The public sector is facing up to IFRS (international financial reporting standards) and seizing the opportunity to use the asset register to maximise business benefits. It’s true that the new IFRS reporting complexity, combined with an extraordinary increase in asset numbers, does present a series of challenges to financial departments. But in time, the new standards will deliver tangible business benefits and increased cost efficiencies. These will make any disruption caused during this transition period, as organisations completely readdress their asset register requirements, seem like a very necessary catalyst to a far more productive time.
A specialist fixed-asset register is key if public sector organisations are to reap the maximum benefits. This tool will not only streamline year-end audits and reduce the reliance on specific skilled personnel, but will also provide the detailed insight into corporate assets required to improve capital expenditure decisions and improve local authorities’ comprehensive performance assessment (CPA) scores.
Fear of IFRS
The public sector is enthusiastic about the business benefits of IFRS, despite the disruption the transition will cause. The implications across the organisation are significant, but for the management of the asset base, the changes will have a fundamental impact on operational processes and the administrative overhead.
From the introduction of current-cost accounting in local government to the need to place PFI projects on the balance sheet, and the need to reassess existing operating leases as potential finance leases, IFRS poses some major challenges.
But the most significant issue is that the process will create far more individual asset records and far more complex registers. This will create audit challenges and constrain the desire to improve operational performance through effective utilisation of assets and budget. It takes an understanding of the bigger picture to really appreciate the long-term benefits that specialised asset accounting and IFRS will bring.
IFRS demands that every asset is broken down into its component parts, with each component potentially having useful economic lives of different lengths. And, as those organisations that have begun to make the move towards component accounting to meet the demands of IFRS and SORP have discovered, the asset register jumps from, for example, a manageable 500 lines on a spreadsheet to hundreds of thousands of separate items.
This problem is especially acute for housing associations and for local authorities with large housing stocks. The move from accounting by scheme, such as each block of flats, not just to unit level but to the components within that unit, has created an asset register of unprecedented complexity.
Each component asset, depreciated over different periods of time and to different rules following acquisitions and refurbishments, is now handled at a far more granular level. Furthermore, changes to the way PFIs and some operating leases are treated will add even more assets to the register.
While it may be tempting to carry on managing fixed assets on a spreadsheet under IFRS, this is simply not practical. The process is cumbersome, prone to errors and provides no support for the complex calculations now required across a broader asset base. Indeed, at the most basic level, most spreadsheets are simply not practical for the new volume of asset records.
Those public sector organisations that have already moved to component accounting to meet SORP obligations may have achieved a greater insight into the overall asset base. Yet without an automated, dedicated system, they still have no way of imposing control over the asset base. There is no clear audit trail, no way of linking housing grants with the relevant assets and no way of streamlining the additional complexity now associated with ongoing asset update and replacement.
The result of switching from spreadsheets to a fixed-asset system will be to make visible a highly-valuable corporate investment that is currently little more than a number on the balance sheet. Organisations that impose control and rigour over the asset register 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 assets such as IT and medical equipment. And they will be able to ensure that new equipment is not automatically purchased; instead, serviceable assets can easily be located and reused where appropriate.
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 the necessary expertise to manage new depreciation calculations and changes to the treatment of leased assets, organisations can leverage a specialist system to dramatically reduce the month- and year-end processes.
This not only drives down administrative time but also reduces the reliance on one or two experts responsible for the creation of highly-complex spreadsheets which are impenetrable to anyone else in the finance team. By leveraging simplicity and automation, organisations can deskill the asset management role to gain further cost savings. This strategy also supports the growing trend towards centralising the finance role within a shared service centre to deliver financial savings and meet government targets for the closure of accounts.
In addition, automated generation of reporting, combined with a full audit trail, significantly reduces the time taken to complete the year-end audit and confirm asset values, resulting in a reduction in external audit fees.
There is little doubt that the shift to IFRS is a major challenge for the public sector. But, with the right approach, it will prove invaluable. Best practice, improved understanding and control over the asset register will enable organisations to make better informed decisions about capital expenditure and replacement budgeting – decisions that will have a measurable impact on CPA scores and audit reports.
Once established, this new set of standards will offer an astonishing level of visibility throughout the fixed-asset register, maximising business value, streamlining processes and allowing organisations across the public sector to achieve their full potential through the prudent management of resources.
Karen Conneely is group commercial manager for Real Asset Management.