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31 Dec 08

If you don’t know what the company has, you can’t use it efficiently. Karen Conneely suggests that the move to IFRS offers a unique opportunity to tighten things up

by Karen Conneely

IFRS – an opportunity for asset utilisation

Organisations may have made the somewhat painful move to IFRS, yet despite the significant changes to asset valuation and management, many are still relying on inaccurate and inefficient spreadsheet-based processes.

The adoption of a fixed-asset register will not only streamline year-end audits and reduce reliance on specific, skilled personnel, but will also provide the detailed insight into corporate assets required to attain maximum asset utilisation across the business.

With many companies now reporting a capital expenditure freeze, the ability to reuse and reinvigorate existing asset value will become increasingly important as the recession bites.

Good housekeeping

As the UK follows the global trend into recession, organisations across the country are imposing far tighter financial controls – and capital expenditure is being reduced to the bare minimum. Over the past decade, however, they have invested heavily in new assets and equipment. Manufacturing lines have been replaced, state-of-the-art IT kit deployed and property portfolios extended.

Very few organisations have any real idea of where much of this asset base resides, whether it is being effectively utilised or whether it has been disposed of, despite still being depreciated on the balance sheet.

What happened to the assets that were replaced by the shiny, new equipment? Are they being used across the business – or simply left unused in a cupboard or warehouse?

With no budget forthcoming for new purchases, now is the time to get an accurate

handle on corporate assets to ensure maximum utilisation and value.

Spreadsheet quandary

The problem for most organisations is that despite going through the process of moving to IFRS and adapting to the new requirements for asset accounting and revaluations, the majority of organisations still rely on spreadsheets to manage the asset register.

The process is cumbersome, prone to errors and provides the finance team with no insight into an asset’s location or its current operational role within the business. Those organisations that have moved to component accounting as part of the shift to IFRS may have achieved a greater insight into the overall asset register, but still have no proactive way of imposing control over this base. The result is a massive, highly valuable corporate investment that is, to all extents and purposes, visible only on the balance sheet.

Yet organisations that can impose control and rigour over the asset register will be in a far better position to maximise the existing, deceptively valuable, asset base.

They will have a complete picture of asset location and current use; they will be able to keep track of assets – a key issue with the growth in portable IT equipment. And they will be able to ensure that new employees are not automatically purchasing brand new equipment but that existing, serviceable assets are reused where appropriate.

In a recessionary climate, this degree of prudence and operational control is essential. Businesses that take care of the pennies on the asset register will soon start to see the pounds appearing on the balance sheet.

Deskilling

With a good asset register in place, organisations can not only impose excellent control over the management of assets but also streamline processes to reduce the administrative overhead – hence saving costs.

Rather than relying on complex spreadsheets – and associated expertise – to manage new depreciation calculations and changes to the treatment of leased assets and impairments, organisations can make use of an automated solution to dramatically reduce the month and year-end processes.

Automation not only drives down administrative time, but also reduces the reliance on one or two experts responsible for the creation of highly complex spreadsheets that are impenetrable to anyone else in the finance team.

Organisations can deskill the asset management role to gain further cost benefits, and this strategy also supports the growing trend towards centralising the finance role for organisations with multiple locations or operating companies. A centralised asset register supports the move to a shared service centre across the entire organisation, delivering significant financial savings.

In addition, automated generation of reporting, combined with a full audit trail, significantly reduces the time taken to undertake the year-end audit and confirm the asset value – resulting in a reduction in auditor fees.

Asset value

It seems extraordinary that so many organisations have made the painful transition to IFRS, with its associated implications for asset valuation, without recognising the administrative overhead and inaccuracy created by reliance on spreadsheets.

The fixed asset register is key to business value in many ways. Disaster recovery strategies, business continuity plans, insurance claims and due diligence during a merger or acquisition all begin with the information recorded in the asset register.

Those businesses that recognise the need for a tailored asset management solution rather than a massive spreadsheet will not only enable maximum asset utilisation and achieve a reduction in administrative cost, but will also be in a very strong position once the economy swings around again.

Karen Conneely is group commercial manager with Real Asset Management.

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