Fixed Assets and Component Accounting

If you’ve not already been put off by the title of this piece, you may well be a finance person rather than an asset management or IT person.  It’s a sad truth that, for asset managers, component accounting is often an inconvenience they would rather ignore or be invisible and, even for finance people, it’s a necessary evil.  The object of the exercise, then, is to make it as painless as possible for all concerned given that, inevitably, both asset management and finance need to be part of the process.

Let’s just step back a bit and have a look at what we are trying to achieve.  For those who are uncertain (probably the asset managers), there is a difference between component accounting and the wider management of fixed assets although both may affect your day to day lives.  Component Accounting tracks individual capital components (kitchens, bathrooms, boilers, etc.), depreciating their installation cost over their individual lives and writing them off when they are replaced.  Fixed Assets covers not only component accounting but also the separate treatment of land, buildings and other fixed assets.

This means that, if you concentrate only on component accounting then you need other tools to manage the acquisition, updating and disposal of land and property, including grants, impairments, shared ownerships, valuations, depreciation, grant amortisation, etc.  Ideally then, the solution you adopt should be able to handle all of these.

So why take the opportunity to discuss this now, when organisations should already have solutions in place? Well, it’s because the practicalities of operating those solutions may make the processes difficult to manage and I thought it was worth opening up the debate on where the most practical solutions lie.  One thing I have learned is that, to operate an effective fixed assets regime, you need understanding and buy-in from both finance and asset management who have to start working more closely together.  Asset managers will need to appreciate that the work they do affects the net book value of the components and properties their organisation owns and that this is important in the context of active asset management.  At the same time, finance managers will need to ensure that their requirements can be implemented in a way which does not unduly restrict what asset managers can do.

There are four main ways in which you can implement a fixed assets solution.  Whichever way you go, you will need to ensure that the solution is compliant with the current SORP / FRS102 and is able to handle the volume of transactions associated with components:

  1. Spreadsheets

These require manual updating and, although they are manageable for very small organisations, the volume of transactions and the risk of error makes them an unattractive option.

2. Finance Systems

Many organisations use their finance systems for fixed assets and component accounting and these systems have modules for the purpose.  They are strong in ensuring transactions are posted correctly but sometimes suffer from:

    • The fact that that they are separated from the asset management systems which hold records with dates and costs for replacements.  Finance systems are often populated initially based on assumptions as to the existence and age of components.  For example, I have often come across an assumption that every property has a boiler and a heating distribution system whereas, in reality, electrically heated properties don’t have boilers.  Another point to note is that asset management systems hold components records at block or sub-block level as well as property level (e.g. roofs) and this is difficult to handle, allowing for individual property disposals, without integration with the asset management system.
    • Issues with volumes of data.  If you have an organisation with 20,000 properties and each has only 5 capital components, each with a unique installation date and life then there are 100,000 individual depreciations to undertake and record every period.  For monthly depreciation, that’s 1.2 million records a year when, in reality, the ledgers may only require a debit and credit for each combination of account and analysis codes per month.
    • Batch event handling and batch data import such as revaluations, additions or disposals are sometimes limited.

3. Stand Alone Fixed Assets Systems

These systems are popular because they are designed specifically for the job of dealing with fixed assets and can be integrated with finance systems for journal creation.  However, they tend not to be integrated with the housing or asset management systems and require maintenance and reconciliation to ensure that their property records are up to date and that component replacements are recorded accurately.  In short, although they can handle the volumes of transactions, they have the same issues as finance systems over the accuracy of component data.

4. Asset Management Systems

These systems are usually integrated or interfaced with the housing management systems so the requirement for property reconciliation is removed.  They are also the prime source of component data, containing records of replacements, with dates, costs etc.  The downside with asset management systems is in ensuring that the cost data loaded against component replacements is reconciled with finance data.  Integration with finance systems is also a key area to get right, ensuring that all relevant transactions are accurately interfaced to the finance system in detailed and summary journals.  Providers of asset management systems, such as ourselves, have put in a lot of effort to ensure that the required integration is as seamless as possible. The fixed assets modules of asset management systems should be able to handle and report on all fixed assets, not just components. Property and land acquisitions and disposals, including shared ownership sales, can often be handled through their integration with housing management systems and the recording of completed component replacements will automatically write off/add the corresponding fixed asset records. This means that although manual or batch/data loaded updates by finance are possible, they can be kept to a minimum.

When making the decision to implement a fixed assets software solution, it is important to consider not only the objectives and requirements of the business, but also the ease of use and effect on different departments, all with the aim of having one version of the truth.

So whilst the decision to use your current solution may, on the surface, have seemed an attractive, cost-effective and easy option, it may be time to reconsider your options and take action.

John Buckland, Director, in4systems