are equipment management, and, to a lesser degree,
inventory control, although that name is normally reserved for the management of expendable
supplies for use within the organization.
The fixed assets manager is continuously encountering a diversity of challenges involving
technology, administration, personnel, and management functions. In order to direct the fixed
asset management effort of their organization, the manager must understand the organization's
operating policies and procedures. The complexity and value of personal property has
dramatically increased in recent years, as a result, the new fixed assets manager is finding it more
and more difficult to learn the skills of managing the fixed assets program. This effort
necessitates more planning and expertise on the part of the manager. The fixed assets program
must be dynamic rather than static, proactive rather than reactive, and accommodating to
changes in organizational needs rather than unaccommodating.
As stated earlier, fixed assets represent a significant dollar/birr investment for any public sector
organization. It is important that the fixed assets be accounted for as they are being used within
the organization.
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When suitable assets are already available, the government agencies should be disallowed to
acquire additional similar assets. A reliable and accurate fixed asset management program will
ensure that such requests will not be allowed.
Public sector managers, administrators, and employees have a duty and responsibility to provide
protection for the assets under their control. This protection is for losses from natural disasters,
theft, fire, and an abundance of other ills that can befall a public sector organization. Protection
is provided in the way of insurance on the fixed assets to provide for replacement if damaged or
destroyed. Accurate fixed asset records are necessary to prove the severity of the losses once
they have occurred. The fixed asset management program ensures accurate documentation for
such an eventuality.
Fixed assets managers play a key role in today's materials management structure, whether they
are at the federal, state, or local level. In today's materials management environment, the fixed
assets manager is confronted with recognizing the need for education and information in a
rapidly changing environment and organization. The fixed assets manager must be a dynamic
supervisor, an organizer, a self-starter, and a generalist who is willing to get out and take charge.
The public sector has not been saddled with the task of computing depreciation on its assets.
Generally accepted accounting practices have not compelled that non-profit governmental
organizations compute and track depreciation. However, this rule has recently changed and all
not-for-profit organizations will be required to recognize the cost of using up long-lived tangible
assets in general-purpose external financial statements. With the obligation for the public sector
to account for depreciation, the burden of providing positive inventory and tracking of fixed
assets will fall on the fixed asset management function.
Is there a standard organizational placement for the fixed asset management function in the
public sector? This question could be researched for years without adequately answering the
question because of the wide diversity in public sector organizations. To understand the enormity
of the task one must gain insight to the organizing function. Increasing specialization of
54
activities, projects, and skills demand that managers look to elements within their control for
gaining coordination by designing, mapping out, and deliberately planning the duties and
relationships of people in the organization.
In summary, the organizing function seeks:
• To establish efficient and logical patterns of interrelationships among members of the
organization;
• To secure advantages of specialization whereby the optimum utilization of talents can be
realized; and
• To coordinate activities of the component parts in order to facilitate the realization of the
goals of the organization.
In some organizations, the fixed assets manager is in the controller's office and is responsible for
the inventory and tracking of assets, as well as, the fixed assets accounting functions. There are
other organizations where the function reports directly to a chief executive officer such as a vice
president. Still other public agencies have the fixed asset management function reporting to the
chief procurement officer.
4.2. Organizational Placement
A major purpose of a fixed asset management program is to establish and assign responsibility
for the assets. From a functional perspective, accountability has been presented in the form of a
ladder comprising five distinct levels. The levels move from more objectively measured aspects
(legal compliance) to aspects requiring more subjective measures (policies pursued and rejected).
The ladder is generally consistent with the analysis of the American Accounting Association's
(AAA) Committee of Concepts of Accounting Applicable to the Public Sector.
Level 1: Policy accountability: Selection of policies pursued and rejected (value);
55
Level 2: Program accountability: Establishment and achievement of goals (outcomes and
effectiveness);
Level 3: Performance accountability: Efficient operation (efficiency and economy);
Level 4: Process accountability: Using adequate processes, procedures, or measures in
performing the actions called for (planning, allocating, and managing);
Level 5: Probity and legality accountability: Spending funds in accordance with the approved
budget or being in compliance with laws and regulations (compliance).
Regardless of the organizational placement of the fixed asset management function, there should
be an organization chart that accurately shows the lines of authority, responsibility, and
accountability for the function. The primary purposes to chart the organization structure are to
show the hierarchical way functions and individuals have been grouped together, including the
authority and responsibility lines that connect them. Organizational charts, to be useful, must
show "what is" as opposed to "what should be." There are six principles proposed by classical
writers of organization design. Although these principles are no longer interpreted to be
universally applicable for all organizations, they continue to offer a foundation upon which
managers can build a workable structure.
One of the traditional principles generally referred to as unity of command, states that no
member of an organization should report to more than one supervisor on any single function. The
application of this principle is easy in a pure line organization, in which each superior has
general authority; however, it becomes a complex problem in actual cases in which some form of
staff and/or functional organization is used. In practice, instructions may be received from
several sources without the loss of productivity. The central problem is to avoid conflict in orders
from different people relating to the same subject. You should recognize immediately that many
people who are not recognized in the formal hierarchy of authority might influence the actions of
a subordinate. The unity-of-command principle simply means that subordinates need to know
from whom they receive the authority to make decisions and take action.
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The exception principle states that lower-level managers should handle recurring decisions in a
routine manner, whereas problems involving unusual matters should be referred to higher levels.
This principle emphasizes that executives at the top levels of an organization have limited time
and capacity and should refrain from becoming bogged down in routine details that can be
handled as well by subordinates. The exception principle states that only exceptionally complex
problems are to be referred to higher levels of management and the routine problems should be
decided by the subordinates themselves.
A third principle involves the span of control of a manger: Span of control means the number of
subordinates a manager can directly supervise. There is a limit to the number of subordinates that
one superior should supervise. The determination of the optimum number depends on many
factors in a given organization and should always be tied directly to the question of the number
of levels in the hierarchy. If it appears that a small span of control for each manager is desirable,
then the number of necessary levels will be larger than would be the case with a larger span of
control. The organization with more levels is considered "tall," whereas the organization with a
larger span of control is "flat." A tall structure with small spans of control assumes that
coordination can be attained only by direct supervision. A flat structure with large spans of
control assumes that mutual adjustment among subordinates can handle much of the coordination
of members.
A fourth principle, the scalar principle, states that authority and responsibility should flow in a
clear, unbroken line, or chain of command, from the highest to the lowest manager. It represents
the vertical division of authority. For instance, from the chief executive, a line of authority may
proceed to departmental managers, to supervisors or foremen and finally to workers. Thus, the
scalar principle contemplates superior subordinate relations from the top to the bottom of the
organization. The principle simply states that an organization is a hierarchy. The importance and
usefulness of the principle is evident whenever the line is severed. The splintering of one
organization into two or more may results from a permanent breach of this principle. Temporary
breaches, however, are not uncommon, although they are frequently subtle and unrecognized.
57
The tendency of an aggressive executive to fight the control of superiors can create an
environment for forming an "empire" that is uncoordinated with the larger organization.
Principle of authority: Authority means power to command others. There should be free flow of
authority in an organization so as to enable people to take decisions without delay.
Principle of responsibility: Responsibility means obligation to do a particular task. Authority
and responsibility should go hand in hand. Although a subordinate is responsible to his superior,
the responsibility of the superior is absolute for the acts of the subordinates.
4.3. Public Asset Management Objective
Management and control processes in the public sector have differed from the corresponding
processes in the business sector. Unlike the private sector, public sector management practice has
been mainly directed towards:
• Establishing a legislative, institutional and control framework;
• Controlling the market formed by national boundaries and running foreign and domestic
affairs;
• Managing the entirety of tax revenues collected and redirecting these revenues to public
consumption, public debt repayment and public investments;
• Preserving the national heritage for future generations and accomplishing strategic goals
while protecting national interests;
• Providing public goods and services and assuring public need fulfillment.
A modern government in a democratic country is representative, meaning that some public
officials are engaged in public decision-making for the collective benefit, with clear
responsibility and accountability for their actions to the public. Even though public asset
58
management is usually not articulated as a direct task of public representatives, it indirectly
relates to the pursuit of many government functions, such as public goods and services provision,
heritage preservation, strategic goal achievement and the daily operational tasks of public
representatives.
Since the early 1990s, management and control in governmental organizations have become
more similar to management and control in business organizations. Regardless of the manner in
which governments have evolved, public sector structures, responsibilities and reporting
requirements have been subject to major processes of change. Public sector management reform
implies:
• The general government sector acting as a business entity which continuously and
efficiently performs its activities;
• Promoting greater competition and efficient public asset utilization in public services
provision;
• Applying “performance-based management” that emphasizes managing and controlling
outcomes rather than inputs only; and
• Introducing accrual accounting and implementing market efficiency and good
governance principles in the general government sector.
While private sector management deals with fulfilling the needs of a limited number of
individuals, the actions of public management are much wider in scope and have collective
consequences
4.4. Purpose of Public Asset Management
The goal of asset management is to achieve the required level of service in the most cost
effective manner, which is achieved through management of the asset-life-cycle.
To be effective, asset management in organizations should include the following:
• Service level needs, identified in the integrated development plan process, drive
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asset management practices and decision-making;
• Asset management plans that are an integral part of the municipal planning process;
• Asset acquisition decisions that are based upon the evaluation of alternatives,
including demand management and non-asset solutions;
• Asset acquisition proposals that include a full business case, including costs, benefits
and risks across each phase of an asset’s life cycle;
• Defined responsibility and accountability for performance, safe custody and use.
• Disposal decisions based upon an analysis of disposal options, designed to achieve
the best possible return for the municipality and made in accordance with the
provisions provided by legislative body;
• Sound risk-based internal controls supporting all asset management practices.
Effective asset management will:
• Maximize the service potential of existing assets by ensuring that they are
appropriately used; maintained, safeguarded and that risks are mitigated;
• Optimize the life cycle costs of owning and using these assets by seeking cost-
effective options throughout an asset’s life cycle;
• Reduce the demand for new assets through optimal use of existing assets and
management of demand through the use of non-asset service delivery options; and
• Establish clear lines of accountability and responsibility for performance.
Thus, in recapped way, the objectives of asset management are to:
o Protect assets from miss-utilization and destruction
o The purpose of having adequate evidence
o Facilitate efficient and effective Service delivery
o Use properties only for their respective intended purposes
o Satisfy the wants of the customers effectively
o Prevent unwanted budget expenditure related to assets and use financial resource
prudently
o Use storehouse properly and efficiently
o Have an effective and efficient controlling system
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o Have an effective inventory recording and stock management system
o Increase efficiency and effectiveness of a public organization in releasing its
responsibility
o Support economic and social development of the public
o Promote quality of life
o Create healthy communities
o Make the most of limited resources
All assets should be used for the purpose they were acquired. Asset performance should be
regularly reviewed to identify underutilized and underperforming assets. The reason should be
examined and appropriate action taken.
A fixed asset management system is a system of methods, policies and procedures which address
the acquisition, use, control, protection, maintenance and disposal of assets. A fixed asset
management is a systematic process of maintaining, upgrading, and operating physical assets. It
enhances capital assets and their respective values and establishes standard processes for
investment decision-making. It is also a systems framework that provides a measure of
organizational performance and ties it to internal short-and long-range planning.
A fixed asset management program is important for a number of reasons. Most evident is its
importance in the control of losses due to pilferage, theft, and neglect. Losses are controllable
and can be prevented or minimized. Reliable fixed asset management programs have an
additional fundamental value in the maximization of the use of assets by facilitating sharing
between and within departments and subdivisions. Scarce resources in the public sector are a
reality and it is highly likely that only one of a particular asset may be affordable to the
organization for use in a number of departments or subdivisions.
There are a number of reasons for fixed assets management. Some of them are:
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• Lifecycle asset management minimizes total costs;
• Poorly maintained assets increase liability concerns;
• Fixed assets management provides better and more consistent levels of service to the
public;
• Assets in good condition provide better and more efficient services;
• Accountability for the proper use and stewardship of publicly owned capital assets is
increasingly expected;
• Current and future changes in government regulations will require knowledge about assets
to determine compliance.
4.5. Asset Management Plan
The development of asset management plans is an interactive process that starts with the
identification of service delivery needs and ends with an approved “multiyear” budget based
upon the most cost-effective method of delivering that service. During that process the asset
manager should:
• Consider the service-level requirements;
• Review the current levels of service provided from the relevant assets;
• Conduct a “gap analysis” of the required vs. current service levels;
• Identify a range of options to resolve that service-level gap;
• Conduct a preliminary assessment of the feasibility of various options;
• Develop a business case for the most feasible option or options.
This business case should include:
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• The proposed service delivery option,
• Identified benefits and identified needs,
• A full life-cycle-costs forecast,
• Credible revenue forecasts including other funding sources;
• A risk assessment across the whole lifecycle of each option, and
• Performance measures that can be used to assess the success of the options and
implementation progress.
The asset manager may consult other divisions in the development of the asset management
plans. For example they may:
• review any legislative issues;
• review any human resource issues with the human resource manager; and
• review other issues with any other relevant managers, e.g. Information Technology.
Asset management plans should also include asset maintenance plans to ensure provision in the
budget for appropriate funding to guarantee that existing assets continue to perform at the
required levels and standards of service.
Benefits of Good Asset Management Plans
The benefits of good asset management plans include:
Aligns asset objectives with organizational objectives
Ensures overall efficient and effective use of assets in the medium/long term
Provides:
o A platform for structured and rigorous forward thinking;
o A basis for corporate and consultative strategy development;
o An explicit description of the direction of the organization (or a particular
aspect of that organization, in this case, assets) - i.e. the elements of the
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strategy;
o A clear statement for communicating the strategy to the organization;
o A basis for future decision making
Asset strategy is placed in the context of wider organizational issues
Brings clarity to the way assets are managed in the organization:
o The organizational arrangements for asset management;
o Corporate processes for assets;
o Performance measures and measurement;
o Data management;
o Capacity management.
4.6. Strategic Vs Operational Asset Management
Asset management is a systematic process of operating, maintaining, upgrading, and disposing of
assets cost-effectively. Alternative views of asset management in the engineering environment
are the practice of managing assets to achieve the greatest return (particularly useful for
productive assets such as plant and equipment), and the process of monitoring and maintaining
facilities systems, with the objective of providing the best possible service to users (appropriate
for public infrastructure assets).
According to university of Leeds (2006), strategic resource management (SRM) is the effective
and efficient direction and utilization of an organization’s resources to sustain its business and
meet the outputs required by government and its tiers. It includes the planning and prioritization
of investment across tangible and intangible assets, the deployment of that investment and
monitoring its use against targets and key performance indicators. It also includes holding
organizational units accountable for their performance and by its nature strategic resource
management also involves the management of strategic risks. The definition encapsulates the
processes of planning, prioritization, deployment, performance targets and key performance
indicators, and management of strategic risks to the asset base (the entirety of the assets owned
or occupied by an organization).
Furthermore, asset management is a structured, holistic and integrating approach for aligning and
managing over time service delivery requirements and the performance of assets to meet
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government objectives. Asset management encompasses two interacting components –a strategic
component, focusing on the medium to longer term and involves decisions on appropriate
investment in property assets to meet customers/end-user needs and service delivery
requirements; and an operational element, focusing on the ongoing management of property
assets over the short to medium term time horizon within an allocated budgetary framework set
at the strategic level once investment decisions in property assets have been made. Typically the
time frame would be less than one year up to three years. The locus of the operational element of
property asset management would be, for example, at or below estates level within a department.
Strategic Asset Management
Asset Strategic Plan is the asset resource component of the agency’s strategic planning process.
It focuses on the following:
o Agency strategic planning concerns identifying output requirements and service
needs and developing strategies to meet those needs, and
o Asset strategic planning involves establishing what asset resources are required to
support service and output strategies identified in the agency strategic plan, compares
this to existing available asset resources and develops a strategy for acquisition,
disposal, funding, operation, maintenance, and management of the asset resource.
The asset strategic plan must provide for:
1) Analyzing the key issues that may influence the agency’s requirements for assets in the
medium to long term
2) Analyzing the appropriateness of existing assets in relation to the agency’s strategic
plan
3) Identifying the need for new assets and developing strategies to meet the needs
4) Identifying the development of strategies for (1) achieving and maintaining the
appropriate level of operational performance for assets (2) maintaining physical assets
in an appropriate condition
5) Developing strategies for disposing assets that are surplus to agency’s requirements
Principles of Asset Strategic Plan
1) Integration of asset requirements with service delivery outcomes
2) Service delivery outcomes are enhanced
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3) Assets are managed efficiently, effectively, and economically in the provision of quality
government services
4) Resources are optimized in the ongoing operation and management of the assets
5) Focus on asset accountability in the governance arrangements
Asset Strategic Plan will:
o Document agency’s need for the asset resources;
o Outline the evaluation process to determine the most suitable solution to the asset
resources needed;
o Improve analysis, planning and monitoring of the recurrent expenses when procuring
new assets;
o Improve the alignment of asset resources with output production requirements
o Highlight the risks associated with asset resource acquisition and control;
o Encourage the examination of options for delivering services( capital investment,
capital grants, private sector involvement); and
o Foster a proactive planning culture of anticipating future asset requirements.
4.7. Investment Decisions
Investment decision addresses first, the question of why investment is required in property assets
and the purpose of that investment. Second, it challenges the need for and use of property to
deliver services, and third, it seeks alternatives that may make service delivery less property asset
dependant if this provides subsequently greater value-for-money. Strategic resource decisions
surrounding property assets would cover an investment timeframe of typically three to five years,
up to ten years, and beyond. They will include making decisions on the location, acquisition, use,
exploitation, maintenance and disposal of property assets and any cross-functional co-ordination
that is required to attain service delivery outcomes.
Decisions about the delivery and procurement of property related projects should always be on
the basis of value for money over the whole life of the facility or service and not on the initial
capital cost alone. It deals with how to take account of all the factors when making an investment
decision. Investments are important not only in optimizing the asset structure of a venture but
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also for enabling the introduction of new products or for introducing structural cost reductions.
The experiences from a range of capital investment optimization projects show that there is
significant value creation potential in optimizing capital investments. This value potential arises
from three core improvement levers for investments: reductions in the amount of capital
invested, acceleration of the production ramp-up, and increases in the operating cash flow or
service during the productive life of an investment. Decision-makers need the best possible
advice to aid them in making decisions on large investments.
Not only is investment critical at the national level but getting investments right at the company
level makes an enormous difference to a company’s value creation. Investment patterns vary
widely between industries. The most investment-intensive industries are Transport & Logistics,
Utilities, Telecommunications, and Oil & Gas, followed by Chemicals, High Tech and
Automotive.
Capital investments matter for business for obvious reasons: they are a prerequisite for entering
new businesses, fuelling future growth, and allowing sustained production. Beyond this, capital
investments are also a main driver of economic performance at the macroeconomic as well as the
microeconomic level:
• Economic growth and investments go hand in hand. Macro-economic analysis shows a
significant correlation (∼70 %) between economic growth and investment in the top 30
most significant economies.
• Investments drive business value creation. Within the last decade companies have been
able to significantly increase their return on invested capital (ROIC).We estimate that for
the top companies worldwide more than half their recent ROIC growth is related to
investment activity.
• Investments drive company growth. An analysis of 25 of the top companies from the 500
worldwide reveals ∼70% correlation between growth and investment intensity. This
connection between investments and long-term company growth is also supported by
fundamental microeconomic considerations.
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Basic microeconomics asserts the conclusion that higher investment rates support increased
growth for a simple reason: A higher reinvestment rate allows faster output growth. If the
investing company is able to sell the additional output in the market the investment will enable
revenue growth in the future, which in turn will raise value creation if the company is able to
reach an acceptable level of profitability on the additional production volume.
Looking at the geographical distribution of investments worldwide, it is clear that there are
significant differences in the pattern of investments between different regions, countries, and
industries. The question we will attempt to answer here is whether these differences have a
significant impact on the development of the various economies.
At the overall level, the structure of investments in the US and Europe still show substantial
commonality – in contrast, say, to that of the less developed economies. However, in the US
there is nonetheless a perceptible shift from manufacturing towards electronics and real estate
and housing that is not so apparent in Europe. In Europe, especially in Germany, a significantly
greater share of investments goes into manufacturing. Europe also invests more in business
services, including accountancy and financial advice, while in the US the level of public sector
investments is higher, reflecting the higher level of commitment to defense expenditure. At a
more granular level, the US and Europe should not be considered monolithic blocs, of course. In
Europe, for example, both Ireland and the UK have achieved above average economic growth. In
both cases this has gone hand-in-hand with increased investment intensity.
New technologies can have a major influence on investment decisions. Many investments are
primarily motivated by the need to introduce a new technology into the production process or the
product itself. Making the right decision about the technology investment can therefore be of the
utmost importance. The choice of technology can ensure the competitiveness of an operation for
years ahead, whereas not making the right investment at the right point in time can lead to the
longer-term failure of a company.
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New technologies can significantly complicate investment decisions for capital goods. This is
particularly the case for certain types of technology. Whereas new product technologies are
usually driven by R&D investments in improvements of the functionality of their products (e.g.
in the next generation of software, the use of new materials for certain parts, or new designs),
these are not investments in the narrow sense, as they are not asset-heavy and therefore do not
significantly impact the balance sheet. Process innovations, on the other hand, very often involve
investment in sophisticated new equipment and frequently have a highly visible impact on the
balance sheet.
The government should review the linkage between investment and asset management at a
strategic level, to ensure a national framework, which balances planning for future capital
investment, from both public and private sources, with full exploitation and maintenance of
existing assets.
As said in the earlier pages, a public sector organization's assets represent a substantial financial
investment. Investments are important not only in optimizing the asset structure of a government
but also for enabling the introduction of new products or for introducing structural cost
reductions.
Once there is a clear view of what the future strategic core assets should be (including new
acquisitions) and what assets are no longer required, it is needed to develop asset management
strategies which:
• Provide a cogent rationale for the proposed assets base and how that fits in with
government planning along with a quantification of the costs and benefits. In addition,
public bodies should also take account of the financial implications for other parts of the
public sector as well as the wider economic impact that any reconfiguration of assets may
have on the local economy.
• Identify those surplus assets that should be disposed of and the rationale for their
disposal taking into account the alternative use opportunities. They should also consider
the costs and benefits of disposing of those assets in a piecemeal way or as part of a
larger package and whether disposal should be through direct sale at optimum market
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conditions or through possible transfer to the private sector in return for risk transfer and
service provision.
• Set out how retained assets will be efficiently utilized and cost effectively maintained
to a good standard. Public bodies need to benchmark their use of assets such as office
space against best practice and to explore scope for better use of retained assets.
Maintenance of assets may be achieved by a range of methods from in-house delivery to
contracted-out privately delivered services or in partnership with other local public sector
organizations.
• Set out the asset acquisition agenda to further corporate government objectives and
create a fit for purpose assets base. In reconfiguring its assets base, an agency may need
to acquire assets such as buildings or land adjacent to existing assets, exploring options to
lease or make use of the property by other means alongside the possibility of outright
acquisition. If acquisitions are to be made, the strategies should describe how they would
be achieved in a way that balances benefits to service delivery with value for money.
Capital Improvement Program
Public Investment Programs (PIPs) have long been a staple of developing countries. They
attempt to provide a mechanism to manage investment projects more effectively both
strategically and operationally. They have a parallel in capital works programs in developed
countries. In developing countries, they have also played a role in managing external donor
financing.
Despite these good intentions, PIPs have, in practice, been associated with many of the
dysfunctional budgeting, resource allocation, and financial management practices around the
world. In particular, PIPs are associated with dual budgeting - the separation of the capital
budget from the regular recurrent budget (Box 3.11). Of even greater concern is that PIPs usually
encourage countries to focus on projects, with policy and program often an afterthought. The
result is an expansionary thrust to spending, leading to unsustainable over-commitment of
government funds and instability in all three levels of budgeting - macro, strategic and
operational.
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In a well-performing system, policy would be constrained by budget realities, but it would be the
driver of projects. There would be a fully integrated approach to the planning of capital and
recurrent expenditures, and to aid and domestically financed activities. Consequently, linking
planning, policy and budgeting within sectors and across government is likely, over time, to
reduce the rationale for traditional government-wide PIPs.
The following are some good practice approaches to improve PIPs in contexts where they are
deemed necessary and a shift to a medium-term framework is considered premature:
• Recognize that preparation of a PIP is a political as well as a technical process.
• Develop plans that are realistically cost constrained, by proceeding sequentially from the
macro framework to sector resource envelopes and then to selection of priority policies
and programs within sector constraints.
Thinking and practice on PIPs has shifted over the years as a reaction to inherent weaknesses.
For example, the limitation of IRR’s as a means of formulating the PIP is acknowledged. The
role of economic analysis is now defined more as a test of the viability of controversial large
projects and as a mechanism to facilitate choice between similar alternatives (i.e., clarifying
policy and program choices) within a sector. Consequently, it is generally considered better
practice to subject the 10 biggest projects in the PIP to economic analysis than attempt to cover
the whole field.
There is also greater recognition that projects should be selected by reference to a range of
criteria, both economic and noneconomic and, in particular, the chosen role of government
within a sector. Get the latter clarified and good project choices will be more obvious. This is
particularly evident in the transition economies where PIPs especially emphasize two things: (a)
ruthless screening out of hand-over projects from central planning using a mix of economic and
noneconomic “role of government” criteria; and (b) where substantial capital investments are
necessary to re-tool the public sector, mechanisms are put in place to ensure that the investments
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are firmly embedded in the changed role for the government. There is also a change in the
transition economies in the type of projects in the PIP. Particularly, there is less reliance on
technical parameters in determining new investments and more on efficiency considerations -
changed management processes coupled with selected re-equipment at existing government
facilities.
Operational Asset Management
Once the strategic investment decisions have been made, this is the continuing management of
the fixed assets on a short to medium term basis. The objective it to secure efficiency gains,
ensure business continuity and support service delivery.
Operational plans establish the means to ensure that assets are efficiently and effectively utilized
in supporting program/service delivery. Underutilization will increase the unit cost of program
delivery and may prompt the purchase of new assets when they are not required. Over-
utilization can have adverse affects in terms of deterioration in asset performance and condition,
shortening productive life and increasing recurrent operating and maintenance costs.
The operational plan should cover:
• Responsibility for, control of, access to, and security of the asset;
• The level and standard of performance required of the asset;
• Arrangements for collecting, monitoring and reporting performance data;
• Training staff in use of the asset; and
• Estimates of operating costs.
Operational capabilities include:
• Knowledge of the physical condition of the assets;
• Knowledge of asset performance and reliability;
• Knowledge of asset utilization and capacity;
• Ability to predict failure modes and estimated time of failure for assets;
• Ability to determine the likelihood and consequences (risk) of different failure modes;
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• Ability to analyze alternative treatment options;
• Ability to prioritize treatment options based on risk;
• Ability to optimize maintenance and operation activities.
In general, all management bodies of an organization are ultimately responsible for, and are held
accountable for, assuming proprietary control of all assets in their custody or assigned to their
organization. Also, all organizational employees are personally responsible for protecting
organization property or government owned property entrusted to them and for helping to protect
all university assets in general. This includes the proper care, maintenance, control, and
reasonable safeguards to prevent loss, damage or theft. Assets should be used for organization`s
business purposes and in accordance with organization policies and state and federal regulations.
4.8. Fixed Asset Management Life Cycle
The fixed management lifecycle begins when the property is acquired and continues on until the
end of its useful life. In the public sector, the acquisition step includes the specification, bidding,
and purchase of the item. Once the equipment is received by the purchasing agency, it is verified
as to its function and quality. Most agencies utilize electronic purchasing systems that include a
receiving function. If the purchased item is in accordance with the specifications and
requirements of the agency, then payment is the next step. According to the terms of the
purchase order or contract, payment is made to the supplier within a certain time period.
The next step in the cycle is for the item to be identified as a fixed asset by tagging or other
inventory method. A permanently attached asset tag can help identify and track the equipment
throughout its useful life. Technology has advanced greatly in recent years to allow automated
tracking of assets. The longest step in the cycle is inventory, as the item will be accounted for
and inventoried up until the time an agency disposes of it. Excess refers to a user declaring an
asset unneeded. In these cases, it is common to transfer the asset to another department within
the same agency. If the item continues to be used, the new owning department must continue to
inventory the asset. The final state of the property management cycle is deeming the item as
surplus. A surplus asset that is no longer needed or valued by an agency can be disposed of in a
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variety of ways. Once the item is disposed of, the agency no longer owns or accounts for the
asset.
The calculation of useful life is a matter of judgment best determined by the relevant asset
manager in consultation with the asset experts e.g. the engineer, a facilities manager or a fleet
manager who is well versed in the management of that type of asset and its life-cycle. In
determining the useful life of an asset, the asset manager will consider many factors including
the following:
• Expected wear and tear due to operational factors, maintenance & rehabilitation policies;
• Economic obsolescence because it is too expensive to maintain;
• Functional obsolescence because it no longer meets the municipality’s needs;
• Technological obsolescence;
• Social obsolescence due to changing demographics; and
• Legal obsolescence due to statutory constraints.
The following diagram shows the newly developed fixed asset management cycle of the Federal
Government of Ethiopia.
Figure 4.1: Fixed Asset Management Cycle
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Source: MOFED Manual, 2007
i. Acquisition
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Stock Mgt System Fixed Asset Mgt Cycle Stock Mgt System
STOCK
Supplies (consumables)
Fixed assets
Supplies (long-term)
Returned to Used-stock store
Fixed assets
Supplies (long-term)
Acquisition
In store
Disposal
Entry in to Custodians’ Card
Annual Fixed assets count
Entries into the fixed assets register Card
Annual Summary
Value of Fixed Assets included in financial ledger
Initial count of existing assets
Valuation of existing assets
Assets reissued for reuse
Assets are owned by an organization to help service provision without which it if it is too hard to
carry out its business. Thus, the organization is forced to acquire assets. The determination of the
requirement is decided by the end user-department or organization based on the available budget.
Any intention to owning an asset must start with a need. Unless a need has been properly
formulated and the desired outcomes of that need are defined, the whole procurement process of
an asset or assets has a good chance of failing. When defining the asset need, it is vital to be clear
about what outcomes are required and why the asset is required. If a need of asset is not clearly
defined, or does not accurately reflect the requirements, then value expected form the asset will
be lost and are not fit for the purpose intended.
Acquisition is the obtaining of a fixed asset. This acquisition can be done by, but is not restricted
to, a cash purchase, receipt of a donation, construction, rental, license, lease purchase, regardless
of funds used. The required and decided asset must be procured in accordance with the
procurement regulations, policies and procedures applicable to the organization.
In making the decision to acquire an asset, the following fundamental guidelines should be
considered carefully by the buyer:
a. Whether the purpose for which the asset is acquired is in line with the objectives of the
organization and plan, and whether it will provide significant, direct and tangible benefit
to the organization.
b. Whether the purchase is absolutely necessary as there is no alternative organizational
asset that could be upgraded or adapted.
c. Whether the asset is appropriate to the task or requirement and cost effective over the life
of asset.
d. Whether the asset is compatible with the existing requirement and will not result in
unwarranted additional expenditure on other assets or resources
e. Whether space and other facilities to accommodate the asset are in place
f. Whether the most suitable type, model and etc has been selected
g. Whether adequate resources are available for the maintenance and operational
requirements of the asset.
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ii. Use and Valuation
In order to determine its book and economic value, each public asset has to be properly
recognized and valued. Different accounting concepts worldwide have built high barriers to
implementing common financial reporting valuation techniques in the public sector. Recognizing
and valuing public assets provides better information about the management of public spending,
because it assures better management of resources – assets and liabilities as well as costs.
Sometimes, just because the use of assets acquired or inherited in the past does not affect the
current budgetary costs, these assets are treated as if their value were zero and remain
unrecorded.
There are tendencies to properly account for the majority of public assets and to assign them a
monetary value whenever and wherever possible, so that they do not remain off the balance
sheet. In order to achieve better control and enhance accountability throughout the public sector,
many countries have either adopted the accrual accounting basis in their public sector reporting
and budgeting (e.g. New Zealand, U.K., Australia, Canada, Finland, Iceland), or have
implemented the accrual accounting basis in public sector financial reporting, while preparing to
move to accrual budgeting (e.g. Denmark, Switzerland, Sweden). The whole of government
accrual reports provide a more complete picture of government finances and assist in assessing
the financial performance and financial position of a government.
For some public sector assets, it may be difficult to establish their market value because of the
absence of market transactions for these assets. Some public sector entities may have significant
holdings of such assets. While it is very difficult to place a meaningful and reliable value on
specific public assets (e.g. heritage assets and natural resources) for the balance sheet, and while
the process of valuing such assets might be very expensive, the fact that organizations are
required to report on how they are caring for specific public assets will ensure that no one could
dispute the assets’ value to the citizens.
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As long as the true reflection of accounts is concerned, it is widely expected that certain unique
public sector assets would remain as off-balance sheet. Their uniqueness alone would imply that
it is impossible to give them a value that is in any way reliable and meaningful. Nevertheless,
assigning value to each single public asset could help ensure that appropriate resources are
devoted to its maintenance, protection and economic usage, even though this sometimes means
valuing the invaluable. It is often forgotten that particular public assets, once recognized, are not
supposed to be included in the financial statements of the entity that controls or manages the
assets. Still, assets should be part of a single public asset registry. In addition, assets need to be
re-valued either annually or when their use is being determined or changed. Such revaluation is
necessary to keep the value of public assets comparable with similar assets in private ownership
and to ensure their fair valuation from a cost-benefit stance.
A schedule of expected useful lives (parameters) is provided. These expected useful lives should
be used unless the asset manager can justify a significantly different useful life (i.e. outside the
parameters).
iii. Performance Measurement
Performance measurement is the process of assessing progress toward achieving predetermined
goals. In some cases, these are related to outputs, such as resources transformed into goods, or
they can be results of activities compared to intended results, or outcomes. Performance
measures must also keep in mind the needs of the customer base. Within the public sector, this
can include internal and external clients alike. Senior management, elected officials, and the
general public should all be considered customers. It should also be mentioned that performance
measures today are very likely to be replaced in the future. Just as organizations change and
develop, so should their performance measures.
Performance measurements may have the following areas of consideration:
• Financial considerations;
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• Customer satisfaction;
• Internal business operations;
• Employee satisfaction;
• Community and shareholder satisfaction.
Stakeholders and participants need to agree on the type and number of measurements to be
employed. The measurements will be far less effective in the long-run if there is no agreement
from the beginning. In addition to being meaningful, measurements should be easy to administer
and leave little room for calibration error. It is also advisable to select just a few measurements,
as too many can lead to little or no action. Finally, the cost of implementing and maintaining the
measurements needs to be less than the tangible benefits received by the organization.
It has often been said, “What gets measured gets done,” which refers to the need for an
organization to identify key business areas for improvement. This will, in turn, allow it to
concentrate on efforts to achieve the desired results. An organization’s ability to measure its
performance is certainly a key to its success. There are countless measurements that may be
considered, so the challenge is to find those measurements that are meaningful and productive.
The University of Arizona has developed criteria for good performance measurements. They
believe measurements must be as follows:
• Organizationally acceptable
• Timely
• Compatible
• Comparable
• Simple
• Responsibility linked
• Cost effective
• Balanced
• Customer focused
• Meaningful
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An important concept to keep in mind is that performance measurements need to be aligned to an
organization’s strategic objectives. Purchasing and supply management professionals must
ensure all their activities, including performance measurement, are consistent with these
objectives.
From asset management perspective, good asset management improves delivery by ensuring that
the asset base is aligned with organizational objectives. Better asset management can also release
resources, generate revenue and improve value for money in service delivery. Establishing a
credible estimate of the aggregate quantifiable benefits of improved asset management requires
an analysis of:
• The scale of the current asset base and the likely trend in future disposals;
• The scope for further efficiency savings through better management of retained
assets; and
• The revenue generating and disposal potential from the identification and
exploitation of assets.
What are some useful performance tools within asset management and disposition? Typical
measurements for the acquisition or assets include the following: number of purchases and
contracts issued, dollar/birr value of expenditures, and reduction in purchasing cycle time.
Although the measurements used in the disposal of assets will differ, they can still be just as
valuable. The following are examples of performance measurements related to asset
management:
• Assets owned: This factor indicates the total number of assets owned by an organization, as
well as their value. As a relatively easy measurement to compile, it can be reported in three
ways: number of assets owned, value of assets owned, or average value of assets.
• Disposal rate: The disposal rate refers to the number and dollar value of assets being
disposed of for a set period of time.
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• Redistribution rate: The rate of the number of assets and their dollar value that are redistrib-
uted within an organization is known as the redistribution rate. When its original department
no longer needs an asset, it is usually in the best interest of the organization to transfer it to
other departments in need.
• Inventory accuracy: The accuracy of the amount of physical inventory on hand compared to
the actual inventory records can be a key measurement. ~ is ratio is figured by dividing the
number of errors by the number of inventory counts performed. A low ratio demonstrates an
effective asset management program.
The following six performance indicators of efficiency, with which government agencies should
routinely monitor the efficient use of resources, can be applied in performance measurement:
• Asset utilization should be regularly reviewed by the agency to assess their contribution
to the departments' core activities; to identify any spare capacity; and to dispose of assets
surplus to needs.
• Full resource cost of programs should be used by agencies to question regularly whether
resource costs are justified in terms of the level and quality of outputs/services delivered.
• Balance between direct costs and overheads should be clearly defined by Boards in terms
of what is an acceptable overhead including expenditure on corporate support activities.
There is a tendency to forget services such as utilities and maintenance which may be less
routinely monitored but can become inefficient or uneconomic.
• Stock and work-in-progress: Work-in-Progress represents resources consumed by
services or assets yet to be delivered such as that under construction. Boards also need to
monitor stock and work in progress because consistently high levels may suggest that
resources are being used inefficiently.
• Productivity: Boards need to monitor the productivity achieved by their staff in delivering
core activities and using internal and external benchmarks Boards should be able to
identify unproductive staffing requiring action.
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• Cash management: Boards require frequent information on expenditure profiles and how
these compare with planned spending patterns. This should enable Boards to identify
likely under spends in sufficient time to reallocate funds to other priorities.
To be effective, asset management in public agencies should include the following:
• Service level needs drive asset management practices and decision-making;
• Asset management plans that are an integral part of the agencies’ planning process;
• Asset acquisition decisions that are based upon the evaluation of alternatives, including
demand management and non-asset solutions;
• Asset acquisition proposals that include a full business case, including costs, benefits and
risks across each phase of an asset’s life cycle;
• Defined responsibility and accountability for performance, safe custody and use;
• Disposal decisions based upon an analysis of disposal options, designed to achieve the
best possible return for the public agencies;
• Sound risk-based internal controls supporting all asset management practices.
Effective asset management will:
• Maximize the service potential of existing assets by ensuring that they are
appropriately used; maintained, safeguarded and that risks are mitigated;
• Optimize the life cycle costs of owning and using these assets by seeking cost-effective
options throughout an asset’s life cycle;
• Reduce the demand for new assets through optimal use of existing assets and
management of demand through the use of non-asset service delivery options; and
• Establish clear lines of accountability and responsibility for performance.
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A condition assessment for tangible capital assets is like a general medical checkup for people.
The regular assessment of the condition and performance of all the tangible capital assets allows
the government to determine the ability of tangible capital assets to continue to perform and
provide services into the future.
While condition assessments for specialized assets like infrastructure would generally be an
engineering function, a government can also establish basic performance and benchmarking
indicators that will assist in the process. For example:
• Keeping historical information on sewer failure could be used to predict when
replacements might be needed. This can also be done for motor vehicles and other capital
assets.
• Analyzing the quality of water treated compared to the quality of water needed can
provide a useful indicator of the condition of the treatment plant to provide sufficient
treated water, as can:
• Driving on roads and over bridges doing visual inspections and counting potholes and
grade separations; and
• Reviewing estimated life-cycle costs and comparing them to the actual amounts
spent on infrastructure maintenance and replacement.
Asset managers should ensure that:
• Appropriate systems of physical management and control are established and carried
out for all assets;
• The government resources assigned to them are utilized effectively, efficiently,
economically and transparently;
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• Proper accounting processes and procedures are implemented in conformity with the
government financial policies to produce reliable data for inclusion in the asset
register;
• Any unauthorized, irregular, fruitless or wasteful utilization and losses resulting from
criminal or negligent conduct are prevented;
• The asset management systems, processes and controls can provide an
accurate, reliable and up-to-date account of assets under their control;
• They are able to manage the asset plans, budgets, purchasing, maintenance and
disposal decisions and justify that they optimally achieve the government’s strategic
objectives;
• Manage the asset life-cycle transactions to ensure that they comply with the plans
and legislative requirements.
Condition assessments can become very sophisticated and expensive, and should be part of risk
management and performance management. A cost versus benefit analysis should be done before
deciding to develop sophisticated techniques for an initial compilation of an asset register. More
sophisticated techniques can be developed over time as the experience and skills within the
municipality increase.
Condition data can be used to predict the timing of remedial action or asset replacement. As time
goes by, predictions will become more accurate as more information becomes available. A
condition assessment can be conducted using a top-down approach based upon staff knowledge,
maintenance records, customer complaints, and performance records. A physical check can also
be conducted whenever routine maintenance is done. This will facilitate updated condition
information and save time as it will eliminate a second visit. Information collected on the
condition should be recorded in the asset register and updated in the strategic plans where
necessary.
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The condition assessment will vary depending upon the class of capital asset being assessed and
the asset management policy pertaining to that class. For example, furniture (chairs) will be
considered operational until returned to a store because they are broken. Complex tangible
capital assets like buildings, community facilities, roads, water networks and other infrastructure
require a more appropriate asset management policy to ensure a more robust assessment process
and criteria. This again varies between assets.
iv. Disposal
Surplus property is best described as materials and assets that an organization no longer needs.
This can include assets of all types and often fall under the control and authority of procurement.
Property can become surplus for a variety of reasons, including spare parts that become outdated,
furniture that has been replaced, and vehicles no longer used. Surplus assets generally fall within
the following categories:
• Damaged stock is a property that has experienced neglect or damage and is not fit for the
use intended. Defective manufacturing or improper packaging can be reasons for the
damage.
• Scrap includes materials like metal or wood that have no use by an organization. It can
come from left over special projects or material left over from normal production.
• Spoilage refers to assets that have no market value. It can include things like chemicals or
rubber products that have a limited shelf life.
• Obsolete assets are items that can no longer serve their intended purpose because of
operational or market charges. Advancements in technology can often render assets
obsolete, such as electronic printing devices that are not network compatible.
The government should confirm and where necessary strengthen the incentives for disposal and
efficient management of assets, in particular as follows:
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• There is a need to reaffirm existing budgetary freedoms and incentives for departments to
dispose of assets, and to realize the benefits of efficient asset management;
• Departments have to cascade freedoms and flexibilities throughout their organizations,
agencies and sponsored bodies to ensure that there are sufficient incentives at unit level to
manage and where necessary dispose of assets;
• Departments have to ensure that managerial responsibilities for asset management within
public organizations are clear; and
• The government has to examine the scope for strengthening the incentive effects of the
resource accounting and budgeting framework on asset management.
There are various methods of disposal. Different disposal methods are needed for different types
of assets. Before deciding on a particular disposal method, the following should be considered:
• The nature of the asset (i.e. a specialized asset or a common item);
• The asset’s potential market value;
• Other intrinsic value of the asset (i.e. cultural/heritage aspects, etc.);
• The asset’s location (with respect to its transportation or access);
• The asset’s volume;
• The asset’s trade-in price;
• The asset’s ability to support wider Government programs;
• Environmental considerations;
• Market conditions; and
• The asset’s life.
Appropriate means of disposal may include:
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• Public auction;
• Public tender (competitive bidding);
• Transfer to another institution;
• Sale to another institution;
• Letting to another institution;
• Trade-in; and
• Controlled dumping (for items that have a low value or are unhygienic).
Methods of Disposal
i. Sealed and Spot Bids
A bid is submitted by an interested offeror in response to an invitation. Normally in public
procurement this is done to purchase an item. However, it is also a useful tool to dispose of
surplus assets. When buying the item, the lowest price offer is most favorable, but logically when
selling, the highest bid is sought. The principle in competitive bidding is to allow the open
market to compete for a requirement in hopes that a fair price is established. This holds true with
both buying and selling.
A sealed bid process is often utilized when an asset has substantial value and it warrants a formal
process. Normally, buyers can inspect the item to be purchased, and then submit their bid price
in a sealed envelope by a designated time. Once all bids are received, the agency representative
opens and evaluates the offers and makes a determination on the best bid. When the sale occurs
at the site of the good or equipment to be sold, it is referred to as a spot bid. Often items are
offered in lots, with the winning bid being announced for each lot before the next item is sold.
An advantage to spot bidding is that it can occur on an as-needed basis and prevents the agency
from having to store the asset for a long period of time.
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ii. Trade-In
A trade-in occurs when older assets are transferred to a supplier at the same time new ones are
purchased. Public agencies often use trade-in for vehicles, heavy trucks, and road maintenance
equipment. By listing the surplus equipment to be replaced, and allowing bidders to submit
trade-in value as well as new equipment prices, a public agency can use a single process to serve
two purposes. In determining the lowest responsive bid for new equipment, an agency can deduct
the value of the trade-in to determine the final cost. If a bidder offers a lower value for the trade-
in than is acceptable, the public agency should always reserve the right to accept or reject the
offer. If necessary, other disposal methods can be employed that bring a greater return.
iii. Donation
When an agency offers a surplus asset to another organization at no cost, it is considered a dona-
tion. The recipients of these donations include other public agencies, nonprofits, and educational
groups. Federal and state agencies often have qualified lists of donors that are eligible to receive
surplus property donations. Donations can generate a great deal of goodwill in the community.
Examples can include surplus computers donated to local schools or fire-fighting equipment
given to a rural fire district. The value of such cooperation and generosity can easily outweigh
the revenue an agency misses out on by electing not to sell.
iv. Auction
A public auction is a very common way for governments to dispose of their assets. These events
are usually advertised locally and run by a professional auctioneering firm, who are well versed
in obtaining the highest possible bids for equipment. This method gives local citizens the
opportunity to purchase the surplus items of a state or local agency they support as taxpayers. In
recent years, the use of internet auctions has increased dramatically. Potential buyers can review
the available equipment on an agency website and submit offers electronically up to the time of
bid closing. Because the internet offers access to a broader geographical base, agencies often
report higher sales revenue than traditional auctions.
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v. Employee Sales
Employee sales should be carefully considered before being allowed by a public agency.
Although offering surplus assets to employees on a first come, first served basis is common in
the private sector, it is generally frowned upon in government. These sales can be perceived as
giving public employees an unfair advantage that the general public is not getting. Even if a
public employee pays a fair market price for an item, there is still a perception of favoritism,
especially if the employee is doing so on agency time. There are simply more issues and risks to
allowing public employee sales than are benefits. Coupled with public ethics laws and policies,
employee sales can be a risky business. Now, an employee may very well attend a public auction
on their own time and bid on surplus property from their agency. Again, even if they outbid
others for the asset, the perception may be that they had inside knowledge that helped them. The
best policy is to avoid public employee sales.
vi. Market Knowledge
It is important for an organization to have a sound knowledge of the disposal marketplace.
Depending on the type of asset to be disposed of, the procurement professional may have a
number of options available to them. Utilizing outside industry experts can be of value to an
organization. Often referred to as third party specialists, these firms are knowledgeable in a
specific industry and assist with property disposition, although they are neither the buyer nor the
seller. They can include brokers, dealers, and auctioneers. For example, a local agency with
surplus tractors may decide to secure the services of an agricultural dealer to get the best price
possible. Such a dealer has contacts within the industry, which can create a competitive
environment for the equipment sale. Their professional fee is likely to be a good investment for
the agency.
Asset management is a broad function and includes a structured process of decision-making,
planning and control over the acquisition, use, safeguarding and disposal of assets to maximize their
service delivery potential and benefits, and to minimize their related risks and costs over their
entire life. The asset life-cycle comprises the whole cycle activities that an asset goes through-
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including planning, design, initial acquisition and/or construction, cycles of operation and
maintenance and capital renewal, and finally disposal. So, the asset management duty is a
structured process that seeks to ensure best value for money from assets in serving the strategic
needs of local authorities and communities.
Asset management is a process to buy or create, maintain, replace and dispose of public assets in
cost effective way, so that the delivery of services within the public can continues in the long
term. This process:
• Identifies all assets owned by the public, gives each asset value, decides what is needed
to bring the asset to an acceptable standard, sets out maintenance program to keep the
assets in good repair, and gets that work done on time.
• Cuts down losses by minimizing the costs of the assets over its useful life span,
preventing the loss of assets too soon, and maintaining their ability to provide services.
• Can be used to set appropriate tariffs and charges that include all or some of the costs of
maintaining assets and wear and tear, thus providing funding for eventual replacement.
• Will consist of planning and policies that give framework of administration, monitoring
and review, and encouragement of innovation.
• Needs to be understood by everyone, and be able to be participated in by community
members, ward committees, and other key people through forums and other cooperative
approaches.
• Gives a means of disposal when organizations have to decide what to do with assets that
no longer serve their purpose or which are of no use to a community.
To manage public assets effectively, it is important to know:
• Every assets owned or controlled by the organization on behalf of the public;
• The service the asset provides;
• The consequences of not delivering the service the asset provides;
• The condition of the of the asset;
• The value of the asset, including the cost to replace the asset;
• The maintenance needs of the asset, including the cost to perform the maintenance on
regular basis;
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• Whether the asset will be replaced at the end of its useful life and the timing.
The asset management managers’ main job is to manage the physical assets owned by the
organization; he/she should know very well what and how to manage the organization’s physical
assets effectively and appropriately. Managing physical assets means must know in detail of any
physical asset owned by the organization and how it can provide benefits to every asset in order
to provide benefits for the organization in the return.
In managing the organization’s physical assets, there are four stages to go through in which the
asset management manager will form a physical asset management cycle. The first stage is the
planning and procurement of assets. Asset management team will assist organizations and
management to see what has been and is still available and then assesses what is needed by the
organization. Asset management team will find a variety of sources to then buy asset whose price
is quite affordable and efficient with an acceptable quality. The second stage is how the asset
management team to explain and convince each organization to use any existing asset to
maximize productivity or service provision. The third stage is financial management. The task
of the team is to provide the calculation of asset management to the organization whether it is
proper to buy a new asset, or simply to repair the damaged part or even no need to change at all.
This calculation also includes the amount of accurate tax, depreciation and other costs. The
fourth stage is disposal. If the asset management team discovered that an asset is already
outdated and really should be replaced, it must recommend to the organization or management
for these assets is being replaced in accordance with the requirements of environmental and
security issues.
Public Fixed Asset Accountability and Control
Accountability is a key feature of the public sector and one of the principal arguments. The
public sector is answerable to the taxpayers such that it must aspire to policies that are
compatible with public desires. The people are the pivotal element in a democracy and those in
the public sector are accountable to all of the people in a democracy. There is, however, an
underlying distrust of the public sector by the people. Therefore, most programs and policies in
government contain numerous control programs and a high degree of accountability. Fixed assets
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management is no exception. The primary purpose for fixed assets management is to ensure
accountability of the significant investment in assets entrusted to the public sector administrators.
No matter what the origin of financing might be, each public asset has its corresponding liability
that has to be taken into account when measuring the benefits from putting an asset into use. The
incentive for putting assets into their most productive use would also mean avoiding the increase
in liabilities that arises when leaving the asset unused.
Organizations need to ensure that there are proper controls and safeguards to ensure capital
assets are protected against improper use, loss, theft, malicious damage or accidental damage. It
is also necessary to ensure that capital assets are maintained to the extent necessary for optimal
levels of effective, efficient and economical service delivery.
An asset control system consists of all the elements of capital budgeting, property record
maintenance, asset handling and usage, maintenance review, and management performance
appraisal. The asset control processes must be documented in proper records.
Why are controls necessary? The possibility of loss, of course, is ever present. Items can be
misplaced, or misappropriated for other than the purposes of the organization. An even greater
possibility for loss is the deterioration of fixed asset may be because it has not been properly
maintained. The future cost of a disruption of business due to breakdown of equipment can be
considerable.
Control also has to do with ensuring that the best use is made of assets. Management must
provide procedures that, if followed, will ensure that assets are used to their maximum and to the
benefit of the organization. They must have a plan in place to provide for required maintenance
of the fixed asset. Management must also provide plans and budgets for replacement and
necessary additional acquisitions.
Controls need to be in place to ensure that someone is aware of underutilized resources, which
can be reallocated or transferred to avoid the cost of purchasing new ones. Both the cost of
physical assets and the cost of maintaining financial resource to finance these assets have
increased dramatically.
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Accountability is a key feature of the public sector. The public sector is answerable to the
taxpayers such that it must aspire to policies that are compatible with public desires. The people
are the pivotal element in a democracy and those in the public sector are accountable to all of the
people in a democracy. There is, however, an underlying distrust of the public sector by the
people in unwise utilization of the public resources. Therefore, most programs and policies in
government contain numerous control programs and a high degree of accountability. Fixed assets
management is no exception. One of the primary purposes for fixed assets management is to
ensure accountability of the significant investment in assets entrusted to the public sector
administrators.
Management body of an organization need to ensure that there are proper controls and
safeguards to ensure capital assets are protected against improper use, loss, theft, malicious
damage or accidental damage. It is also necessary to ensure that capital assets are maintained to
the extent necessary for optimal levels of effective, efficient and economical service delivery.
So, asset manager (any official who has been delegated responsibility and accountability for the
control, usage, physical and financial management of the organization`s assets in accordance
with the entity’s standards, policies, procedures and relevant guidelines) should ensure that:
o appropriate systems of physical management and control are established and carried out
for all assets;
o the organization`s resources assigned to them are utilized effectively, efficiently,
economically and transparently;
o proper accounting processes and procedures are implemented in conformity with the
governmental financial policies and the asset management unit to produce reliable data for
inclusion in the organization`s asset register;
o any unauthorized, irregular, fruitless or wasteful utilization and losses resulting from
criminal or negligent conduct are prevented;
o the asset management systems, processes and controls can provide an
accurate, reliable and up-to-date account of assets under their control;
o they are able to manage the asset plans, budgets, purchasing, maintenance and disposal
decisions and justify that they optimally achieve the municipality’s strategic objectives;
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o manage the asset life-cycle transactions to ensure that they comply with the plans and
legislative and organizational requirements.
Thus, asset manager is accountable for ensuring that organizational resources are utilized
effectively, efficiently, economically and transparently. This would include:
o complying with systems of management and internal controls established by the
municipality;
o preventing inappropriate losses;
o appropriately managing, safeguarding and maintaining assigned assets; and
o Providing all asset-related information as and when required.
Auditing Fixed Assets
There should be properly structured internal control system within an organization and be in
place to meet the intended targets. Internal control implies methods and procedures within the
agency established to safe guard assets, check the accuracy and reliability of data, promote
operational efficiency, and encourage adherence to the prescribed policies and procedures of the
agency. According to internal audit manual of the MOFED (2005), the internal control of an
organization that is related to asset management need to focus on procurement of assets, proper
recording of assets, preservation and control of assets, inventory taking, disposing of asset items
and other issues related to the assets.
On the other hand, audit duties that are related to asset management functions focus on
examining the effectiveness of internal control of an organization in managing assets (other than
financial assets) as well as general asset management functions such as asset planning, presence
and proper execution of store functions (receipt procedure, inspection, storing systems, issuance,
stock records, and recording systems), having approved budget for asset acquisition and
acquisition procedure, verifying the existence of assets against records, maintenance procedure
and its effective implementation, insuring assets, disposal procedure and disposing off unwanted
assets on timely basis, having appropriate records formats for assets, having proper reporting
system and being in place, proper handling and preservation of assets, and presence of asset
management performance measurement system and its implementation.
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4.9. Risk Management of Fixed Asset
Risk management was introduced into the New Zealand public sector in 1988, when the
Government of New Zealand established the New Zealand Debt Management Office in order to
improve risk management associated with management of the government's debt portfolio.
Besides being responsible for controlling the government's debt and overall net cash flows, it is
also responsible for an array of assets of national interest. New Zealand’s experience serves as
proof that a public sector asset information system should not only refer to the asset recognition
process but also to asset management activities.
When public asset management is concerned, a certain degree of managerial autonomy needs to
be employed. In other words, the management of public assets is to be exercised according to
financial management rather than according to political principles alone. The existence of
professional management implies that the public sector kick-starts investment practice the same
way investors in the private sector do, taking into account future cost-benefit and risk-return
relations.
Operational risk: Often, once the investment has been made, it can turn out that the operating
cost is much higher than anticipated, thus killing the benefit the technology originally was
expected to have. If, for instance, an IT investment does not achieve its promised performance
improvement in its service provision, this can only be compensated for, for example, by
increasing the number of people employed in the call center. Thus, the performance deficit of the
technology is compensated for by added labor.
Financial risk: The cost of the new facility or equipment can be significantly higher than
anticipated, sometimes for rather mundane reasons, such as increasing raw material prices.
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Political, environmental or legal risks: The investment could face unexpected intellectual
property or regulatory risks. In the rapidly changing arena of environmental legislation, in
particular, it could be the case that new environmental legislation is enforced during the course
of the investment process, thus raising the cost of the investment significantly or even making it
obsolete. The current CO2 abatement discussion, for example, has certainly made the planned
lignite power plant investments in Germany much more challenging economically, as lignite-
based plants emit a high amount of CO2 per kWh when compared to other power generation
technologies.
Technological risk: Such risks are commonly related to change of technology. There are long-
terms highly sensitive to technological risks such as computer technologies. Such assets need a
detail analyses before acquiring them.
Market demand risk: Markets very often pay a premium to the first mover that is able to bring a
particular functionality to the market. Following in their footsteps or being late to market can
mean that the profit pool is already distributed and so the investment will never reach break-even
point. Customer adoption rates are inherently difficult to predict. If they are slow, then the
premium to be first mover is wasted and a fast-follower strategy can be far more value creating.
Testing and implementation risks: Often, when new technology is first implemented it has only
been tested in smaller pilot applications. Whether it will work at the actual production size is
often a question of experience and judgment – and the outcome can sometimes bring nasty
surprises.
i. Insuring Public Fixed Asset
Managing risks that are associated to assets of the organization should be an indispensable
concern of the organization since they hold back assets from fitting their intended purpose. Risk
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is an organization’s asset exposure that creates the potential for loss. Managing risk is the
process of identifying and controlling risks of all kinds: accidents, fire, thefts, and liability suits.
A constructive initial step in risk management is the development of policy(s) to guide
governments’ and not-for-profits’ actions. Among the aspects that organizations should consider
before articulating risk policies include the following:
o Prioritized risk-management program goals;
o Clear articulation of the authority and responsibilities of the risk manager;
o How the risk-management activities are to be coordinated among departments;
o Clear guidelines relating risk retention through the use of deductibles or self-insurance;
o Whether and how insurance-purchasing responsibilities are to be centralized; and
prevention rather than reimbursement for loss.
To be most effective, risk management must be understood and accepted by the highest level of
leadership and every employee must buy-in. Leadership must set the tone and demonstrate its
continuing and unwavering commitment to risk prevention. The organization should adopt an
education-and-training program about policies, procedures, and ways and means of developing
positive attitudes toward safeguarding assets and the prevention of loss. There must be a system
that clearly identifies and prioritizes risks.
Though it should not be the only orientated around insurance risk management, the asset items
that should be insured should have adequate insurance coverage. The head(s) of an organization
should maintain and ensure that all fixed assets (as much as possible) are insured at least against
fire and theft and that all buildings are insured at least against fire and allied perils. For this
purpose, the organization will outsource its insurance needs to registered insurance companies.
ii. Managing Risks of Public Fixed Asset
Risk management is an organized method of identifying and measuring risk and developing,
selecting, and managing options for handling these risks. There are several types of risk an
agency should consider as part of risk management. These include:
• Schedule risk;
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• Cost risk;
• Technical feasibility;
• Risk of technical obsolescence; and
• Dependencies between a new project and other projects or systems (e.g., closed
architectures).
Risk management should be central to the planning, budgeting, and acquisition process. Failure
to analyze and manage the inherent risk in all capital asset acquisitions may contribute to cost
overruns, schedule shortfalls, and acquisitions that fail to perform as expected. For each major
capital project, a risk analysis that includes how risks will be isolated, minimized, monitored, and
controlled may help prevent these problems. The project cost, schedule and performance goals
established through the planning phase of the project are the basis for approval to procure the
asset and the basis for assessing risk.
Public Private Partnership
Several departments are contracting private service providers through public -private
partnerships (PPPs) to improve service delivery. Currently, projects either in progress or in the
process of design include vehicle fleet management, information technology, accommodation
and facilities management, tourism, rapid rail and health services. It is important to stress that
PPPs are not a means to circumvent the budget. Planning and submissions for PPPs should be
integrated into the annual budget process.
Three criteria of public private partnership guide the project’s feasibility. The project:
• Must be affordable;
• Provide good value for money;
• Must transfer appropriate technical, operational and financial risk to the private party.
Like for other programs, the baseline for public -private partnerships in the third year of the
medium-term expenditure period, 2004/05, is 6 per cent above the baseline for 2003/04 in South
Africa. This is based on the preliminary National Treasury inflation forecast of 4,5 per cent for
2004/05.
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Affordability means that the cost of the PPP over the whole project life (as determined by a
detailed feasibility analysis) can be accommodated in the budget of the relevant department,
given its existing commitments. This is different from value-for-money, which means that private
provision of a government function / service results in a net benefit to government in terms of
enhanced quality, quantity and accessibility of services and / or less exposure to commercial and
operating risk. A PPP contract may therefore be unaffordable, even though it provides “value for
money”. If a project is unaffordable, it jeopardizes the Government’s ability to deliver other
services. Unless Government’s overall priorities change, the project should therefore not be
pursued, even if there is a possibility that it may meet “value for money” criteria.
It is necessary to distinguish between projects that involve cash outflows and ones that include
cash inflows. Cash outflows could either be aimed at new capital expenditures or occur within
the existing baseline. Where the outflows are towards new capital expenditures, this should be
listed as an option, as outlined in the section below. The procedure followed will depend on
whether the project has been a PPP from the outset or a conventional procurement that has been
transformed into a PPP. With the transformation to a PPP, it may be necessary to roll out the
amount over a longer period than the medium-term expenditure period. The department will
require National Treasury approval for this. Where the project is a PPP from the outset, the initial
expenditure is likely to be spread in smaller amounts over a longer period. If there is no
budgetary provision, the department will have to enter the next budgetary cycle to find the funds.
It is advisable to enter into public private partnership (PPP) only if such agreement:
• Provide value for money; and
• Transfers appropriate technical, operational, and financial risks to the private party.
Furthermore, government should undertake a feasibility study broadly including:
• The strategic and operational benefits of the PPP agreement for the municipality;
• The specific description of the extent to which the function, both legally and by nature,
can be performed by a private party in terms of a PPP agreement and what other forms of
PPP agreement were considered;
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• Explanation of the government’s capacity effectively to enforce the agreement, including
monitoring and regulating implementation and performance of the agreement.
Before a capital project is included in the budget for approval, the asset manager should
demonstrate that he/she has considered:
• The preliminary or conceptual design and specification of the asset;
• The projected cost over all the financial years until the project is operational;
• The future operational costs and revenue on the project, including tax and tariff
implications;
• The financial sustainability of the project over its operational life, including revenue
generation and subsidization requirements;
• All preliminary costing-projected timeframes, cash flows and other requirements; and
• Alternatives to this capital purchase.
4.10. Inventorying and Reporting Public Fixed Asset
Routine fixed asset management regains after the initial comprehensive count, the registration of
the fixed assets in the fixed asset registration card and user card and valuation process is
completed. New fixed asset issuance will continue; assets under construction are finalized and
capitalized, transfers of assets from one custodian to the other can be made, damaged and
unwanted assets will be returned to the used-stock store.
For audited financial statement purposes, additions to fixed assets and the related incurring of
financial liabilities must be disclosed in accordance with generally accepted accounting
principles. The following disclosure requirements for depreciation were established by APB
Opinion No. 12:
1. Depreciation expense for the period,
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2. Balances of major classes of depreciable assets, by nature or function, at the balance
sheet date,
3. Accumulated depreciation, either by major classes of depreciable assets or in total,
at the balance sheet date, and
4. A general description of the method or methods used in computing depreciation
with respect to major classes of depreciable assets.
Fixed assets are purchased like any other stock item following the government purchase policy.
This is part of the purchasing activity of the public bodies. Purchased fixed assets are taken to
store. It does not matter how the fixed asset is acquired; be it is using the government budget of
donors money, be it purchased for normal government activity or for projects run by
government, be it in donation or transfer, all fixed assets newly obtained should go through the
store system. No one should be allowed to use fixed asset that has not gone through the store
system. When the store receives the asset the storekeeper issues Receipt for Fixed Assets
Received (RFAR).
The history of the asset should be kept with the fixed asset management unit. As the store is
getting copy of all documents like the copy of the supplier invoice, copy of the contract, copy of
the packing list, copy of tax declarations, those copy are copied and attached with the third copy
of the RFAR. This Model together with the supporting documents shall be filed in box files in
the fixed asset management unit. When one wants to refer to the history of the asset, it can
easily be obtained in those files.
When fixed assets are issued from the store, Receipt for Fixed Assets Requested and Issued
(FAIRR) is used. As soon as the issue voucher is received, the fixed asset management unit
performs the following tasks:
1. Identify the appropriate category of the fixed asset – fixed asset categories are as explained
in the previous sections. The correct category should be identified so that the quality of
information on the fixed asset is enhanced. If there are unique items that come for the first
time, the category should be given in consultation with government property administration
department.
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2. Assign PIN for the asset – PBs shall maintain PIN register. The purpose of this register is to
indicate the last number issued to a certain category of fixed assets. Using this register
avoids assigning the same PIN to different assets or jumping PIN numbers unused. The
person assigning the PIN to newly issued fixed asset should refer to this register and put a
mark on the register. PIN is assigned to all fixed assets including those that are below the
minimum amount given in the definition for fixed assets (currently Birr 200) but that can be
used for more than a year.
3. Register the asset on the UC – This is the complete record of assets as it includes both fixed
asset above the threshold and asset below the threshold but with permanent nature. All the
necessary details required by the UC should be filled.
4. Register the asset on the FAR if the item worth more than the minimum threshold for fixed
asset. Assets which costs less than the minimum amount given to the fixed assets but which
can use for more than a year are not registered in the FAR. Only those assets that clearly
satisfy the definition of fixed assets are registered in the FAR.
5. Print the PIN on the fixed asset. This is done as per the instruction given in the previous
sections of this manual and the method chosen by the PB. Whatever method is selected for
printing the PIN on fixed asset, it is important that PIN is printed before the asset is issued
to the user. This is helpful to avoid delay in assigning PIN to assets because of distance of
the user’s location. If can also be forgotten.
6. Issue the fixed asset to the user. This is the last task. All the previous tasks should be
completed before fixed assets are issued to the user.
Assets might be transferred from one custodian to the other without physically returning the asset
to the used-stock store. The following steps are followed:
1. The surrendering user and the recipient user should come to the FAMU to explain their
intention.
2. If the FAMU accepts the request, a FATF shall be filled in three copies by the two users
and presented to the FAMU.
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3. The FAMU assigns one of its staff members to inspect the asset in person and to finalize
the transfer.
4. The FAMU head approves the transfer by signing on the FATF.
5. The FAMU is filled in three copies and distributed as 1st Copy- for the surrendering user,
2nd Copy – for the recipient user, and 3rd Copy – for FAMU
6. Using the third copy, the FAMU makes the necessary correction in the UC. The name of
the user is changed to the new user. Other changes are not required. The PIN should not
be amended unless there is a change of location.
7. Amendment is made in the FAR too. When there is a change of department or location
that is the major change that is made in the FAR. The detail of the new location and the
new PIN, if it is changed because of the change in location, shall be entered in the FAR.
It is advisable to prepare new FAR instead of overwriting on the old FAR.
In the fixed asset management system, return of the used asset to the store is the final step. When
an asset is returned to store, it stops being fixed asset and becomes part of stock. Other actions on
the fixed asset, such as disposal and cannibalization might continue. Those actions should not
affect the fixed assets system.
A voucher called Receipt for Articles or Property Returned (RAPR), is introduced in the fixed
asset management system (it can also be used in the stock management system) to be used when
fixed assets are returned to the used-stock store. The following steps are followed:
1. The user who wanted to return the assets shall come to the FAMU and requests for the return
of the asset. The department in which the user works should write a note to the FAMU or a
clearance letter or equivalent should be copied to the FAMU so that the process could go to
the next step.
2. The FAMU assigns one of its staff members to physically inspect the assets.
3. The UC of the particular user should be referred to ensure that the asset is in the name of the
user.
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4. If assets are as per the UC, the RAPR shall be filled in four copies and presented for the
approval of the head of the FAMU.
5. The cost that is filled in the RAPR shall be the book value of the asset at the time it is
returned to store.
6. The assets are transported to the used-stock store.
7. Using the copy of the FAMU, the fixed asset records shall be amended. The UC is amended
if the user returned only some of the assets he was using. The UC shall be voided if the user
has returned the entire asset under his custody.
8. The FAR shall be segregated and kept in a separate file under the name “Fixed Assets
Returned to Store”.
9. When fixed asset are reissued, Used Assets Reissue Receipt (UARR) shall be used to
document the issuance. The cost to be filled in the UARR shall be the book value of the fixed
asset.
10. In case the fixed asset is reissued to a different user but under a similar location like the
previous user, then the FAR shall be reactivated.
11. When assets are reissued, the PIN written on the asset could be used unless the location is
different from the previous location of the asset.
12. If the asset is reissued to a different location, the FAR shall be amended (preferably replaced)
by a new FAR.
Assets may be taken outside the premises of the PB for repair, on temporary lending purpose and
so on. A voucher called Gate Pass for Fixed Assets (GP) shall be prepared.
The requesting user shall go to the FAMU and request the form. FAMU shall study the condition
and allow the form to be filled. The requesting user and his/her immediate supervisor shall sign
the GP and bring it to the FAMU. FAMU shall authorize the delivery of the assets and gives one
copy of the GP to the user who is carrying the asset. That copy of the GP is given to the security
staff at the gate.
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Both the security and FAMU shall keep file of GP. When the assets are returned, the GP shall be
cancelled by the security staff who allowed the goods to get in. Similarly the FAMU shall cancel
the copy of GP it kept to certify the return of the assets. Cancellation is done by writing
“Returned” on the face of the GP.
To manage effectively the resources of an organization, the management must have information
regarding the current location, use, state of repair, and future usefulness of its productive assets
as well as requirements. The manager of an entity has a responsibility to ensure a system is in
place to provide this information. However, creating this system is not just an accounting; it will
require the assistance and time of other senior managers.
The whole effort of fixed asset valuation, incorporating the values in the fixed asset register,
calculating depreciation, opening ledger accounts in the financial system is to incorporate the
final balances in the financial statements of the public bodies. The Council of Ministers Financial
Regulations No 17/1997, Article 61(7) provides that “…cost of fixed assets shall be included in
the Public Accounts in accordance with directives of the Minister of Finance.” This section
explains how this can be achieved. In addition to the finance related reports, other reports need
also be prepared and disseminated by fixed asset management unit. The number and type of
reports that are prepared by fixed asset management unit is to be determined by the demand for
the reports by the management of the public unit, government property administration
department and other concerned bodies. The most common once are explained in this section.
The monthly report in the modified cash basis accounting system of the federal government of
Ethiopia is the Trial Balance, including the supporting schedules or reports. The balance of fixed
assets and the corresponding fund balance should appear only in the Trial Balance for the month
of Sene so that MoFED can incorporate the balance of fixed assets of each and every public body
in its consolidated report. In the month of Hamle of the following year, the public bodies shall
reverse the entry that was passed in the month of Sene. This will make the ledger balance of
fixed assets nil. Again at the end of the following year, physical count of asset is taken, ASS is
prepared by fixed asset management unit and a new balance shall be sent to the finance section
of the public body that will incorporate it in the Trial Balance for Sene.
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In addition, fixed asset management unit shall prepare different reports on demand during the
year. It can prepare report on:
1. Lost and damaged assets and action to be taken;
2. Disposed assets, indicating the value at which the assets were sold for or the way
they were disposed of;
3. Assets that need maintenance, the budget required for the maintenance, the
planned time for the maintenance;
4. And other such reports.
Chapter Five
An Overview of Intellectual Property
After successfully completing this chapter, you should be able to:
o Understand what intellectual property is
o Explain different types of intellectual properties
o Tell why intellectual property consideration is essential
o Tell the significance of ensuring intellectual property rights
o Describe the intellectual property system of Ethiopia and its drawbacks
o Tell the intellectual properties currently in place in Ethiopia
5.1. Intangible Assets
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If an asset is something that can be not touched, then it is an intangible asset. By definition, it is a
thing that cannot be touched. What are the characteristics that make some types of intangible
assets ‘intellectual property’ in the eyes of the law? A way to answer that question is to consider
the concepts behind the two words included in the phrase ‘intellectual property’, which will be
discussed hereafter.
5.2. Definition of Intellectual Property
What are the characteristics that make some types of intangible assets ‘intellectual property’ in
the eyes of the law? A way to answer that question is to consider the concepts behind the two
words included in the phrase ‘intellectual property’.
i. Intellectual
A common way of classifying those intangible assets that constitute IP is as all those things
which emanate from the exercise of the human brain, such as ideas, inventions, poems, designs,
microcomputers, etc. This classification is consistent with the notion that the subject matters
constituting IP are primarily derived from human intellectual activity – hence the word
intellectual in the title. The particular human intellectual activities that commonly result in most
IP are innovation and creativity.
Innovation and creativity result in doing something new or bringing into existence something
new. An idea about how to do a thing differently is a subject matter that may be protected by
patent law. A new piece of art or music is a subject matter that may be protected by copyright
law. A new way of naming a product or service is a subject matter that may be protected by
trademark law. Thus, it can be seen that many of the assets that are considered to be IP can be
identified by the fact that they are an innovative or a creative product of the human intellect.
ii. Property
To lawyers, the concept of ‘property’ is more one of rights to subject matter than of subject
matter per se. That is to say, a lawyer is more likely to see ‘property’ as the entitlements to
something exercisable against third parties, than as the thing in respect of which those
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entitlements exist. Put another way, land is property only if someone has rights exercisable
against others in relation to that land. Absent such rights, there is no property in the land and
hence it may be said that the land is not property.
The key entitlement one may have in relation to something is the right to possess it exclusively –
the corollary of which is the right to exclude others from accessing it. This right of exclusivity is
a hallmark of property.
The above descriptions of ‘intellectual’ and ‘property’ provide a basis for describing IP as an
intangible subject matter emanating from the human intellect in respect of which a legal right of
exclusivity may be granted.
Types of Intellectual Property
There are many different types of intangibles, and they are often classified into the following six
major categories.
Marketing-related intangible assets
They are those assets primarily used in the marketing or promotion of products or services.
Examples are trademarks or trade names, newspaper mastheads, Internet domain names, and
noncompetition agreements
Customer-related intangible assets
They occur as a result of interactions with outside parties. Examples are customer lists, order or
production backlogs, and both contractual and non-contractual customer relationships
Artistic-related intangible assets
They involve ownership rights to plays, literary works, musical works, pictures, photographs,
video and audiovisual material (motion pictures and television programs), and R & D. These
ownership rights are protected by copyrights
Contract-related intangible assets
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They represent the value of rights that arise from contractual arrangements. Examples are
franchise and licensing agreements, construction permits, broadcast rights, service or supply
contracts, and use rights (such as drilling rights or water rights). A very common form of
contract-based intangible asset is a franchise.
Technology-related intangible assets
They relate to innovations or technological advances. Examples are patented technology, trade
secrets (such as secret formulas and recipes), and computer software. To illustrate, patents are
granted by the U.S. Patent and Trademark Office. The two principal kinds of patents are product
patents, which cover actual physical products, and process patents, which govern the process by
which products are made.
Goodwill
It is often referred to as the most intangible of the intangibles because it can only be identified
with the business as a whole.
Intellectual Property (IP) is an increasingly important aspect of business today. As we move
further into the "knowledge economy", the embodiment of knowledge in the form of IP forms a
crucial part of the value of a business and IP considerations underlie many important business
decisions.
Patents
A patent is a right granted for an invention: a product or a process that provides a new way of
doing something or offers a new technical solution to a problem. In order to be patentable, an
invention must fulfill the patentability criteria of novelty, inventiveness (non-obviousness) and
industrial use (utility). The application of the patentability criteria varies from country to
country, and fulfilling other technical requirements may be required in order for a patent to be
granted.
Subject to several important exceptions, a patent enables the patent holder to exclude
unauthorized third parties from making, using, offering for sale, selling or importing for those
purposes a product, a process, or a product obtained by a patented process. Generally, this right
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is offered for a period of 20 years from the date of filing an application for a patent. In
recognition of the lengthy period for the development and marketing approval process for
bringing some products in the life sciences to market (chiefly, pharmaceutical products), certain
jurisdictions offer Supplementary Protection Certificates or patent term extension/restoration,
through which the term of patent protection may be extended for a period of time.
Trademarks
A trademark is a distinctive sign that identifies certain goods or services as those produced or
provided by a specific person or enterprise. The objective of this system is to help consumers
identify and purchase a product or service because its nature and quality, indicated by its unique
trademark, meets their needs.
A trademark provides protection to the holder of the mark by ensuring the exclusive right to use
that mark to identify goods or services, or to authorize another to use it in return for payment.
The period of protection varies, but a trademark may be renewed indefinitely on payment of
additional fees. Trademark protection is enforced by the courts, which in most systems have the
authority to block trademark infringement.
Copyright and Related Rights
Copyright provides the right to exclude others from copying expressive works – including
software – but does not cover ideas, procedures, and methods of operation or mathematical
concepts as such. The kinds of works that may be covered by copyright include: literary works
such as novels, poems, plays, reference works, newspapers and computer programs; databases;
films, musical compositions, and choreography; artistic works such as paintings, drawings,
photographs and sculpture; architecture; and advertisements, maps and technical drawings.
Unlike patents, copyright does not depend on official procedures and exists from the moment of
creation of the literary and artistic work. Generally, these rights have a time limit, according to
the relevant WIPO treaties, for example 50 years after the creator's death. As with other IP rights,
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authorization from the rights holder or his or her authorized representative is required in order to
copy, publish, distribute to the public or broadcast the protected work.
Trade Secrets
A trade secret may be considered as any confidential business information that provides a
business with a competitive edge. What is considered to be a trade secret is broad and can
encompass manufacturing, industrial or commercial secrets. For example, a trade secret may
include sales methods, distribution methods, and advertising strategies, lists of suppliers and
clients, and manufacturing processes. A trade secret can be protected for an unlimited period of
time as long as it is actually kept secret.
Depending on the legal system, the legal source of protection of trade secrets may include
legislation and case law on the protection of confidential information. While there are no
procedural requirements for the protection of trade secrets, in practice, trade secrets are often
protected through confidentiality or non-disclosure agreements and/or non-compete clauses.
5.3. Intellectual Property Vs Intellectual Property Right
It is critical to understand the difference between intellectual property (IP) and intellectual
property rights (IPR); many poor businesses decisions have been made because of such a
misunderstanding. Intellectual Property describes what it is; Intellectual Property Rights describe
what you can do with it, an important distinction. Ownership of IP is not necessarily important; it
is quite possible to own IP but not to have the rights to use it. Equally, you may have all the
rights you need to use the IP as you wish without needing to own it.
Most tangible assets can be possessed exclusively by virtue of the fact that they are tangible –
and hence can be physically secured against access by third parties. Thus, a movable tangible
asset (such as a television) can be possessed exclusively by locking it within a house; and an
immovable tangible asset (such as land) can be possessed exclusively by fencing it. It is, of
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course, the case that most, if not all, means of physical security can be overcome – that is, most
tangible assets can be stolen. To counter this, the law imposes legal prohibitions on the
overriding physical means of securitization – for example, the law makes theft of another’s
goods a crime.
Exclusive possession of intangible assets is problematic, precisely because they are intangible.
This means they usually cannot be physically secured against access by third parties; as an
economist would put it, they are non- excludable. To remedy this defect, the law provides the
means by which intangible assets can be legally secured against access by third parties. The
particular means provided by the law is the grant of (intellectual) property rights, enforceable by
the owner of the rights, with the backing of the state, against third parties by way of legal action
in the courts.
Characteristics of Intellectual Property
In general terms, intellectual property rights have certain common characteristics. First, the
rights apply only in relation to a sub-set of all innovative/creative emanations from the human
intellect – this sub-set being specific types of IP subject matter defined in the IPR laws. Second,
the rights apply only to those defined subject matters that satisfy a specific innovation/creativity
threshold. Third, the rights are not absolute; third parties remain free to engage in certain types of
activity with the IP, even without the consent of the IP owner. Fourth, the rights are generally of
limited duration. Fifth, the rights are generally freely transferable to other parties. Sixth, the
rights are usually, but not always, created under statute. Each of these characteristics of IPRs is
considered in some detail below.
i. Specific Subject Matters
Just as not all intangible assets are IP, not all IP is protected by IPRs. Rather, only those IP
subject matters for which there is a specific legal regime obtain the benefit of the grant of
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exclusive rights. The various IPR regimes specify the sub-set of IP to which they are applicable.
For example, only ‘inventions’ may be granted a patent, and only ‘signs’ may be registered as
trademarks.
ii. Innovation/Creation Thresholds
The laws that create IPRs generally specify a threshold of innovativeness or creativity that must
be satisfied for the subject matter to gain the benefit of the rights. Thus, it is only inventions that
are both ‘new’ and ‘non-obvious’ which may be granted protection by a patent. Likewise, it is
only a literary work that is ‘original’ which will be protected by copyright law.
iii. Limitations on Exclusivity of Rights
The exclusivity provided by IPRs is not, as a rule, absolute. Rather, certain activities in relation
to the IP remain free for all to undertake, even though the IPR owner does not consent. In patent
law, for example, it is generally recognized that uses of an invention for ‘experimental purposes’
are not within the exclusive entitlements of the patent owner. Likewise, in copyright law, certain
uses of a work are considered ‘fair uses’ or ‘fair dealings’ and thus permitted without the consent
of the copyright owner.
iv. Limitations on duration of rights
Most IPRs do not subsist indefinitely; rather, they last for set period of time. In the case of
patents, for example, the duration of the patentee’s exclusive rights is 20 years from the date of
filing the application for the patent. Some IPRs, however, may last indefinitely. A good example
is provided by trademark registration, where the exclusivity continues so long as the registration
is maintained – and there is no limit on how long that may be.
v. Transferability of Rights
Intellectual property rights are assets like other property rights. Accordingly, they may be
transferred to other parties at the will of the owner. The rights may be assigned – that is,
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transferred absolutely from one person to another (the equivalent of selling title to land).
Alternatively, the rights may be licensed – that is, granted for a limited duration but not
absolutely transferred (the equivalent of leasing land).
vi. Statutory Basis of Rights
The majority of IPRs are created by statute – that is, by legislation enacted by Parliament. The
statutes usually are titled by the name of the IPR – hence, the Copyright Act, the Patents Act, and
so on. In some cases, however, the IPRs arise not by statute but by the ‘common law’ or by
‘equity’; that is, by the unwritten law recognized by judges. Examples of common law and
equity IPRs are the entitlements protected by the actions for ‘breach of confidence’ and for
‘passing off’.
5.4. The Intellectual Property System in Ethiopia
The existing laws and Directives in Ethiopia in the field of IP are
• The Patent Proclamation and the Implementing Regulation
• The Copyright and Related Rights Proclamation
• The Trademark Registration Directive
The Proclamation Concerning Inventions, Minor Inventions and Industrial Designs is Issued in
1995. Four forms of Protection:
1. Patents
2. Patents of Introduction
3. Utility Model Certificates
4. Certificates of Registration of Industrial Designs
The Objectives of the Proclamation is to create a favorable environment in order to promote
local inventive and related activities as well as to encourage the transfer and adoption of foreign
technology:
• By giving protection to local inventions it encourages further creativity and the
development of indigenous technological capability;
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• Through the protection it gives to foreign technology owners it facilitates the transfer of
foreign technology.
According to the proclamation in order to be granted a patent, an invention must fulfill three
conditions:
• It must be new - it should never have been published or publicly used before;
• It should be capable of industrial application – it must be something which can be
industrially manufactured or used;
• It must be "non-obvious" - it should not be an invention which would have occurred to
any specialist working in the relevant field.
The proclamation excludes the following from patentability:
• Inventions contrary to public order or morality,
• Plant or animal varieties or essentially biological processes for the production of plants or
animals,
• Schemes, rules or methods for playing games or performing commercial and industrial
activities and computer programs,
• Discoveries, scientific theories and mathematical methods,
• Methods for treatment of the human or animal body by surgery or therapy as well as
diagnostic methods practiced on the human or animal body.
Rights of a patentee include:
• Making;
• Using; and
• Exploiting the patented invention in any other way.
Any person who wants to use the patented invention has to get the authorization of the owner.
The patentee does not have import monopoly right over the products of the patented invention in
Ethiopia.
There are certain limitations of rights of the patentee included in the proclamation:
• Acts done for non commercial purposes,
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• The use of the patented invention solely for the purposes of scientific research and
experimentation,
• The use of patented articles on aircraft, land vehicles or vessels of other countries which
temporarily or accidentally enter in to the air space, territory or waters of Ethiopia,
• Acts in respect of patented articles which have been put on the market in Ethiopia by the
owner of the patent or with his consent.
• The use of the patented invention for national security, nutrition, health or for the
development of vital sectors of the economy, subject to payment of an equitable
remuneration to the patentee.
The duration of a patent is 15 years which may be extended for a further period of five years if
proof is furnished that the invention is properly worked in Ethiopia.
Patents of Introduction are granted to inventions which:
• Have been patented abroad;
• Not expired;
• Have not been patented in Ethiopia.
Protection is valid for a period of 10 years.
Industrial Designs
Criteria of protection for industrial designs:
• Originality;
• Industrial Applicability;
• Industrial designs, which are contrary to public order or morality, are excluded from
protection.
The protection period of an industrial design lasts for a period of five years which may be
renewed for two extensions of five years. Most the applications for industrial design protection
are for shoe and furniture design
Utility model protection is given to inventions which are:
• New in Ethiopia;
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• Industrially applicable.
Reason for inclusion of Utility Model Protection in the law:
• Most of the inventions in Ethiopia involve small adaptations of existing technologies
which do not qualify for patent protection;
• These inventions can have a positive impact on the growth of productivity in the country.
Trademark directive issued in 1986 and its objectives are:
1. To centrally deposit trademarks that is used by local and foreign enterprises to distinguish
their goods or services.
2. To distinguish the products or services of one enterprise from those of other enterprises
and prevent consumers from being victims of unfair trade practices.
3. To provide information on trademark ownership and right of use when disputes arise
between parties;
4. To provide required information on trademarks to government and individuals.
Protection is granted after publication of cautionary notice.
Copyright
• Copyright is protected on the basis of the copyright and related rights proclamation issued
in 2004.
• The proclamation gives protection to literary, artistic and scientific works which include:
Books, pamphlets, articles, computer programs and other writings;
Speeches, lectures, addresses, sermons, and other oral works;
Dramatic, dramatico-musical works, pantomimes, choreographic works, and
other works created for stage production;
Musical works, with or without accompanying words;
Audiovisual works and sound recordings;
Works of architecture;
Works of drawing, painting, sculpture, engraving, lithography, tapestry, and other
works of fine arts;
Photographic and cinematographic works;
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Illustrations, maps, plans, sketches, and three dimensional works related to
geography, topography, architecture or science;
Derivative works;
Collection of works, collection of mere data (databases) whether readable by
machine or other form.
The Proclamation gives protection to:
• Works of authors who are nationals of or have their habitual residence in Ethiopia;
• Works first published in Ethiopia; or works first published in another country and
published within thirty days in Ethiopia;
• Audio-visual works whose producer has his headquarter or habitual residence in
Ethiopia; and
• Works of architecture erected in Ethiopia and other artistic works incorporated in a
building or other structure located in Ethiopia.
The author of a work shall be entitled to protection, for his work upon creation where it is:
• An original work; and
• Written down, recorded, fixed or otherwise reduced to any material form.
Quality of the work and the purpose for which the work may have been created is not taken in to
consideration. The rights of performers, producers of phonograms and broadcasting
organizations are also protected by law.
Periods of protection:
• Copyright is protected for the life of the author plus fifty years;
• Fifty years for the rights of performers and producers of sound recordings;
• 20 years for the rights of broadcasting organizations.
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Chapter Six
Intellectual Property Management
After successfully completing this chapter, you should be able to:
o Understand what intellectual property management is
o Tell the significance of effectively managing intellectual property in relation to
individuals and government
o Tell the benefit of having all inclusive legal ground to protect intellectual property
o Explain the value of respecting others intellectual property
o Describe how to manage intellectual property effectively
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o Describe the benefit of considering and managing risks that are associated to
intellectual property
o Design the system to effectively manage intellectual property
It is in the last 25 years or so that the role of intangible assets has begun to be seriously addressed
in the business management literature, although some specific forms of intellectual capital such
as patents, trademarks and brands have long been recognized as significant contributors to
corporate value creation. What has changed is the growing recognition that intellectual capital is
a component of a broader range of intangible assets, whose development and management is
critical to the competitive capabilities of an increasing proportion of contemporary businesses.
Many of the familiar and traditional sources of differentiation among competitors have been
neutralized by the emerging globalization of trade and developments in information technology
and communication. Geographical advantages have been diminished, distinctions between
products have been blurred and many new market areas have been created. These trends, in turn,
have enhanced the importance of intangible assets as a source of differentiation and competitive
advantage because they are much more difficult to imitate and transfer. They have thus moved
center stage as a vital factor in competitive rivalry in many sectors of business.
5.5. Why Intellectual Property Management?
Intellectual property and rights in IP (and in particular their future promised value) are often a
crucial factor in the value of a company. Intangible assets, of which IP is often the major part,
represented almost three quarters of industrial market capitalization in USA by the end of the
1990s. In 2000, licensing and royalties earned the USA $37 billion, compared to $29 billion for
aircraft sales. There is no doubt that it is worth managing and protecting.
i. Confidentiality Policy
Any business that considers its Intellectual Property to be important should have and use a
confidentiality policy. This is not a document to be put into the drawer to gather dust (with the
business plan and the requirements specifications); rather it is important information with which
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every employee should be familiar. The policy should outline everyone's responsibilities for
protecting the company's confidential information.
ii. Trade Secrets
Trade secrets are the most important and, in many ways, the simplest way of protecting IP.
Anything stays a secret if you don't tell anyone! However, keeping your information secret is not
as simple as it may sound. There are a number of risks and problems. It is unlikely that you could
develop your product without discussions with third parties, customers, suppliers, contractors
etc. you need to be able to share confidential information, such as technical details, with such
partners.
You will also need to market your product or service, usually a process that begins before the
development is completed. Often your marketing program requires you to divulge some details
about your product that you may have preferred to keep as a trade secret until the product is
launched. You could choose to release no details about your product, but there is a real danger of
protecting yourself out of business. You need a mechanism to allow you to release some secrets
to your key customers without putting the information into the public domain and compromising
your trade secrets and your ability to apply for patent protection for your inventions.
Confidentiality agreements offer a way forward.
iii. Confidentiality Agreements
Legal protection of trade secrets can allow you to tell people about your secrets without making
them public. Confidentiality agreements, often known as Non-Disclosure Agreements (or
NDAs), are a common way of protecting your information as trade secret while still allowing
detailed discussion with third parties. Remember, though, that a secret shared with many people
is no longer a secret. Above all, remember that NDAs are only as strong as the management that
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signs them. When you consider signing an NDA, or review your portfolio of existing NDAs, it is
useful to ask yourself the following questions:
• Is this transfer of confidential information necessary for the business purpose?
• Who, individually, is involved in the transfer and who needs to know the information?
• Can I be sure that the information is restricted to those individuals that need to know?
5.6. Legal Ground of Intellectual Property
i. Legal protection
Legal protection of IP can exist in a number of forms, the most important of which are:
• Patents
• Trade marks
• Copyright
• Design Right
• Database Right
ii. Benefits and Costs/Problems of Legal Protection
Benefits of legal protection
Legal protection allows you to seek the protection of the courts against infringement. The courts
can require payments, including royalties, license fees and damages; the courts can also grant
injunctions to stop the infringement. Legal protection is also a clearly demonstrable IP right; it is
registered with an independent body and can be a measurable, albeit intangible, asset of the
company.
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Costs/Problems of Legal Protection
Some protections, e.g. patents, require publication of the IP, which may not always be
appropriate or desirable. The famous Coca-Cola recipe is protected as trade secret and not
protected by any legal protection.
Legal protection can be expensive, particularly in the cost of policing, detection of infringers and
litigation against infringers. If you will never be able to take action in the courts against
infringers, is the legal protection of any real value? Again, these decisions must be taken on a
business, not legal, basis, by management, not your lawyer.
5.7. Respecting Other People’s Intellectual Property
An important consideration, not least through your obligations in NDAs, is to respect properly
other people's IP rights. Such rights include copyright, trademarks and patents, as well as
confidentiality. A major infringement of a third party's IP rights could result in litigation that
might severely damage your company.
If you receive confidential information from a third party (e.g. a supplier, customer or potential
customer, university, partner, etc), you must, at the very least, treat it with the same respect that
you treat your own IP, that includes not sharing it internally except where there is a reason to do
so. Remember that there may be additional constraints applied through the NDA covering the
transfer.
If there is no NDA in place before a discussion with a third party, it is your responsibility to
ensure that you are not given any confidential information — it is worth beginning such a
meeting by stating that you are not prepared to hear any confidential information and will not
treat anything you are told as confidential.
5.8. Risk Management of Intellectual Property
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A good risk management process is proactive, not reactive. Without this systematic process in
place, obtaining insurance coverage may be difficult. There is insurance for intellectual property
risk. However, insurance is not the primary tool for protection of intellectual property, but it can
be protection for the asset. In the consideration of the issue, it is critical to decide what exactly
need to be covered and from what perils.
Intellectual Property is far more vulnerable to risk than most organizations or governments realize.
Organizations purchase insurance for their tangible assets such as buildings and equipment, but
what about an organization's or government`s intangible assets-the right to protect their creative
efforts and the freedom to sell their product in the marketplace? According to the American
Society for Industrial Security, the theft of IP cost North American businesses and taxpayers
over $300 billion in the year 2000 (all amounts in U.S. dollars). A researcher for Fortune
magazine estimated that 10 to 30 per cent of China’s entire manufacturing economy thrives on
producing knockoffs of brand-name articles produced in other countries. If you are a producer or
licensing agency for pharmaceuticals, foods or beverages, the value of your good name is at
tremendous risk if people are poisoned by counterfeit products. How did an organization or
government become vulnerable? Perhaps it is because the organization or government doesn’t
identify the risk to IP at a strategic level; perhaps it is because the organization or government
doesn’t measure that risk. It is true that you can’t manage what you don’t measure. For example,
does your organization know the quantitative value of its brand equity? Does it know the
quantitative impact of losing a key employee?
There are four types of IP insurance that can help organizations better manage risks associated
with intellectual property. They are:
o Defensive IP insurance: Provides protection in the event your product is accused of
patent, trademark or copyright infringement.
o Enforcement (Abatement) IP insurance: Provides capital in the event another entity is
infringing on your intellectual property rights.
o First Party Riders: Provides coverage to pay you for loss of income, design around costs,
etc. in the event your product is found to be infringing.
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o Representations and Warranty insurance: Provides satisfaction for indemnity agreements
in contracts such as supplier agreements.
In general, there should have adequate ground to manage risk of IP and it should be taken into
account as other areas of risk management
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