Many public sector entities own and manage large asset portfolios amounting to many millions (or billions) of dollars. Management can make better decisions when they have good data about their assets. Better data can come from an entity aligning its financial management and asset management principles, practices, and systems.
Entities use their financial systems to prepare external financial reports that typically adopt Australian accounting standards. They may also use the data in these systems to prepare budgets and other internal reports.
Entities may use their asset management systems for many purposes, including:
- planning and recording the maintenance of an asset
- tracking the location of an asset
- recording the dimensions, and useful life (including the condition) of an asset
- recording when and how the entity plans to renew the asset (or its parts).
Successfully integrating both financial and asset management systems can improve the following areas.
Ensuring complete asset registers
When both systems use the same asset identifier (such as an asset number, or linear metres), the entity can automatically reconcile the asset register in each system to ensure it is complete. This means that if an asset is first added to the asset management system, it will automatically flow to the financial system. This reduces the risk that an entity’s financial records are incomplete.
During 2018–19, 18 of the 77 Queensland councils reported ‘found’ assets due to mismatches between their financial and asset management systems. Ten councils had to make material changes to amounts in their prior year financial reports.
Understanding condition and remaining useful lives
Each asset has a useful life recorded, many within their financial system. Under accounting standards, this is the period over which the entity expects to use the asset. This can be different from the engineering design life, which an entity would record in the asset management system.
An entity must also annually assess whether the useful life of each asset remains appropriate compared to previous estimates. One input to this process is the current condition of the asset, which entities should record in their asset management systems.
Aligning these two processes helps finance teams to have confidence in their useful life assessments and helps asset managers understand when assets may need renewal or refurbishment. This helps decision-makers allocate scarce resources in an effective way.
Forecasting replacement and renewal
The useful life of an asset recorded for financial reporting purposes indicates when the entity expects to replace an asset. Asset management systems may include a separate assessment of when the engineers expect the asset will need renewal or replacement. Aligning these two assessments:
- results in better information for decision-makers
- improves availability of financial information to inform forward planning, including capital and entity-wide budgets, and setting rates and charges
- helps to identify and correct any differences in forecasted amounts
- gives leaders greater confidence in the financial information the entity uses in setting performance metrics
- increases opportunities for meaningful data analysis.
Understanding maintenance demand
Asset management systems often include records of maintenance for an individual asset. Financial systems usually lack this level of detail. Understanding where the entity has spent its maintenance budget and when during an asset’s lifecycle can improve future forecasting and identify particular asset categories or locations that may require investment.
It can also help the entity to identify the optimal time to replace the assets; this may be sooner or later than initially expected, and can change depending on the maintenance cycle adopted. For example, it may make financial sense to replace the asset soon if the current maintenance cost (from the asset management system) is a significant proportion of the replacement cost of a new asset (from the financial system).
This information provides an overview from the Queensland Audit Office. For further insights on other topics, please see our blog.