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 stoc o !xplain the difference between tangible and intangible assets
o !xplain the importance of having organi"ational placement and policy in managing

public asset o Describe ma#or issues that should be considered in public asset management policy an procedures

1.1. Definition of Public Asset According to the $inancial Accounting %tandards &oard 'oncepts %tatement (, assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. The Institute of )anagement Accountants* Accounting +lossary 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. n its broadest sense, an asset is anything that will probably bring future economic benefit. n loo!ing at assets, the focus will be on long" lived tangible assets, sometimes referred to as fixed assets or property, plant, and e#uipment. The term $asset% can be used to describe many different types of assets; for example, road infrastructure, plant and machinery, e#uipment and property. &ore specifically, '(ublic 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 par!s, and so on). Assets may also be 'intangible such as copy right or mineral exploitation rights and others). According to *ederal +overnment of ,thiopian Accounting system manual -, volume . chart of accounts, the assets of the ,thiopian +overnment constitute cash and cash e#uivalents, receivables, goods in transit, stoc!s, fixed assets (construction in progress, and property and e#uipment), and investments. The (ublic (rocurement and (roperty Administration (roclamation /o. 01234552 of ,thiopia define public property as all public properties other than public fund and land. 6upplies and materials include all public property other than fixed assets, which can be consumed within one year. 6upplies immediately not consumed shall form part of supply inventories and presence of custodial responsibilities. 7hereas, fixed assets are tangible assets that have a useful economic life of more than one year. As it is stated in *ederal government of ,thiopia stoc! management manual (45.5), stoc! (inventory) represents items that are purchased or produced or donated and are not immediately consumed, which is temporally !ept 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. 6uch a portfolio would be a solid base for implementing the valuation methods necessary for efficient utili8ation of public assets. 9ust 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. Ta!ing 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 business3government uses in
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the production of goods and services. They constitute the production facilities, buildings, e#uipment, and vehicles and operational assets of a business3government that constitute furniture, computers, and similar items not used up within a year. Assets that are consumed during the normal operation are current. ;urrent physical assets are referred to as financial assets. These are physical assets such as raw materials, wor!"in"progress inventories, finished goods, and goods held for resale. (hysical items can be financial assets, held in inventory, in one business3government, whereas in other businesses3governments 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 organi8ation or builder, which would be a fixed asset for everyone else. ,#uipment manufacturers have financial assets in finished goods or inventory held for sale, as well as plant and e#uipment that will be sold to other businesses3governments. The inventory is a financial asset; when sold for use in a production line it becomes a fixed asset to the purchaser. *ixed assets are physical or tangible assets in nature. They can be any items costing over a certain dollar3birr amount, large or small, to an item that has a certain useful life. A public sector organi8ation<s assets represent a substantial financial investment. They will be discussed in detail in chapter three and four of this module. The costs of ac#uiring, maintaining, insuring, and replacing these assets have a considerable impact on the operations of the entity. *ixed assets are not always found in one place and, in fact, are more commonly thought of as movable assets, property, or e#uipment. 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 organi8ation. 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 an !nventories The dictionary meaning of the inventory is stoc! of goods or a list of goods. n accounting language, inventory means stoc! of finished goods. n a manufacturing point of view, inventory includes, raw material, wor! in process, stores, etc.

nventories constitute the most significant part of current assets of the business concern. t is also essential for smooth running of the business activities. nventories can be classified into five major categories. i. Raw Material t 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. iv. Consumables Finished Goods These are the materials which are needed to smooth running of the manufacturing process. These are the final output of the production process of the business concern. t is ready for consumers. v. Spares t is also a part of inventories, which includes small spares and parts. t should be emphasi8ed that the +eneral *und and all other funds classified as governmental funds account for only current financial resources (cash, receivables, mar!etable securities, and, if material, prepaid items and inventories). ,conomic resources, such as land, buildings, and e#uipment utili8ed in fund operations, are not recorded by these funds because they are not normally converted into cash. 6imilarly, governmental funds account for only those liabilities incurred for normal operations that will be li#uidated by use of fund assets. f a government is large enough to have si8eable inventories of consumable supplies that are used by a number of departments, it is generally recommended that the purchasing, warehousing, and distribution functions be centrali8ed and managed by an internal service fund. n fund accounting perspective, +overnments that account for their supplies within the +eneral *und can use either the purchases method or the consumption method, =sing the purchases "etho # expenditures for supplies e#uals 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 +eneral *und and other governmental funds. The purchases method is generally associated with a periodic inventory system, so the balance of the nventory of 6upplies account is increased or decreased as necessary at year"end to agree with the valuation based on a physical count. n addition, a >eserve for nventory of 6upplies account, having a credit balance e#ual in amount to the balance of the inventory account, is re#uired to indicate that the inventory reported on the balance sheet is not available for spending. The consu"ption "etho is consistent with the accrual basis of accounting, as resources (i.e., supplies) consumed in providing services is the essence of an expense. Thus, +A6? standards re#uire the use of the consumption method for government"wide and proprietary fund reporting. =sing this method, the +eneral *und recogni8es expenditures e#ual 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. 7hen using the consumption method, reporting of a reservation of fund balance is optional, though recommended. nventory 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). @owever, when a government has significant amounts of inventory, it should be reported on the balance sheet. nventories are most often associated with manufacturing and retail operations, rather than not" for"profit organi8ations. &any not"for"profit organi8ations do maintain inventories, however. n other words, supplies that are expected to be used by the not"for"profit organi8ation in its operations should not be reported as inventories. n 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. ,xamples include cash, short"term investments, contributions and other receivables, inventories, and prepaid expenses. ;urrent assets would not include those assets restricted for use in the operation of the organi8ation, 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 re#uired to ensure production or service delivery can continue as planned without interruption. Ai!e any asset, decisions need to be made whether they should be held, and how much to hold, and they need to be efficiently managed. Bften the level of effort dedicated to inventory management will depend on the level of inventory investment. Bne of the !ey challenges in inventory management is to hold the minimum level of stoc!, tying up minimum cash resources, while ensuring delivery continues uninterrupted. &anaging inventory assets can be seen from two perspectives:

optimal planning in terms of levels of inventory re#uired to be held, timing of ac#uisition, and order si8es; and (hysical and process control over inventory to ensure efficient handling and prevention of losses (includes proper record !eeping of transactions and stoc! on hand).

nventory management records, procedures and systems (whether manual or computeri8ed) may vary significantly from one entity to the next depending on the si8e and nature of the entity. 1.2.2.1. Ob$ectives of !nventory %anage"ent nventory occupies -5CD5E of the total current assets of the business concern. t is also very essential part not only in the field of *inancial &anagement but also it is closely associated with production management. @ence, in any wor!ing capital decision regarding the inventories, it will affect both financial and production function of the concern. @ence, efficient management of inventories is an essential part of any !ind 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 maximi8e the profitability; To meet the seasonal demand of the products; To avoid price increase in future; To ensure the level and site of inventories re#uired; To plan when to purchase and where to purchase; To avoid both over stoc! and under stoc! of inventory.
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1.&. Asset %anage"ent Organi'ation an Policies 1.&.1. Organi'ational Place"ent for Public Asset %anage"ent There is a need of standard organi8ational placement for the asset management function in the public sector. To understand the enormity of the tas!, one must gain insight to the organi8ing function. ncreasing speciali8ation of activities, projects, and s!ills demand that managers loo! to elements within their control for gaining coordination by designing, mapping out, and deliberately planning the duties and relationships of people in the organi8ation. n summary, the organi8ing function see!s: To establish efficient and logical patterns of interrelationships among members of the organi8ation. To secure advantages of speciali8ation whereby the optimum utili8ation of talents can be reali8ed. To coordinate activities of the component parts in order to facilitate the reali8ation of the goals of the organi8ation. n some organi8ations, the assets manager is responsible for the inventory and trac!ing of assets, as well as, the assets accounting functions. >egardless of the organi8ational placement of the asset management function, there should be an organi8ation chart that accurately shows the lines of authority, responsibility, and accountability for the function. The primary purposes to chart the organi8ation structure are to show the hierarchical way functions and individuals have been grouped together, including the authority and responsibility lines that connect them. Brgani8ational charts, to be useful, must show Fwhat isF as opposed to Fwhat should be.F 1.&.2. Public Asset %anage"ent Policies t 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; GG

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Asset categories (classes); 6ingle asset versus component approach (segmentation); Asset valuation (cost, contributed or donated assets, grants or donations, so on); ;apitali8ation policies (buildings i.e. more than one building on a land parcel or one building on several land parcels), library boo!s; ;apitali8ation thresholds; ;apitali8ation of subse#uent costs; ,nhancements (rehabilitation) versus maintenance; Hepreciation methodology and rates; >eviews of estimated useful life and write"down for impairment; ;apital leases (finance leases); Asset registers (content, maintenance of the register"updating, physical verification, register content (periodic)); ;ontrol (asset base, maintaining records and documentation); ;onstruction wor!"in"progress (when to start capitali8ing, and when to stop capitali8ing and start depreciating); 6urplus assets; Asset disposal (sale, abandonment, demolition, trade"in); ris! management, health and safety issues and environmental issues.

Chapter Two
Public Stoc( %anage"ent
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 !xplain the significance of inventory management o Appreciate how to classify and code inventory
o !xplain the ob#ective of classifying and coding inventory o Identify the procedures of coding inventory o %tate inventory holding and ordering costs and their effects o Describe the reasons for holding inventory o !xplain economic order -uantity, lead time and safety stoc o !xplain techni-ues necessary for inventory management

o !xplain the benefit of stoc ta ing o Describe the need for stoc recording and accounting o !xplain the significance of reporting stoc on hand at year end
o Tell the benefit of inventory management performance evaluation

1.1. Overview of !nventories an Supplies A private sector entity is interested in inventory management to ensure the most efficient investment of resources in the pursuit of profit maximi8ation and therefore return on investment, whereas in a public sector the objective differs from profit or wealth maximi8ation. The importance of inventory management in the public sector is based on the need to:

Hemonstrate accountability for public resources; mprove transparency and credibility of information used for ma!ing policy choices; and

mprove efficiency.

A public sector entity is loo!ing to maximi8e return on investment to deliver more services or a higher level of service to the community and other sta!eholders. 7here services are paid for by taxes, tariffs or service charges, the #uestion of accountability for public funds arises. nventories are assets: a. n the form of materials or supplies to be consumed in the production process, b. n the form of materials or supplies to be consumed or distributed in the rendering of services, c. @eld for sale or distribution in the ordinary course of operations, or d. n the process of production for sale or distribution. nventories generally include:

&aterials and supplies awaiting use in the production process or provision of a service;

7or! 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);

*inished goods not yet sold or otherwise distributed; +oods purchased and held for resale; and +oods purchased for distribution at no charge or nominal charge.

Assets classified as inventory are current assets which are often held in a warehouse or stoc!room and issued to jobs or projects or otherwise utili8ed as re#uired. ,xamples might include such items as spare parts for speciali8ed machinery held a warehouse.

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(ublic 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 re#uired to be held as inventory; An efficiency review of inventory operations; Hetailed operational plans or material re#uirement plans which indicate re#uirements for holding inventory;

A review of inventory management policies and procedures.

1.2. !nventory %anage"ent Techni)ues

(ublic organi8ations must progressively review inventory management techni#ues to minimi8e holding cost while ensuring uninterrupted service. This may be done in conjunction with reviewing policies and procedures. The management techni#ues considered must include:

A?; inventory control to classify items for differential management; 9ust"in"time inventory control; 6toc! ta!e; (hysical protection from theft, damage, and abuse; 7arehouse and stoc!room organi8ation; ;ompetencies and training of staff; Hetermining #uantities to be held, order si8e and order fre#uency C economic order #uantity model;

Iuantity discount model; and >eorder point model.

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*inancial management and related governance reforms being introduced in the public sector are see!ing 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:

mproved information for ma!ing policy choices (allocation of resources to programs); &ore efficient use of resources in delivering the chosen programs; ncreasing the rate of delivery of basic services and associated elimination of bac!logs.

This is achieved primarily through:

,nhancing 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

mproving 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. t is critical to note the increased focus on measuring outputs and outcomes and not just what was spent and what was received.

mproved inventory management in the public sector in terms of financial management and internal controls can, for example, lead to:

ncreases in investment revenue or freeing up of resources to be used elsewhere due to reductions in stoc! held in inventory; and

A reduction in losses due to theft, wastage, damage, spoilage or misuse.

>eductions in losses or otherwise freeing up resources to be utili8ed in other areas may lead to increasing the rate of delivery of basic services and associated elimination of bac!logs.
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1.3. Accounting for !nventories an Supplies

&anual

, of the ,*+ accounting system, volume

, accounting for other assets and liabilities This manual

specify whenever the value of stoc! cannot be determined; the value of the good is estimated based on the identical or similar good value at the time of ac#uiring the good.D also re#uired to report the value of ending stoc! to the accounts unit. Ade#uate store accounts are necessary for a variety of reasons, of which the following are the most important to: a) ndicate the value of goods in stoc!. b) (rovide a basis for material costing. c) (rovide the means of operating stoc! control by value. &aterial costing is done at the receipt of materials, issue of materials and the stoc!s held at the end of the fiscal year. According to the *inancial Accounting 6tandard ?oard, 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 *inancial Accounting 6tandards ?oard issued *A6? 6tatement /o. .J., nventory ;osts, an amendment of A>? /o. 1-, ;hapter 1. The factors that are to be included in the cost of materials received are material price, freight charges insurance and taxes. (rice usually refers to the price #uoted 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. *or costing purposes we have to wor! out the actual cost incurred by ta!ing price #uoted by the supplier as the basis, subtracting the discounts and adding freight, insurance duties taxed and pac!age charges.

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6toc! accounting is important in terms of: o The valuation of the cost of materials consumed by production and other departments. o ,stimation of the value of materials held in stoc!. 1.&.1. Proce ures an recor s for Stoc( Accounting The main records involved in stoc! accounting are: a) stoc! record for individual item b) stoc! control account for classification of items c) main stoc! account for the total stoc! 6toc! record for individual item shows the #uantity, unit price, value of each transaction and total value of the balance on hand. >eceipts are treated as debit entries and issues as credits, and the value of stoc! on hand is, therefore, debit balance. 6toc! increases as a result of goods received and goods returns to store. 6toc! decreases as a result of issue. The store cler! should obtain a source document before the recording the increase (debit) and the decrease (credit) of each transaction. *or stoc! control accounts, the stoc! records should be !ept in classification order in accordance with the coding system, i.e., from 1155 to 1122 and for each classification there should be a control account li!e for food one control account, for office supplies another control account and so on. >eceipts documents are summari8ed at interval, say wee!ly or monthly and one total posting is made to each control account. 6imilarly, issues are aggregated each wee! or month and posted to each control account. The main stoc! account shows for the whole public body the total value of receipts, the total value of issues and the value of the balance of stoc! on hand. n the same way the stoc! controls account"controls the stoc! records, the main stoc! account"controls the stoc! control accounts. ts balance should, therefore, e#ual the sum of the balance of the stoc! control accounts.
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(eriodical chec!, preferably monthly should be made to verify that there is no discrepancy.

1.4. *arehouse/Store +unction

The primary objective of store is providing service to operating functions and controlling materials. The services provided by store may include the following.

&a!ing available and balancing the flow of materials; >eceiving and issuing materials; Accepting and storing scrap; Accounting for all receipts, issues and !eeping goods in stoc!.

The store functions are usually associated with nspection, >eceiving, 6torage and (reservation. nspecting is uploading and chec!ing for #uality, #uantity and delivery as per specification of the purchaser. @ere the #uestion is who should inspectK s that team or from technical staff or store!eeper, and how to inspectK /o inspection if the purchaser has confidence of supplier but when the inspection is re#uired, each and every item (time, cost) delivered should be inspected and cross chec!ed against the sample. After inspection duty is completed, items are received and stored in their proper location. >eceiving is the process of accepting from all sources materials and e#uipment used by the organi8ation. The receiving procedures of the items may be chec!ing the shipment against freight bill and material against the pac!ing slip and against the purchase order (correct items and #uantity); chec!ing the general condition of the material. 6ubse#uently, the receiving report will be prepared. Then after, the materials need to be properly stored and preserved. 7hen the re#uired materials are re#uested by user(s), through proper authori8ation of issue (including names and signature, forms"stores re#uisition) they are issued and dispatched. ssue and dispatch is the process of receiving approved re#uest, selecting the items re#uired, and hand over them to user(s).

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6toc! records and recording systems are necessary for accurate recording of stoc! movements. The purpose is to:

ndicate the amount3balance of stoc! without counting; Ain! the physical stoc! with the stores account; (rovide a means of provisioning; 6upply information for stoc!ta!ing or inspector.

?oth &in 'ard and %tore .edger 'ard in addition to other records may be used in stoc! recording system. ?in card shows the level of stoc! of an item at a particular stores location and !ept with the actual stoc!, and updates by the store!eeper; whereas store ledger shows the value of stoc!.

6tore accounting is the process of recording stoc! movements and balances in value. ts purpose is to value the materials consumed and materials held in stoc!, and costing of issue may be * *B, A *B, 7A, standard cost method. @owever, * *B method is preferable in public organi8ations.

The store functions may also focus on minimi8ing obsolescence, scrap, surplus through proper codification and preservation; and highlighting stoc! accumulation, discrepancies, abnormal consumption and efficient control.

ts objective of identification of materials is to develop unambiguous identification system, with ade#uate item description, that facilitates clear communication among users. &aterials 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. ;oding materials3items is useful for3to:

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Avoidance of long description, Accurate identification, (revent duplication of items, (rovide efficient purchasing, 6implifying mechanical recording.

Stocktaking Stock !eri"ication t is the process of physically counting, measuring or weighing the entire range of items in the stores. ts purpose is to: o reconcile the stoc! records and documents for the accuracy and usefulness o o identify areas which re#uire more disciplined document control bac! up the stoc! figures and minimi8e pilferage and fraudulent practice ,and to !now the condition of goods

6toc!ta!ing could be ta!en through periodically (at the end of the year), or continuous verification is done throughout the year), or low point inventory (when the stoc! reaches to lowest level, irregular time) system.

nventory3stoc! is idle goods in stores waiting to be used. nventory classification or types or forms of inventory depend on the organi8ation (raw materials, in process inventories, finished goods and &>B (maintenance, repair and operating supplies). The purpose of maintaining inventory in stoc! may be to meet variation in product demand or protect suppliers% error and shortages and ta!e advantage of economic purchase.

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#nventor$ Costs Bne thing that needs to be considered in handling inventory within store is inventory costs. They include purchase price of the item, carrying3holding3costs (storage facilities, handling, insurance, brea!age, obsolescence, deterioration, and opportunity cost of capital), and ordering costs"managerial and clerical cost to prepare the purchase order.

%a$out o" Stores Aayout of stores also matters for proper handling of materials. ,ven if it is based on the re#uirements of an entity, the following issues should be considered:

;onstruction" single store is usually preferable due to construction cost; Lentilation: allow easy circulation of air; Hoors"wide and high enough; 6tructures" able to carry cranes, minimum height for receipt M dispatch doc!s; Aighting" natural light; ,fficient space utili8ation and flexibility of arrangements.

n relation to organi8ation of stores, many sections may exist depending on the si8e and number and #uantity of items held. t is highly related with purchasing, and stoc! control. f integrated under one department3section, it is good for better accountability, and control, and have relationship with other departments.

Sa"et$ and Securit$ "or Store Function 6tore function should consider safety measures that enable to prevent danger that may face store men3women during carrying out store functions. 6o, in order to curtail ris!s that may face, some of the issues that should be considered are as follows:
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o o o o o

6afety appliance such as goggles, gloves; +ood house!eeping" gangway are clean, wide and so on; 6afety signs; ,#uipments for use in accident li!e first aid !it, gas mas!, high volume shower; ;ustody of !ey " !eys must be registered and numbered, off"duty to be !ept in a loc!ed !ey safe;

o o

Access to premises; *ire precautions " smo!ing is prohibited, fire prevention e#uipment, fire drill, fire fighting training, calling fire brigade, inflammable stores to be isolated;

o &inimum number of doors.

Stocking Positions and &eights As it is already mentioned, stoc! should be arranged to use the oldest first (Ffirst in first outF principle) and to prevent obsolete stoc! from accumulating; containers should be arranged to minimi8e handling problems and thus avoid mechanical damage giving rise to lea!s; and floor spaces should be neat, with mar!ed, may be ."m wide gangways between shelves or stac!s.

1.5. !nventorying an ,eporting -on.+i/e Assets

6toc! ta!e is the process of counting physical stoc! present in the warehouse or other locations, comparing it to the manual or computer records and ma!ing adjustments where necessary. t verifies inventory records supporting the value in the financial accounts; reduces the possibility of theft and fraud; and reveals any wea!nesses in inventory management. 6toc! ta!e could involve staff wor!ing 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 stoc! item and each item is still physically counted. A >* H reader could be used to actually count the stoc! present with one
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pass of the reader over the general area. This would re#uire the >* H tag to be mounted in such a way that it could not be removed and its presence actually truly indicates that the stoc! is present. &oreover, a variety of stoc! ta!ing methods could be employed depending on the nature of the item and how it has been classified for inventory management purposes. 6toc! ta!e is a chec! 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 re#uired in procedures.

t should be seen as an opportunity to continuously improve the accuracy and efficiency of the warehouse operation. Periodic stock take (eriodic stoc! ta!e refers to performing the stoc! ta!e on a periodic basis, for example, annually, semi annually or #uarterly. n many cases stoc! ta!e is only done annually near the end of the financial year to satisfy audit re#uirements. ?est 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 stoc! ta!e is the continuous stoc! ta!e. n a system where the entire warehouse is subject to a continuous stoc! ta!e, once all items in the warehouse have been counted, the stoc! ta!e process begins again from the beginning. *uel is an example of an item which re#uires very fre#uent confirmation of actual physical stoc! because of its physical nature: tendency to evaporate, contract and expand; and potential issues with measurement and delivery systems. &$brid stock take Hifferent items may re#uire closer management attention in the form of more fre#uent stoc! ta!es. >emember the example of critical, short life, drugs re#uiring refrigeration in the hospital pharmacy. These may be identified as re#uiring a continuous stoc!ta!e. (erhaps the stoc! levels
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are small and it is decided that stoc! levels, expiry dates and storage e#uipment operation should be verified each day. t 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 re#uire verification once or twice a year. @ybrid stoc! ta!es are recommended for all warehouse environments. The inventory controller should determine a stoc! ta!e plan which groups items based on their stoc! ta!e fre#uency re#uirements. Ta!ing into account resources available (usually staff and technology), the plan will provide a schedule for stoc! ta!e for the entire warehouse. ;oupled with this should be a focus on continuously improving inventory accuracy with a view to optimi8ing efficiency and effectiveness in inventory management.

&anual

of the ,thiopian *ederal +overnment accounting system volume

, accounting for

other assets and liabilities set that at the end of the fiscal year, the ending balance of the stoc! items should be reported to the finance and account unit in terms of value (,*+ @ouse of (eoples >epresentative, The ,thiopian +overnment (rocurement and (roperty Administration (roclamation /o. 01234552). The store cler! should report totals of values of stoc! on hand at the end of each accounting period, by each categories of classification using the account code of 1155 " 1122 for the account unit. The stoc! cler! should produce the following report from the control account for each major classification of stoc!. The balance indicates the value of stoc! 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 stoc! balance as given in the &anual of federal government of ,thiopia accounting system. n 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 *ixed Asset >eport (art of government owned fixed asset management manual. /ote that; new fixed assets that are

21

not put into use will not have depreciation value. The stoc! cler!s are also expected to produce periodic report, preferably at each #uarter, indicating the movement of each stoc!. This report will serve management to ta!e action on dead and slow moving items as well as provisioning. Stoc( "anage"ent Perfor"ance 0valuation (erformance 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, stoc!room or other inventory operation must be reviewed. The internal audit function is ideally placed to conduct an independent review. (erformance should be measured in terms of at least the following: o o o o o ,fficiencies achieved in reducing total annual inventory costs; Bbsolete, damaged and spoiled items or otherwise no longer re#uired to be held in store; 6toc! outs during the year, especially whereservice has been disrupted; Hirect and indirect administrative overheads applicable to the store; 6toc! ta!e discrepancies;

o ?reaches of restricted areas; o Aossesincurred and efforts torecover losses;

o 6afety breaches; o Accuracy and timeliness in recording and filing documentation for orders, receipts, issues, returns and disposals; o ;orrect o operation of computeri8ed systems; Accuracy and timeliness of inventory management reports;

o ;ompliance with procedures; and o >etraining and3 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

22

Accuracy " #uantity and #uality delivered matching #uantity and #uality ordered.

A strong focus on this area can lead to significant improvements in efficiencies in inventory management. t is widely recogni8ed that supplier agreements should specifically state the level of timeliness and accuracy which must be sustained in order for the contractual relationship to continue. 6ome 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 tas!s of trac!ing receipts into store and paying accounts.

Chapter Three
Public +i/e 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 %tate what should be considered as a part of the cost of public fixed asset o Tell the .ife 'ycle of public $ixed 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 !xplain what fixed asset depreciation methods are and which of them are preferable

for public fixed assets and why +overnments are accountable for providing #uality public services to their citi8ens% at the most favorable terms. They are, among other issues, responsible for managing a diversified public asset portfolio, 6ince the .2D5s, many developed and developing countries have been embar!ing on public sector management reforms. The main reasons for commencing public sector reforms were public sector inefficiency and ineffectiveness. +overnments have been constantly under pressure to improve public services #uality while containing costs and enhancing public accountability at the same time. Bverall, those reforms, widely recogni8ed under the concepts /ew (ublic &anagement (/(&) and /ew (ublic *inancial &anagement (/(*&), were directed at improving efficiency, effectiveness and accountability in the public sector. ,ncouraging 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 e#ually strict to non"financial or fixed assets as fixed assets are investments and consume considerable financial resources during the ac#uisition of these assets. *ixed asset management means the safeguarding of the government<s interest in property in an efficient and economical manner consistent with the best business practices. t will be discussed in the subse#uent chapter in detail.
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1.1. Definition of +i/e Asset

The method of ac#uisition is not a determining factor in classifying an item as a fixed asset. tems ac#uired by any means, including regular purchase, lease3purchase, donation, annexation, trade or barter, transfer from another department annexation, construction by public sector wor!force, 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 loo! 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 &erriam"7ebster Hictionary 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. (ersonal property is defined as property other than real property consisting of things temporary or movable. The dictionary further defines e#uipment as the implements used in the operation or activity; all the fixed assets other than land and buildings of a business enterprise. *ixed assets, from the definitions above, can be thought of as something owned or possessed, something to which the public organi8ation 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 organi8ation. t is those assets that are movable or used temporarily that lend themselves to being managed. ,xamples of fixed assets include computers, furniture, printers, vehicles, boats, motors, analy8ers, microscopes, medical e#uipment, education e#uipment, athletic e#uipment, roadway e#uipment, etc. ,xpendable supplies that are expended upon use, such as, pens, pencils, nuts, bolts, pipe, oil, gas, and valves are not fixed assets. *ixed 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, e#uipment, vehicles, and construction in progress. *ixed assets can be both movable and immovable. tems of

25

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 ac#uired for use in operations and not for resale. Bnly assets used in normal business operations should be classified as fixed assets. They are long"term in nature. *ixed assets yield services over a number of years. They possess physical substance. *ixed assets are characteri8ed by physical existence or substance and thus are differentiated from intangible assets, such as patents and goodwill. ;apital assets are all assets with a life cycle of greater than one year and above the capitali8ation threshold (where applicable). *or example, this would include property, plant and e#uipment (infrastructure networ!, furniture, motor vehicles, computer e#uipment, etc.), intangible assets, and investment property. *ixed Assets are (hysical 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: e#uipments, furniture, tools# machinery# buildings, land, and stand by e#uipment for use in the event of brea!down of regular e#uipment or during pea! period is also included in fixed Assets. The (rocurement and (roperty Administration (roclamation of the *ederal Hemocratic >epublic of ,thiopia ((roc. 01234552) also defines public fixed asset as: /$ixed asset means a tangible asset a value of which is determined by the directive to be issued by the )inister, that is in operational use and that has a useful economic life of more than one year, such as furniture, computers, heavy e-uipments, vehicles, ships and aircraft, buildings, roads, sewers, bridges, irrigation systems, dam and the li e,0 The value determined by the &inister (&o*,H) indicates that the asset has to be a fixed asset if: i. ii. ts useful economic life exceeds one year; and ts value e#uals or exceeds ?irr .,555.

The above two criteria should be satisfied at the same time to consider the asset as a fixed asset in ,thiopia.

26

?ut those assets that worth less than ?irr .555 but have a useful life of more than a year such as paper punchers, staplers, poc!et calculators, paper try, chairs, and so on are not considered under the definition of fixed asset; however re#uire 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 ?irr .555. f such assets are not considered as fixed assets and are not controlled li!e the other fixed assets, there could be misuse of the asset. *or example, a stapler could be considered a stationery item and a new one could be re#uested whenever stationery is re#uested. To avoid such misunderstandings and to ma!e the control over assets of permanent nature complete, an internal control system with the necessary records need to be designed. n general, fixed assets of the ,thiopian government are physical assets that have a useful economic life of one year or more and have a monetary value of 'irr ())).)) and more that are owned by the government and its public bodies. As per (roc. /o. JN 3.22N and 01234552, and *ixed Asset &anagement &anual (&B*,H, 455N), the assets are as follows:

*urnishings and *ixtures" ,xterior and nterior *ixtures of ?uildings, *urniture, ;arpets and >apes, *ixtures and (hoto *rames, *iling ;abinets, 6helves and so on1 Lehicles and Lehicular Transport C &otor Lehicles, &otor ;ycles, ?icycles, Trailers, ;ars and so on; 6hips and Aircrafts; >esidential or /on">esidential ?uildings C purchase or construction of houses in the country or abroad of Administrative Bffices, 7arehouses, &useums, &onuments, Hormitories, (ersonal residences, ;amps and so on which are in domestic or abroad;

Hams; nfrastructureC>oads, ?ridges, Airfields, ;anals, 6ystems, (ar!s, 6port *ields and so on; rrigation 6ystems, 6ewerage

Bffice ,#uipmentsC;omputers, Typewriters, (hotocopiers, ;alculators, *ax &achines, 6canners, Tape >ecorders Television, refrigerators, @eaters, Telephone Apparatus, ;hairs, Tables and so on;

Aive 6toc! and Transport AnimalsCAive 6toc! for breeding and research purpose and Transport Animals for government purpose;
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&ilitary ,#uipmentsC&ilitary Air ;rafts and ?oats, Artillery, Tan!s, Truc!s and so on; ?oo!sC reference boo!s in hands of users excluding those for resale; (lant and &achineryCgenerators, heavy construction e#uipments, survey e#uipments, medical e#uipments, education e#uipments and so on.

1.2. +i/e Asset 2ife Cycle

*ixed assets have a useful life, which is also referred to as lifecycle. The asset lifecycle is a !ey concept underpinning asset management. An asset lifecycle covers all phases of an asset%s life starting with planning, through its ac#uisition, operation, maintenance and eventual disposal. &anagement of these phases should be aligned to the public agency%s planning, budgeting, monitoring and reporting processes. n summary, the phases are as follows:

a. The planning phase deals with the planning for service delivery that drives the need for

assets. Larious ac#uisition options should be considered during this phase.

b. The ac)uisition phase deals with the purchase, construction or manufacture of new assets. c. The operation an

"aintenance phase deals with the operation of the assets,

maintenance3refurbishment, enhancement3rehabilitation, depreciation and impairment. This phase includes activities of a capital and current nature.
d. The isposal phase deals with the timing of and disposal of the assets including the disposal

costs and specific re#uirements for the assets, e.g. dismantling costs, medical e#uipment legal re#uirements, etc.

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+igure &.13 +i/e Asset 2ifecycle

(lanning

Hisposal

Ac#uisition

Bperation M &aintenanc

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 organi8ation. This useful life is often shorter than its economic life. *or example, an organi8ation 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. @owever, such cars may continue to operate in another environment for many years.
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1.2.1. Asset 2ife.Cycle Costs A clear understanding of asset life"cycle costs is crucial for the development of cost"effective asset management plans and options. Onowledge of these asset life"cycle costs is also a legislative re#uirement. 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.

*c+uisition-phase costs and bene"its . special levies, purchase price3construction 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 re#uired to bring that asset to its proper wor!ing condition and location for intended use (excluding training on use of the new asset, should this be re#uired). ,peration 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.

%aintenance " spare parts and repair labor.

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A "inistration 4asset specific5 " insurance, rates and taxes, management fees, and so forth.

,ehabilitation an renewal C cost of upgrading, modification costs if these improve asset life (capital), re"training costs (current), and so on.

Asset.relate receipts 6 tariff rates and e#uitable share (only to the extent that it relates to this asset ac#uisition).

Disposal.phase costs C disposal costs li!e auctioneer fees, storage costs, environmental rehabilitation costs, decommissioning costs, demolition costs, and so on.

1.2.2. +i/e Assets Ac)uisition# 7sage an 8aluation Laluation 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 C 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. @owever, the fixed assets serve for more than one accounting period. @ence 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. *ixed assets owned by the government where so far controlled mainly physically. The cost data were not seriously !ept. n 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. *inding documentations to arrive at the cost of such assets is unthin!able. 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 ;ouncil of &inisters *inancial >egulations /o .N3.22N, Article 0. (0) 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 &inister of *inance.)

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;onsidering the problems associated with valuation, very accurate valuation of fixed assets is not expected. 7hat 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 subse#uent sections, after valuations are attached to fixed assets, depreciation will be calculated reducing the value to boo! value. As times elapse, the effect of incorrect values attached to fixed assets now becomes lesser and lesser. *inally, 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 ,thiopia, the following groups of assets could be established.
1. Aivestoc! and transport animals; 2. &ilitary e#uipment, &ilitary purpose buildings, Aircraft; 3. Lehicle and other vehicular transport; 4. ?oats; 5. (lant and machinery, *urnishings and fixtures, Bffice e#uipments; 6. ?uildings "residential, ?uildings " non residential, nfrastructure.

The possible source of values could also be the following: ndustrial (roject 6tudies (government owned enterprise), &inistry of Hefense, ,thiopian ?uilding Hesign ,nterprise, &inistry of nfrastructure, >oad Transport Authority, and (ublic ?odies.

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Pou can find the values of from the manual of government owned fixed asset that is prepared by &B*,H (in 455N) of ,thiopia. Fi.ed *sset !aluation Process The main steps in logical se#uence that need to be followed in the execution of the fixed asset valuation as per &unicipal Hevelopment Aending *und Brg. (45.5) are as follows:
1. Hetermining and Assigning Aocal +overnment =nit (A+=) staff for the implementation

of the valuation process. A+= staff should be carefully selected so that at least it ma!es the assessment re#uired on the asset registry forms.
2. (reparing A+=s for the valuation process (defining and explaining the methodology to

A+=s staff assigned to get them ready). A+= staff should be advised of the tas! they are expected to carry out and should have a clear understanding of the nature of the information they must record.
3.

dentification of assets (Hetermining types of Assets).

4. Brgani8ing Assets.

J. (reparation of registration sheets. 0. (hysical visits. N. >ecording assets (>egistration of data).

8. Laluation of assets (,stablishing replacement costs M determining assets% remaining

useful lives).
9. >eviewing Asset >egister by A+= after the recording is completed so that any missing or

inconsistent data is captured or clarified #uic!ly. >eview the asset register to identify any anomalies, such as:

6erviceable assets with nil values; =nusually high or low valuations;

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7hether significant assets have been omitted or overloo!ed; Houble counting of asset; nconsistent determination of (units of measure, valuations, residual life...)

10. Amending (;orrecting) asset register upon organi8ation%s reasonable comments.

1.2.&. Disposal of +i/e 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 ac#uisition. 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. *ixed 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 boo! 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. 7hen fixed assets are no longer useful to an organi8ation and have no residual value or mar!et value, they are discarded. &aterials may become scrap (salvage after giving service for ample period), surplus (excess over organi8ation%s re#uirement), 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 store!eeping3preservation, 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 organi8ation, or burying or burning, provided that it has to be approved by the head of the organi8ation.

34

Selling Fi.ed *ssets n 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. ?y doing so, the asset should be removed from the record of an organi8ation. *or example, assume that the e#uipment is ac#uired at cost of ?r. .5,555 and is depreciated at annual straight"line rate of .5E. The e#uipment is sold for cash on Bctober .4 of the eight year of use. The balance of accumulated depreciation account as of the preceding Hecember -. is ?r. N,555. Thus, the depreciation expense of e#uipment for the nine months is ?r. NJ5. Assume that the e#uipment is sold at - different prices. 1hen sold at &irr 2,234,44: ;ash...........................................4,4J5.55 Accumulated depreciation...........N,NJ5.55 ,#uipment....................................5,555.55 6old at ?irr....................................,555.55 ;ash..............................................,555.55 Accumulated depreciation...........N,NJ5.55 Aoss and disposal fixes.................,4J5.55 ,#uipment....................................5,555.55 1hen sold at &irr 2,544,44: ;ash.................................... 4,D55.55 Accumulated depreciation.... N,D55.55 ,#uipment ...................................5,555.55 +ain on fixed Assets.................... JJ5.55 /?: 7hen the asset is sold on its boo! value, there is no gain or no loss. /.changing Similar Fi.ed *ssets =sed e#uipment can often be traded in for new e#uipment having similar use. This is called the trade"in allowance, may be either greater or less than the boo! value of the old e#uipment. The remaining balance (the amount owed) is either paid in cash or recorded as a liability. +ain on exchanges of similar fixed Assets is not recogni8ed for financial reporting purpose. This is based on the theory that revenue occurs from the production and sale of goods produced by fixed asset
35

and not from the exchange of similar fixed assets. 7hen the trade"in allowance exceeds the boo! value of asset traded in and no gain is recogni8ed, the cost recorded for the new asset can be determined in either of the two ways. ;ost of a new Assets Q Aist price of new assets " unrecogni8ed gain or; ;ost of new Assets Q ;ash given or (liability assumed) R boo! value of old asset. *or financial reporting purposes, losses on exchanges are recogni8ed on exchange of similar fixed Assets. f the traded "in allowance is less than the boo! value of the old e#uipment. 7hen there is a loss, the cost recorded for the new asset should be the mar!et price. 1.&. Accounting for +i/e Assets All fixed assets must be accounted for at all times. f 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 re#uirements. Appropriate records must be established to provide information on location, maintenance history, and future usefulness of assets. 1.&.1. Cost of +i/e Assets ;ost is the amount of cash or cash e#uivalents paid or the fair value of the other consideration given to ac#uire an asset at the time of its ac#uisition or construction or, where applicable, the amount attributed to that asset when construction or, where applicable, the amount attributed to that asset when initially recogni8ed in accordance with the specific re#uirements, and then to put the asset in to use. The costs recorded for each asset ac#uired include the purchase price and anything necessary to ma!e it ready for production. All expenditures involved in the ac#uisition of an asset and getting it ready for use are capitali8ed as part of original cost. ncluded are the invoice price for the asset, transportation charges, and installation costs, including any construction or changes to the building necessary to house it. Bther incidental costs are use tax, duties on imported items, and testing and initial setup costs. The total costs of ac#uiring and putting the asset into actual production use should be capitali8ed. The use in production at a reasonable production rate (as

36

opposed to limited use during testing) is also the point where capitali8ation 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 ac#uiring fixed assets includes all amounts spent to get it in place and ready for use, e.g., freight cost and the costs of installing e#uipment are included as part of asset%s total ;osts. *or instance, the cost of ac#uiring building includes (engineers fee, insurance costs incurred during constructions, interest on money borrowed to finance construction, wal! 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 e#uipment contains (sale taxes, frights, installation, repair (purchase of used e#uipment), reconditioning (purchase of used e#uipment), insurance while in transit, assembly, modifying for use, testing for use, and permits from government agencies). A cost of small item li!e a calculator is the amount paid to purchase it and Lalue Added Tax paid on it. Bn 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, Lalue Added Tax paid, title transfer cost paid to the &inistry of Transport and ;ommunication and other costs that are necessary to put the vehicle in to use. 6imilarly the cost of machinery is the cost paid to the supplier, the custom duty paid, the Lalue Added Tax paid, installation costs paid, other costs to bring the machinery to the place where it gives service, and so on. Capitali0ation o" /.penditure ;apital expenditures are costs that add to the usefulness of assets more than one accounting periods. ;ost of ac#uiring fixed assets, addition to a fixed assets improving fixed assets or extending a fixed asset%s useful life are called capital expenditures. 6uch 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. &ajor maintenances that are capitali8ed include the cost of major overhauls to machinery or vehicles should be capitali8ed; the effect of which being to significantly extend the useful life of the asset. *or 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

37

capitali8ed or not; maintenance paid on a fully depreciated asset, even if it is major, is not capitali8ed; 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. *or 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. ,xtraordinary repair is an expenditure that increases the useful life of assets beyond the original estimate. 6uch expenditures should be debited to the related accumulated depreciation. The depreciation for the future period should be computed on the basis of the revised boo! value of the assets and the revised estimate of the remaining useful life. Depreciation of +i/e Assets t is not necessary that an organi8ation uses a single method all the time for computing depreciation for all its depreciation Assets. There are some methods according to +enerally Accepted Accounting (rinciple (+AA(). They include straight"line method, declining balance method, units of production method, and sum"of "year%s digit method. nitial 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. Hepreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Hepreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. =seful 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.

38

>emaining =seful Aife is the time remaining (of the total estimated useful life) until an asset ceases to provide the re#uired service level or economic usefulness. ,conomic Aife 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. ,conomic 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. t 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. f 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. Bther factors to be considered in estimating the useful life of a capital asset include: o ,xpected future usage; o ,ffects of technological obsolescence; o ,xpected wear and tear from use or the passage of time; o The maintenance program; o +eological conditions; o 6tudies of similar items retired; o ;hanges in demand for services; and o ;ondition of existing comparable items.

39

t may be necessary to review the useful life of assets as the original estimate of useful life may become inappropriate. f 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. *or example, deferral of annual pavement crac! filing programs could allow water to infiltrate the road bed, causing deterioration and shortening of the life of the road. &any 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 6esidual 7alue 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 7alue is the net amount that the organi8ation 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. @owever, if the organi8ation 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. 7hen the normal useful life of an asset is ended the asset will be held in the organi8ation boo!s with its salvage value. Hepreciation allocates the original cost of an asset to expense in the periods in which the asset is consumed. Hepreciation is calculated whether the asset is in use or idle. *urthermore, accumulated depreciation is the portion of an asset%s original cost that has already been written off as a depreciation expense in prior periods C it is not a sum of cash waiting to be used.

The depreciation charge for each period is recogni8ed 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.

40

The calculation of future funding re#uirements 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-%ine Method 1S%M2 6traight"line method depreciation is a depreciation method that provides for e#ual periodic depreciation expense over the estimated life of an asset. t is computed as:

@owever, when an asset is used for part of a year, the annual depreciation is prorated. *dvantages o" using S%M
o o

t is simple and widely used; t 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.

llustration: Assume that the cost of a depreciable asset is S -J,555 and its estimated residual value is SJ555 and its estimated life is J years. 7hat is the amount of annual depreciationK

3nits o" Production Method A unit of (roduction Hepreciation &ethod is a method of depreciation that provides depreciation expense based on the expected productive capacity of an asset. 7hen the use of a fixed asset varies from year to year, the unit of production method is more appropriate than the straight line method. n 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 miles. t is computed as: units of productive capacity such as hours or

!llustration3 Assume that a machine with a cost of S-J,555 and estimated residual value of S J555 is expected to have an estimated life of .5,555 operation hours.

4he 5ecline 'alance Method t 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. t 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. =sing 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:

Br The boo! value at the end of the year is the difference between cost and depreciation of the year and the boo! value at the beginning of the succeeding year. The boo! value decreases from year to year and thus depreciation also decreases. t should be noted that when the declining balance method is used, the estimated residual value is not considered in the determining the depreciation rate. @owever, the asset should not be depreciated below its estimated residual value. !llustration3

42

The annual declining balance depreciation for an asset with an estimated J year"life and cost of S 41,555 M a boo! value of S4555 is shown as follows. Pear Accumulated depreciation of the ;osts beginning of the year 41,555 41,555 2055.55 41,555 .J-05.55 41,555 .DD.0.55 41,555 45DD2.05 ?oo! Lalue at the beginning of the year 41,555 .1155.55 D015.55 J.D1.55 -..5.15 Hepreciation for the year 2055.55 JN05.55 -1J0.55 45N-.05 ...5.15 ?oo! Lalue At the beginning of the year .1155.55 D015.55 J.D1.55 -..5.15 4555.55

. 4 1 J

Su".of.9ear.Digits Depreciation %etho 6um"of"years"digits depreciation method is a method of depreciation that provides decline of depreciation expense over estimate life of the assets. =nder 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. *or example, assets with a useful life of J years would have a denominator of .J, (i.e. JR1R-R4R.) or where n is number of years. 7hat if the plant asset is not placed in a service at the beginning of the yearK 7hen 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. >evising the estimates of the residual value and the useful life is normal. 7hen 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. !llustration Assume that the original costs of the assets R .0,555 boo! value of the asset at the end of the Jth year are ?irr .555 useful life is J years.
43

;ost less Pear . 4 1 J residual value >ate J3.J 13.J -3.J 43.J .3.J

Hepreciation for the year

Accumulated depreciation at the end of the year

?oo! Lalue at the end of the year

.J,555 .J,555 .J,555 .J,555 .J,555

J,555.55 1,555.55 -,555.55 4,555.55 .,555.55

J,555.55 2,555.55 .4,555.55 .1,555.55 .J,555.55

..,555.55 N,555.55 1,555.55 4,555.55 .,555.55

As it is already mentioned, depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. An entity is re#uired to depreciate an item of property, plant and e#uipment when it is available for use and to continue depreciating it until it is derecogni8ed. f 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. =nli!e business enterprises or the full"fledged accrual basis of accounting, the purpose of the depreciation that is explained in the manual of &B*,H of ,thiopia is not to charge the portion of the cost to the income and expenditure account. t 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 ta!ing into account the following points in the form of summary: .. The purpose of depreciation is not to calculate the accurate value of use that is derived out of the fixed assets; 4. 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; -. Hepreciation calculation is a new phenomenon in the +overnment Accounting 6ystem. There is no practice of calculating depreciation in almost all (?s. f the depreciation

44

system is complicated, the rate of error could be high and the rate of reception of the method among the employees would be low; 1. The effort is to arrive at the fair value of total assets owned by (?s and not to calculate the correct boo! value. There are various methods of depreciation as mentioned above. The simplest of all is the straight"line method of depreciation. 6traight"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. 6traight"line method had been used in ,thiopian in the past many years, as it was the method proposed by the income tax proclamation to calculate depreciation for tax purpose. ;urrently the ncome Tax (roclamation /o 4D034554 has proposed pooling method of depreciation for tax purpose. This method is more complicated than the straight"line method. 6traight"line depreciation method has to be used in this manual. All (?s 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 +overnment Bwned *ixed Assets. The rates are developed on the basis of the rates that had been widely used in ,thiopian in the past many years with some modifications. The rates are: Category Lehicle and other vehicular transport Aircraft, boats, and so on (lant and machinery &ilitary e#uipment ?uildings C residential ?uildings C non residential nfrastructure &ilitary purpose buildings *urnishings and fixtures Aivestoc! and transport animals Bffice e#uipments
45

Depreciation ,ate 45E 45E .4.JE 45E JE JE JE JE .5E 45E .5E

?oo!s 6ource: +B*A&& &anual of &B*,H, 455N

4JE

Applying these rates on the cost of fixed assets enables getting of a fair amount of boo! value at the end of each year. The following rules are applied when calculating the depreciation:
1. Hepreciation has to be calculated on each and every asset, which has fixed asset

register. 4. The fixed asset management unit is responsible for calculating the depreciation and posting it to the fixed asset register. -. Hepreciation on assets purchased in the middle of the year is calculated proportionally.
4.

n the last year of depreciation of an asset, the amount of depreciation has to be reduced by ?irr .5 so that the boo! value becomes ?irr .5. A fully depreciated asset has a boo! value of ?irr .5.

J. &aintenance on fully depreciated asset is not capitali8ed. t is treated as expense of the year in which it is paid. Accounting for +i/e Assets i. ,ecor ing +i/e Assets

A public asset registry can either be centrali8ed or decentrali8ed. The level of centrali8ation depends on the organi8ational structure of the general government that is closely related to the si8e of a particular country. >egardless of the degree of centrali8ation 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. /ew Tealand, Australia, the =nited Oingdom and *rance are !nown for the establishment of fairly complete public asset databases. The public asset registries in Australia and /ew Tealand were developed in the course of the public sector reform. The /ational Asset >egister that represents a comprehensive list of assets owned by =O +overnment departments and governmentally sponsored bodies is considered to be an international landmar! in transparency and accountability. The role of the /ational Asset >egister has been to achieve greater transparency and better decision"ma!ing in managing public resources, maintenance and
46

opportunity costs of public assets, ma!ing 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. *ixed assets owned by the governmental unit should be recorded in the accounting records. Accounting classifications of fixed assets are: !"prove"ents Other than :uil ings: A fixed assets account that reflects the ac#uisition value of permanent improvements (other than buildings) that add value to the land or improve the use of the land. ,xamples of such improvements are: fences, retaining walls, drainage systems, sidewal!s, par!ing lots, and driveways. /ote that when used with fixed assets, the terms improvement and betterment have different meanings. mprovements are fixed assets permanently attached to land. ?etterments are additions to or changes in existing depreciable assets intended to increase their efficiency or prolong their useful lives.

>ecording 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 sidewal!s, drainage systems, and similar assets that are immovable and of value only to the governmental unit. :uil ings: A fixed assets account that reflects the ac#uisition value of permanent structures owned by the governmental unit used to house persons and property. (ermanently 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. Purchase 8s Donate Assets

7hen an item is donated to a public agency, it becomes the property of that agency. f it meets the re#uirements of a fixed asset, it should be recorded as a fixed asset for that agency. 7hen a donated item is received, the item has to be recorded at its current value if !nown or an estimated value if not !nown. +overnment *ixed Asset &anagement &anual (455N) explains, fixed assets are purchased li!e any other stoc! item following the +overnment purchase policy. This is part of the purchasing
47

activity of the (?s. (urchased fixed assets are ta!en to store. t does not matter how the fixed asset is ac#uired; 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. /o one should be allowed to use fixed asset that has not gone through the store system. 7hen the store receives the asset the store!eeper issues >eceipt for *ixed Assets >eceived (>*A>). The format (6ee sample in Annex L) is developed to be used only for fixed assets. This form is not used to receive consumable stoc!s. The distribution shall be:

Briginal to deliverer, 4nd copy to finance department, -rd copy to fixed asset management unit (*A&=), 1th copy to store, Jth remains in the pad.

The history of the asset should be !ept with the *A&=. As the store is getting copy of all documents li!e the copy of the supplier invoice, copy of the contract, copy of the pac!ing list, copy of tax declarations, those copy are copied and attached with the third copy of the >*A>. This &odel together with the supporting documents shall be filed in box files in the *A&=. 7hen one wants to refer to the history of the asset, it can easily be obtained in those files. 7hen 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. f not, the donor should be approached timely to provide cost of the asset donated. That is the amount to be filled in the &odel .2, &odel 44 and hence in the *ixed Asset >egister.

iii.

2ease 8s Purchase of +i/e Assets

*ixed assets do not always have to be constructed or purchased outright in order to be of benefit to a local government. *ixed assets may be temporarily utili8ed through a rental agreement, !nown as an operating lease. n other situations, the utili8ation of leased fixed assets may be such
48

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 !nown as a capital lease. A lease is an operating lease if it does not transfer the benefits and ris!s of ownership to the local governmental unit. Bperating lease payments are recogni8ed as expenses3expenditures to the local governmental unit when they become payable. The fixed assets leased through operating leases are not capitali8ed; however, they should be inventoried and tagged for control purposes. According to +overnmental Accounting 6tandards ?oard 6tatement .-, lease payments will generally be recogni8ed as expenditures3expenses as specified in the lease contract unless the lease terms are designed so that the lessor is subsidi8ing the lessee and part of the lease payments are actually interest charges. This will usually be indicated by rent holidays or below mar!et 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 NJE 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 25 percent of the fair value of the leased property to the lessor. f the beginning of the term falls within the last 4J percent of the total estimated life of the leased property, criteria (c) and (d) are not used for classifying the lease. *or leases involving land, either conditions (a) or (b) must be met. f title to the land will not be transferred to the lessee at some point, the lease is not a capital lease. Bnce a lease has been determined to be a capital lease, the governmental unit should record the asset ac#uired and the corresponding obligation at the present value of the minimum lease payments minus any portion representing executory costs and related profit. @owever, if the fair mar!et 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 mar!et 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. (roperty 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 mar!et can provide generic assets to meet a government%s service needs. 7here an asset is leased, it is necessary to record the details in an appropriate register. Additional details, which should also be recorded, include:

Aease start and completion dates; *irst installment date; Asset fair"value; mplicit interest rate; and Aease payments.

Aeases have a built"in interest cost which should be considered when evaluating whether to lease or buy (cash) an asset. nformation in the register should be reviewed annually to confirm that the decision remains the most economical one. The advantages of leasing include:

ncreased flexibility to change <asset solutions< (with an operating lease);

>educed need for large capital outlays; and

solation from short "term fluctuations in mar!et supply and values.

Hisadvantages can include:

(enalty clauses for the early termination of leases; @igher implicit interest costs in leases compared to cost of funds available to the municipality; and Hependence on the mar!et to supply assets leading to long"term exposure to mar!et ris!.

The advantages and disadvantages of buying and leasing options are summari8ed below:
50

Table -..: Advantages and disadvantages of leasing and buying :uying A vantage Butright ownership Assets modified stage changing Assets replaced time to can at 2easing Disa vantage A vantage Disa vantage asset &ajor capital ;ash"flow effective method /o asset ownership outlay upfront be ,ntity suit repairs for gaining access to assets as Assets may not be able to be modified to suit changing incurs no major capital outlay upfront costs and maintenance costs

any maintenance and ,ntity may not incur repair business replacements without as lessor approval and attracting typically assets may fall under the fees term of the lease for fixed so asset replacements

business which can be age or ,ntity

re#uirements

increase as assets warranty of the lessor over the Aease terms are generally incurs The entity may not incur and early terminations at the the costs associated with disposal re#uest of the entity may or and replacement of assets at attract penalties and fees (otential capital outlay at

disposed of at any costs

replacement

disposal of assets the end of their useful lives their useful lives

at the end of Assets may be replaced the end of the lease term if more fre#uently, allowing the purchasing the asset at the end entity cost (ossible access to !nowledge, purchasing power and discounts offered by the lessor access to latest of the lease technology for no additional

51

Chapter +our
%anage"ent of Public +i/e 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 ris 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 !xplain what matters should be considered to invest on fixed assets

;.1. !ntro uction *ixed assets management activities are a meaningful part of the public sector functions. +ood fixed assets management establishes and maintains a current inventory of personal property used within the organi8ation. n 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. t is important that the worth of the accountability over assets does not become the basis for the rejection of government grants, contracts, and appropriations.

*ixed assets management is not the only name for this segment of the materials management area. t has had a number of titles through the years. (roperty management is a common title used in the public sector. Bther names used are e#uipment management, and, to a lesser degree, inventory control, although that name is normally reserved for the management of expendable supplies for use within the organi8ation.

The fixed assets manager is continuously encountering a diversity of challenges involving technology, administration, personnel, and management functions. n order to direct the fixed asset management effort of their organi8ation, the manager must understand the organi8ation<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 s!ills 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 organi8ational needs rather than unaccommodating.

As stated earlier, fixed assets represent a significant dollar3birr investment for any public sector organi8ation. t is important that the fixed assets be accounted for as they are being used within the organi8ation.

53

7hen suitable assets are already available, the government agencies should be disallowed to ac#uire additional similar assets. A reliable and accurate fixed asset management program will ensure that such re#uests will not be allowed.

(ublic 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 organi8ation. (rotection 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.

*ixed assets managers play a !ey role in today<s materials management structure, whether they are at the federal, state, or local level. n today<s materials management environment, the fixed assets manager is confronted with recogni8ing the need for education and information in a rapidly changing environment and organi8ation. The fixed assets manager must be a dynamic supervisor, an organi8er, a self"starter, and a generalist who is willing to get out and ta!e charge.

The public sector has not been saddled with the tas! of computing depreciation on its assets. +enerally accepted accounting practices have not compelled that non"profit governmental organi8ations compute and trac! depreciation. @owever, this rule has recently changed and all not"for"profit organi8ations will be re#uired to recogni8e the cost of using up long"lived tangible assets in general"purpose external financial statements. 7ith the obligation for the public sector to account for depreciation, the burden of providing positive inventory and trac!ing of fixed assets will fall on the fixed asset management function.

s there a standard organi8ational placement for the fixed asset management function in the public sectorK This #uestion could be researched for years without ade#uately answering the #uestion because of the wide diversity in public sector organi8ations. To understand the enormity of the tas! one must gain insight to the organi8ing function. ncreasing speciali8ation of
54

activities, projects, and s!ills demand that managers loo! to elements within their control for gaining coordination by designing, mapping out, and deliberately planning the duties and relationships of people in the organi8ation.

n summary, the organi8ing function see!s: To establish efficient and logical patterns of interrelationships among members of the organi8ation; To secure advantages of speciali8ation whereby the optimum utili8ation of talents can be reali8ed; and To coordinate activities of the component parts in order to facilitate the reali8ation of the goals of the organi8ation.

n some organi8ations, the fixed assets manager is in the controller<s office and is responsible for the inventory and trac!ing of assets, as well as, the fixed assets accounting functions. There are other organi8ations where the function reports directly to a chief executive officer such as a vice president. 6till other public agencies have the fixed asset management function reporting to the chief procurement officer.

6.7. ,rgani0ational Placement A major purpose of a fixed asset management program is to establish and assign responsibility for the assets. *rom 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 re#uiring more subjective measures (policies pursued and rejected). The ladder is generally consistent with the analysis of the American Accounting Association<s (AAA) ;ommittee of ;oncepts of Accounting Applicable to the (ublic 6ector.

%evel (8 (olicy accountability: 6election of policies pursued and rejected (value);

55

%evel 78 (rogram accountability: ,stablishment and achievement of goals (outcomes and effectiveness); %evel 98 (erformance accountability: ,fficient operation (efficiency and economy); %evel 68 (rocess accountability: =sing ade#uate processes, procedures, or measures in performing the actions called for (planning, allocating, and managing); %evel :8 (robity and legality accountability: 6pending funds in accordance with the approved budget or being in compliance with laws and regulations (compliance).

>egardless of the organi8ational placement of the fixed asset management function, there should be an organi8ation chart that accurately shows the lines of authority, responsibility, and accountability for the function. The primary purposes to chart the organi8ation structure are to show the hierarchical way functions and individuals have been grouped together, including the authority and responsibility lines that connect them. Brgani8ational charts, to be useful, must show Fwhat isF as opposed to Fwhat should be.F There are six principles proposed by classical writers of organi8ation design. Although these principles are no longer interpreted to be universally applicable for all organi8ations, they continue to offer a foundation upon which managers can build a wor!able structure.

Bne of the traditional principles generally referred to as unit$ o" command; states that no member of an organi8ation should report to more than one supervisor on any single function. The application of this principle is easy in a pure line organi8ation, in which each superior has general authority; however, it becomes a complex problem in actual cases in which some form of staff and3or functional organi8ation is used. n 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. Pou should recogni8e immediately that many people who are not recogni8ed in the formal hierarchy of authority might influence the actions of a subordinate. The unity"of"command principle simply means that subordinates need to !now from whom they receive the authority to ma!e decisions and ta!e action.

56

The e.ception 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 emphasi8es that executives at the top levels of an organi8ation 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 o" control of a manger: 6pan 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 organi8ation and should always be tied directly to the #uestion of the number of levels in the hierarchy. f 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 organi8ation with more levels is considered Ftall,F whereas the organi8ation with a larger span of control is Fflat.F 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, unbro!en line, or chain of command, from the highest to the lowest manager. t represents the vertical division of authority. *or instance, from the chief executive, a line of authority may proceed to departmental managers, to supervisors or foremen and finally to wor!ers. Thus, the scalar principle contemplates superior subordinate relations from the top to the bottom of the organi8ation. The principle simply states that an organi8ation is a hierarchy. The importance and usefulness of the principle is evident whenever the line is severed. The splintering of one organi8ation into two or more may results from a permanent breach of this principle. Temporary breaches, however, are not uncommon, although they are fre#uently subtle and unrecogni8ed.

57

The tendency of an aggressive executive to fight the control of superiors can create an environment for forming an FempireF that is uncoordinated with the larger organi8ation.

Principle o" authorit$: Authority means power to command others. There should be free flow of authority in an organi8ation so as to enable people to ta!e decisions without delay.

Principle o" responsibilit$: >esponsibility means obligation to do a particular tas!. 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.

;.&. Public Asset %anage"ent Ob$ective &anagement and control processes in the public sector have differed from the corresponding processes in the business sector. =nli!e the private sector, public sector management practice has been mainly directed towards: ,stablishing a legislative, institutional and control framewor!; ;ontrolling the mar!et formed by national boundaries and running foreign and domestic affairs; &anaging the entirety of tax revenues collected and redirecting these revenues to public consumption, public debt repayment and public investments; (reserving the national heritage for future generations and accomplishing strategic goals while protecting national interests; (roviding 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"ma!ing for the collective benefit, with clear responsibility and accountability for their actions to the public. ,ven though public asset
58

management is usually not articulated as a direct tas! 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 tas!s of public representatives.

6ince the early .225s, management and control in governmental organi8ations have become more similar to management and control in business organi8ations. >egardless of the manner in which governments have evolved, public sector structures, responsibilities and reporting re#uirements have been subject to major processes of change. (ublic sector management reform implies: The general government sector acting as a business entity which continuously and efficiently performs its activities; (romoting greater competition and efficient public asset utili8ation in public services provision; Applying 'performance"based management) that emphasi8es managing and controlling outcomes rather than inputs only; and ntroducing accrual accounting and implementing mar!et efficiency and good governance principles in the general government sector.

7hile 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 conse#uences ;.;. Purpose of Public Asset %anage"ent The goal of asset management is to achieve the re#uired 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 organi8ations should include the following:
6ervice level needs, identified in the integrated development plan process, drive 59

asset management practices and decision"ma!ing;

Asset management plans that are an integral part of the municipal planning process; Asset ac#uisition decisions that are based upon the evaluation of alternatives,

including demand management and non"asset solutions;

Asset ac#uisition proposals that include a full business case, including costs, benefits

and ris!s across each phase of an asset%s life cycle;

Hefined responsibility and accountability for performance, safe custody and use. Hisposal 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;
6ound ris!"based internal controls supporting all asset management practices.

,ffective asset management will:

&aximi8e the service potential of existing assets by ensuring that they are

appropriately used; maintained, safeguarded and that ris!s are mitigated;

Bptimi8e the life cycle costs of owning and using these assets by see!ing cost"

effective options throughout an asset%s life cycle;

>educe 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
,stablish clear lines of accountability and responsibility for performance.

Thus, in recapped way, the objectives of asset management are to:

o o o o o o

(rotect assets from miss"utili8ation and destruction The purpose of having ade#uate evidence *acilitate efficient and effective 6ervice delivery =se properties only for their respective intended purposes 6atisfy the wants of the customers effectively (revent unwanted budget expenditure related to assets and use financial resource prudently =se storehouse properly and efficiently @ave an effective and efficient controlling system

o o

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o o

@ave an effective inventory recording and stoc! management system ncrease efficiency and effectiveness of a public organi8ation in releasing its responsibility

o 6upport economic and social development of the public o (romote #uality of life o ;reate healthy communities o &a!e the most of limited resources All assets should be used for the purpose they were ac#uired. Asset performance should be regularly reviewed to identify underutili8ed and underperforming assets. The reason should be examined and appropriate action ta!en.

A fixed asset management system is a system of methods, policies and procedures which address the ac#uisition, use, control, protection, maintenance and disposal of assets. A fixed asset management is a systematic process of maintaining, upgrading, and operating physical assets. t enhances capital assets and their respective values and establishes standard processes for investment decision"ma!ing. t is also a systems framewor! that provides a measure of organi8ational performance and ties it to internal short"and long"range planning.

A fixed asset management program is important for a number of reasons. &ost evident is its importance in the control of losses due to pilferage, theft, and neglect. Aosses are controllable and can be prevented or minimi8ed. >eliable fixed asset management programs have an additional fundamental value in the maximi8ation of the use of assets by facilitating sharing between and within departments and subdivisions. 6carce resources in the public sector are a reality and it is highly li!ely that only one of a particular asset may be affordable to the organi8ation for use in a number of departments or subdivisions.

There are a number of reasons for fixed assets management. 6ome of them are:

61

Aifecycle asset management minimi8es total costs; (oorly maintained assets increase liability concerns; *ixed 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;

;urrent and future changes in government regulations will re#uire !nowledge about assets to determine compliance.

;.<. Asset %anage"ent 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. Huring that process the asset manager should:

;onsider the service"level re#uirements; >eview the current levels of service provided from the relevant assets; ;onduct a 'gap analysis) of the re#uired vs. current service levels; dentify a range of options to resolve that service"level gap; ;onduct a preliminary assessment of the feasibility of various options; Hevelop a business case for the most feasible option or options.

This business case should include:

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The proposed service delivery option, dentified benefits and identified needs, A full life"cycle"costs forecast, ;redible revenue forecasts including other funding sources; A ris! assessment across the whole lifecycle of each option, and (erformance 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. *or 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. nformation 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 re#uired levels and standards of service. :enefits of =oo Asset %anage"ent Plans The benefits of good asset management plans include: Aligns asset objectives with organi8ational objectives ,nsures overall efficient and effective use of assets in the medium3long term (rovides: o A platform for structured and rigorous forward thin!ing; o A basis for corporate and consultative strategy development; o An explicit description of the direction of the organi8ation (or a particular aspect of that organi8ation, in this case, assets) " i.e. the elements of the
63

strategy; o A clear statement for communicating the strategy to the organi8ation; o A basis for future decision ma!ing Asset strategy is placed in the context of wider organi8ational issues ?rings clarity to the way assets are managed in the organi8ation: o The organi8ational arrangements for asset management; o ;orporate processes for assets; o (erformance measures and measurement; o Hata management; o ;apacity management. ;.>. Strategic 8s Operational Asset %anage"ent 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 e#uipment), 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 Aeeds (4550), strategic resource management (6>&) is the effective and efficient direction and utili8ation of an organi8ation%s resources to sustain its business and meet the outputs re#uired by government and its tiers. t includes the planning and prioriti8ation of investment across tangible and intangible assets, the deployment of that investment and monitoring its use against targets and !ey performance indicators. t also includes holding organi8ational units accountable for their performance and by its nature strategic resource management also involves the management of strategic ris!s. The definition encapsulates the processes of planning, prioriti8ation, deployment, performance targets and !ey performance indicators, and management of strategic ris!s to the asset base (the entirety of the assets owned or occupied by an organi8ation). *urthermore, asset management is a structured, holistic and integrating approach for aligning and managing over time service delivery re#uirements and the performance of assets to meet
64

government objectives. Asset management encompasses two interacting components Ca strategic component, focusing on the medium to longer term and involves decisions on appropriate investment in property assets to meet customers3end"user needs and service delivery re#uirements; and an operational element, focusing on the ongoing management of property assets over the short to medium term time hori8on within an allocated budgetary framewor! 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 %anage"ent Asset 6trategic (lan is the asset resource component of the agency%s strategic planning process. t focuses on the following: o Agency strategic planning concerns identifying output re#uirements and service needs and developing strategies to meet those needs, and o Asset strategic planning involves establishing what asset resources are re#uired to support service and output strategies identified in the agency strategic plan, compares this to existing available asset resources and develops a strategy for ac#uisition, disposal, funding, operation, maintenance, and management of the asset resource. The asset strategic plan must provide for: .) Analy8ing the !ey issues that may influence the agency%s re#uirements for assets in the medium to long term 4) Analy8ing the appropriateness of existing assets in relation to the agency%s strategic plan -) 1) dentifying the need for new assets and developing strategies to meet the needs dentifying the development of strategies for (.) achieving and maintaining the appropriate level of operational performance for assets (4) maintaining physical assets in an appropriate condition J) Heveloping strategies for disposing assets that are surplus to agency%s re#uirements
(rinciples of Asset 6trategic (lan

.) ntegration of asset re#uirements with service delivery outcomes 4) 6ervice delivery outcomes are enhanced
65

3) Assets are managed efficiently, effectively, and economically in the provision of #uality

government services 1) >esources are optimi8ed in the ongoing operation and management of the assets J) *ocus on asset accountability in the governance arrangements Asset 6trategic (lan will: o Hocument agency%s need for the asset resources; o Butline the evaluation process to determine the most suitable solution to the asset resources needed; o mprove analysis, planning and monitoring of the recurrent expenses when procuring new assets; o mprove the alignment of asset resources with output production re#uirements o @ighlight the ris!s associated with asset resource ac#uisition and control; o ,ncourage the examination of options for delivering services( capital investment, capital grants, private sector involvement); and o *oster a proactive planning culture of anticipating future asset re#uirements. ;.?. !nvest"ent Decisions nvestment decision addresses first, the #uestion of why investment is re#uired in property assets and the purpose of that investment. 6econd, it challenges the need for and use of property to deliver services, and third, it see!s alternatives that may ma!e service delivery less property asset dependant if this provides subse#uently greater value"for"money. 6trategic 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 ma!ing decisions on the location, ac#uisition, use, exploitation, maintenance and disposal of property assets and any cross"functional co"ordination that is re#uired to attain service delivery outcomes.

Hecisions 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. t deals with how to ta!e account of all the factors when ma!ing an investment decision. nvestments are important not only in optimi8ing the asset structure of a venture but
66

also for enabling the introduction of new products or for introducing structural cost reductions. The experiences from a range of capital investment optimi8ation projects show that there is significant value creation potential in optimi8ing 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. Hecision"ma!ers need the best possible advice to aid them in ma!ing decisions on large investments.

/ot only is investment critical at the national level but getting investments right at the company level ma!es an enormous difference to a company%s value creation. nvestment patterns vary widely between industries. The most investment"intensive industries are Transport M Aogistics, =tilities, Telecommunications, and Bil M +as, followed by ;hemicals, @igh Tech and Automotive.

;apital investments matter for business for obvious reasons: they are a prere#uisite for entering new businesses, fuelling future growth, and allowing sustained production. ?eyond this, capital investments are also a main driver of economic performance at the macroeconomic as well as the microeconomic level:

!conomic growth and investments go hand in hand, &acro"economic analysis shows a significant correlation (N5 E) between economic growth and investment in the top -5 most significant economies.

Investments drive business value creation, 7ithin the last decade companies have been able to significantly increase their return on invested capital (>B ;).7e estimate that for the top companies worldwide more than half their recent >B ; growth is related to investment activity.

Investments drive company growth, An analysis of 4J of the top companies from the J55 worldwide reveals N5E correlation between growth and investment intensity. This connection between investments and long"term company growth is also supported by fundamental microeconomic considerations.
67

?asic microeconomics asserts the conclusion that higher investment rates support increased growth for a simple reason: A higher reinvestment rate allows faster output growth. f the investing company is able to sell the additional output in the mar!et 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.

Aoo!ing 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 #uestion 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 =6 and ,urope still show substantial commonality C in contrast, say, to that of the less developed economies. @owever, in the =6 there is nonetheless a perceptible shift from manufacturing towards electronics and real estate and housing that is not so apparent in ,urope. n ,urope, especially in +ermany, a significantly greater share of investments goes into manufacturing. ,urope also invests more in business services, including accountancy and financial advice, while in the =6 the level of public sector investments is higher, reflecting the higher level of commitment to defense expenditure. At a more granular level, the =6 and ,urope should not be considered monolithic blocs, of course. n ,urope, for example, both reland and the =O have achieved above average economic growth. n both cases this has gone hand"in"hand with increased investment intensity.

/ew technologies can have a major influence on investment decisions. &any investments are primarily motivated by the need to introduce a new technology into the production process or the product itself. &a!ing 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 ma!ing the right investment at the right point in time can lead to the longer"term failure of a company.

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/ew technologies can significantly complicate investment decisions for capital goods. This is particularly the case for certain types of technology. 7hereas new product technologies are usually driven by >MH 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. (rocess innovations, on the other hand, very often involve investment in sophisticated new e#uipment and fre#uently have a highly visible impact on the balance sheet. The government should review the lin!age between investment and asset management at a strategic level, to ensure a national framewor!, 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 organi8ation<s assets represent a substantial financial investment. nvestments are important not only in optimi8ing the asset structure of a government but also for enabling the introduction of new products or for introducing structural cost reductions. Bnce there is a clear view of what the future strategic core assets should be (including new ac#uisitions) and what assets are no longer re#uired, it is needed to develop asset management strategies which:

Provi e a cogent rationale for the propose assets base and how that fits in with government planning along with a #uantification of the costs and benefits. n addition, public bodies should also ta!e 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.

! entify those surplus assets that shoul be ispose of and the rationale for their disposal ta!ing 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 pac!age and whether disposal should be through direct sale at optimum mar!et

69

conditions or through possible transfer to the private sector in return for ris! transfer and service provision.

Set out how retaine assets will be efficiently utili'e and cost effectively maintained to a good standard. (ublic bodies need to benchmar! their use of assets such as office space against best practice and to explore scope for better use of retained assets. &aintenance 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 organi8ations.

Set out the asset ac)uisition agen a to further corporate government objectives and create a fit for purpose assets base. n reconfiguring its assets base, an agency may need to ac#uire assets such as buildings or land adjacent to existing assets, exploring options to lease or ma!e use of the property by other means alongside the possibility of outright ac#uisition. f ac#uisitions 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 !"prove"ent Progra" (ublic nvestment (rograms (( (s) 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 wor!s programs in developed countries. n developing countries, they have also played a role in managing external donor financing.

Hespite these good intentions, ( (s have, in practice, been associated with many of the dysfunctional budgeting, resource allocation, and financial management practices around the world. n particular, ( (s are associated with dual budgeting " the separation of the capital budget from the regular recurrent budget (?ox -...). Bf even greater concern is that ( (s 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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n 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. ;onse#uently, lin!ing planning, policy and budgeting within sectors and across government is li!ely, over time, to reduce the rationale for traditional government"wide ( (s.

The following are some good practice approaches to improve ( (s in contexts where they are deemed necessary and a shift to a medium"term framewor! is considered premature: >ecogni8e that preparation of a ( ( is a political as well as a technical process. Hevelop plans that are realistically cost constrained, by proceeding se#uentially from the macro framewor! to sector resource envelopes and then to selection of priority policies and programs within sector constraints.

Thin!ing and practice on ( (s has shifted over the years as a reaction to inherent wea!nesses. *or example, the limitation of >>%s as a means of formulating the ( ( is ac!nowledged. 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. ;onse#uently, it is generally considered better practice to subject the .5 biggest projects in the ( ( 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. +et the latter clarified and good project choices will be more obvious. This is particularly evident in the transition economies where ( (s especially emphasi8e 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
71

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 ( (. (articularly, there is less reliance on technical parameters in determining new investments and more on efficiency considerations " changed management processes coupled with selected re"e#uipment at existing government facilities. Operational Asset %anage"ent Bnce 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. Bperational plans establish the means to ensure that assets are efficiently and effectively utili8ed in supporting program3service delivery. =nderutili8ation will increase the unit cost of program delivery and may prompt the purchase of new assets when they are not required. Over utili8ation 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: >esponsibility for, control of, access to, and security of the asset; The level and standard of performance re#uired of the asset; Arrangements for collecting, monitoring and reporting performance data; Training staff in use of the asset; and ,stimates of operating costs.

Bperational capabilities include:

Onowledge of the physical condition of the assets; Onowledge of asset performance and reliability; Onowledge of asset utili8ation and capacity; Ability to predict failure modes and estimated time of failure for assets; Ability to determine the li!elihood and conse#uences (ris!) of different failure modes;
72

Ability to analy8e alternative treatment options; Ability to prioriti8e treatment options based on ris!; Ability to optimi8e maintenance and operation activities.

n general, all management bodies of an organi8ation are ultimately responsible for, and are held accountable for, assuming proprietary control of all assets in their custody or assigned to their organi8ation. Also, all organi8ational employees are personally responsible for protecting organi8ation 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 organi8ationGs business purposes and in accordance with organi8ation policies and state and federal regulations. 6.<. Fi.ed *sset Management %i"e C$cle The fixed management lifecycle begins when the property is ac#uired and continues on until the end of its useful life. n the public sector, the ac#uisition step includes the specification, bidding, and purchase of the item. Bnce the e#uipment is received by the purchasing agency, it is verified as to its function and #uality. &ost agencies utili8e electronic purchasing systems that include a receiving function. f the purchased item is in accordance with the specifications and re#uirements 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 trac! the e#uipment throughout its useful life. Technology has advanced greatly in recent years to allow automated trac!ing 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. ,xcess refers to a user declaring an asset unneeded. n these cases, it is common to transfer the asset to another department within the same agency. f 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
73

variety of ways. Bnce 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. n determining the useful life of an asset, the asset manager will consider many factors including the following:

,xpected wear and tear due to operational factors, maintenance M rehabilitation policies; ,conomic obsolescence because it is too expensive to maintain; *unctional obsolescence because it no longer meets the municipality%s needs; Technological obsolescence; 6ocial obsolescence due to changing demographics; and Aegal obsolescence due to statutory constraints.

The following diagram shows the newly developed fixed asset management cycle of the *ederal +overnment of ,thiopia.

+igure ;.13 +i/e Asset %anage"ent Cycle

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Stoc( %gt Syste" Ac#uisition

+i/e Asset %gt Cycle

nitial count of existing assets

Stoc( %gt Syste"

6TB;O 6upplies (consumables)

Laluation of existing assets

>eturned to =sed"stoc! store

*ixed assets

,ntries into the fixed assets register ;ard

*ixed assets

6upplies (long"term) 6upplies (long"term)

,ntry in to ;ustodians% ;ard

Annual *ixed assets count

n store
!i"#o"a $

%nnua$ &u''ary

(a$ue o) *i+ed %""et" inc$uded in financial ledger

Assets reissued for reuse

6ource: &B*,H &anual, 455N

i. Ac)uisition
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Assets are owned by an organi8ation to help service provision without which it if it is too hard to carry out its business. Thus, the organi8ation is forced to ac#uire assets. The determination of the re#uirement is decided by the end user"department or organi8ation based on the available budget. Any intention to owning an asset must start with a need. =nless 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. 7hen defining the asset need, it is vital to be clear about what outcomes are re#uired and why the asset is re#uired. f a need of asset is not clearly defined, or does not accurately reflect the re#uirements, then value expected form the asset will be lost and are not fit for the purpose intended. Ac#uisition is the obtaining of a fixed asset. This ac#uisition 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 re#uired and decided asset must be procured in accordance with the procurement regulations, policies and procedures applicable to the organi8ation. n ma!ing the decision to ac#uire an asset, the following fundamental guidelines should be considered carefully by the buyer:
a. 7hether the purpose for which the asset is ac#uired is in line with the objectives of the

organi8ation and plan, and whether it will provide significant, direct and tangible benefit to the organi8ation.
b. 7hether the purchase is absolutely necessary as there is no alternative organi8ational

asset that could be upgraded or adapted.

c. 7hether the asset is appropriate to the tas! or re#uirement and cost effective over the life

of asset. d. 7hether the asset is compatible with the existing re#uirement and will not result in unwarranted additional expenditure on other assets or resources e. 7hether space and other facilities to accommodate the asset are in place
). 7hether the most suitable type, model and etc has been selected

g. 7hether ade#uate resources are available for the maintenance and operational re#uirements of the asset.
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ii.

7se an 8aluation

n order to determine its boo! and economic value, each public asset has to be properly recogni8ed and valued. Hifferent accounting concepts worldwide have built high barriers to implementing common financial reporting valuation techni#ues in the public sector. >ecogni8ing and valuing public assets provides better information about the management of public spending, because it assures better management of resources C assets and liabilities as well as costs. 6ometimes, just because the use of assets ac#uired or inherited in the past does not affect the current budgetary costs, these assets are treated as if their value were 8ero 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. n 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. /ew Tealand, =.O., Australia, ;anada, *inland, celand), or have implemented the accrual accounting basis in public sector financial reporting, while preparing to move to accrual budgeting (e.g. Henmar!, 6wit8erland, 6weden). 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.

*or some public sector assets, it may be difficult to establish their mar!et value because of the absence of mar!et transactions for these assets. 6ome public sector entities may have significant holdings of such assets. 7hile 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 organi8ations are re#uired to report on how they are caring for specific public assets will ensure that no one could dispute the assets% value to the citi8ens.

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As long as the true reflection of accounts is concerned, it is widely expected that certain uni#ue public sector assets would remain as off"balance sheet. Their uni#ueness alone would imply that it is impossible to give them a value that is in any way reliable and meaningful. /evertheless, 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. t is often forgotten that particular public assets, once recogni8ed, are not supposed to be included in the financial statements of the entity that controls or manages the assets. 6till, assets should be part of a single public asset registry. n addition, assets need to be re"valued either annually or when their use is being determined or changed. 6uch revaluation is necessary to !eep 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.

Perfor"ance %easure"ent

(erformance measurement is the process of assessing progress toward achieving predetermined goals. n 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. (erformance measures must also !eep in mind the needs of the customer base. 7ithin the public sector, this can include internal and external clients ali!e. 6enior management, elected officials, and the general public should all be considered customers. t should also be mentioned that performance measures today are very li!ely to be replaced in the future. 9ust as organi8ations change and develop, so should their performance measures.

(erformance measurements may have the following areas of consideration:

*inancial considerations;

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;ustomer satisfaction; nternal business operations; ,mployee satisfaction; ;ommunity and shareholder satisfaction.

6ta!eholders 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. n addition to being meaningful, measurements should be easy to administer and leave little room for calibration error. t is also advisable to select just a few measurements, as too many can lead to little or no action. *inally, the cost of implementing and maintaining the measurements needs to be less than the tangible benefits received by the organi8ation.

t has often been said, '7hat gets measured gets done,) which refers to the need for an organi8ation to identify !ey business areas for improvement. This will, in turn, allow it to concentrate on efforts to achieve the desired results. An organi8ation%s ability to measure its performance is certainly a !ey 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 =niversity of Ari8ona has developed criteria for good performance measurements. They believe measurements must be as follows: Brgani8ationally acceptable Timely ;ompatible ;omparable 6imple >esponsibility lin!ed ;ost effective ?alanced ;ustomer focused &eaningful

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An important concept to !eep in mind is that performance measurements need to be aligned to an organi8ation%s strategic objectives. (urchasing and supply management professionals must ensure all their activities, including performance measurement, are consistent with these objectives.

*rom asset management perspective, good asset management improves delivery by ensuring that the asset base is aligned with organi8ational objectives. ?etter asset management can also release resources, generate revenue and improve value for money in service delivery. ,stablishing a credible estimate of the aggregate #uantifiable benefits of improved asset management re#uires an analysis of:

The scale of the current asset base and the li!ely 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.

7hat are some useful performance tools within asset management and dispositionK Typical measurements for the ac#uisition or assets include the following: number of purchases and contracts issued, dollar3birr 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:

*ssets owned: This factor indicates the total number of assets owned by an organi8ation, 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.

5isposal 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 organi8ation is !nown as the redistribution rate. 7hen its original department no longer needs an asset, it is usually in the best interest of the organi8ation to transfer it to other departments in need.

#nventor$ accurac$: The accuracy of the amount of physical inventory on hand compared to the actual inventory records can be a !ey measurement. U 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 utili8ation 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.

*ull resource cost of programs should be used by agencies to #uestion regularly whether resource costs are justified in terms of the level and #uality of outputs3services delivered.

?alance between direct costs and overheads should be clearly defined by ?oards 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.

Stoc( an wor(.in.progress : 7or!"in"(rogress represents resources consumed by services or assets yet to be delivered such as that under construction. ?oards also need to monitor stoc! and wor! in progress because consistently high levels may suggest that resources are being used inefficiently.

Pro uctivity: ?oards need to monitor the productivity achieved by their staff in delivering core activities and using internal and external benchmar!s ?oards should be able to identify unproductive staffing re#uiring action.

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Cash "anage"ent3 ?oards re#uire fre#uent information on expenditure profiles and how these compare with planned spending patterns. This should enable ?oards to identify li!ely under spends in sufficient time to reallocate funds to other priorities.

To be effective, asset management in public agencies should include the following:

6ervice level needs drive asset management practices and decision"ma!ing; Asset management plans that are an integral part of the agencies% planning process; Asset ac#uisition decisions that are based upon the evaluation of alternatives, including demand management and non"asset solutions;

Asset ac#uisition proposals that include a full business case, including costs, benefits and ris!s across each phase of an asset%s life cycle;

Hefined responsibility and accountability for performance, safe custody and use; Hisposal decisions based upon an analysis of disposal options, designed to achieve the best possible return for the public agencies;

6ound ris!"based internal controls supporting all asset management practices.

,ffective asset management will:

&aximi8e the service potential of existing assets by ensuring that they are appropriately used; maintained, safeguarded and that ris!s are mitigated;

Bptimi8e the life cycle costs of owning and using these assets by see!ing cost"effective options throughout an asset%s life cycle;

>educe 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

,stablish clear lines of accountability and responsibility for performance.

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A condition assessment for tangible capital assets is li!e a general medical chec!up 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.

7hile condition assessments for speciali8ed assets li!e infrastructure would generally be an engineering function, a government can also establish basic performance and benchmar!ing indicators that will assist in the process. *or example:

Oeeping 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.

Analy8ing the #uality of water treated compared to the #uality of water needed can provide a useful indicator of the condition of the treatment plant to provide sufficient treated water, as can:

Hriving on roads and over bridges doing visual inspections and counting potholes and grade separations; and

>eviewing 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 utili8ed effectively, efficiently, economically and transparently;

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(roper accounting processes and procedures are implemented in conformity with the government financial policies to produce reliable data for inclusion in the asset register;

Any unauthori8ed, irregular, fruitless or wasteful utili8ation 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;

&anage the asset life"cycle transactions to ensure that they comply with the plans and legislative re#uirements.

;ondition assessments can become very sophisticated and expensive, and should be part of ris! management and performance management. A cost versus benefit analysis should be done before deciding to develop sophisticated techni#ues for an initial compilation of an asset register. &ore sophisticated techni#ues can be developed over time as the experience and s!ills within the municipality increase.

;ondition 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 !nowledge, maintenance records, customer complaints, and performance records. A physical chec! 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. nformation 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. *or example, furniture (chairs) will be considered operational until returned to a store because they are bro!en. ;omplex tangible capital assets li!e buildings, community facilities, roads, water networ!s and other infrastructure re#uire a more appropriate asset management policy to ensure a more robust assessment process and criteria. This again varies between assets.

iv.

Disposal

6urplus property is best described as materials and assets that an organi8ation no longer needs. This can include assets of all types and often fall under the control and authority of procurement. (roperty can become surplus for a variety of reasons, including spare parts that become outdated, furniture that has been replaced, and vehicles no longer used. 6urplus assets generally fall within the following categories:

Hamaged stoc! is a property that has experienced neglect or damage and is not fit for the use intended. Hefective manufacturing or improper pac!aging can be reasons for the damage.

6crap includes materials li!e metal or wood that have no use by an organi8ation. t can come from left over special projects or material left over from normal production.

6poilage refers to assets that have no mar!et value. t can include things li!e chemicals or rubber products that have a limited shelf life.

Bbsolete assets are items that can no longer serve their intended purpose because of operational or mar!et charges. Advancements in technology can often render assets obsolete, such as electronic printing devices that are not networ! 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 reali8e the benefits of efficient asset management;

Hepartments have to cascade freedoms and flexibilities throughout their organi8ations,

agencies and sponsored bodies to ensure that there are sufficient incentives at unit level to manage and where necessary dispose of assets;
Hepartments have to ensure that managerial responsibilities for asset management within

public organi8ations are clear; and

The government has to examine the scope for strengthening the incentive effects of the

resource accounting and budgeting framewor! on asset management.

There are various methods of disposal. Hifferent disposal methods are needed for different types of assets. ?efore deciding on a particular disposal method, the following should be considered:

The nature of the asset (i.e. a speciali8ed asset or a common item); The asset%s potential mar!et value; Bther intrinsic value of the asset (i.e. cultural3heritage 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 +overnment programs; ,nvironmental considerations; &ar!et conditions; and The asset%s life.

Appropriate means of disposal may include:

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(ublic auction; (ublic tender (competitive bidding); Transfer to another institution; 6ale to another institution; Aetting to another institution; Trade"in; and ;ontrolled dumping (for items that have a low value or are unhygienic).

%etho s of Disposal i. Sealed and Spot 'ids

A bid is submitted by an interested offeror in response to an invitation. /ormally in public procurement this is done to purchase an item. @owever, it is also a useful tool to dispose of surplus assets. 7hen 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 mar!et to compete for a re#uirement in hopes that a fair price is established. This holds true with both buying and selling.

A sealed bid process is often utili8ed when an asset has substantial value and it warrants a formal process. /ormally, buyers can inspect the item to be purchased, and then submit their bid price in a sealed envelope by a designated time. Bnce all bids are received, the agency representative opens and evaluates the offers and ma!es a determination on the best bid. 7hen the sale occurs at the site of the good or e#uipment to be sold, it is referred to as a spot bid. Bften 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.

4rade-#n

A trade"in occurs when older assets are transferred to a supplier at the same time new ones are purchased. (ublic agencies often use trade"in for vehicles, heavy truc!s, and road maintenance e#uipment. ?y listing the surplus e#uipment to be replaced, and allowing bidders to submit trade"in value as well as new e#uipment prices, a public agency can use a single process to serve two purposes. n determining the lowest responsive bid for new e#uipment, an agency can deduct the value of the trade"in to determine the final cost. f 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. f necessary, other disposal methods can be employed that bring a greater return.

iii.

5onation

7hen an agency offers a surplus asset to another organi8ation at no cost, it is considered a dona" tion. The recipients of these donations include other public agencies, nonprofits, and educational groups. *ederal and state agencies often have #ualified lists of donors that are eligible to receive surplus property donations. Honations can generate a great deal of goodwill in the community. ,xamples can include surplus computers donated to local schools or fire"fighting e#uipment 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.

*uction

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 e#uipment. This method gives local citi8ens the opportunity to purchase the surplus items of a state or local agency they support as taxpayers. n recent years, the use of internet auctions has increased dramatically. (otential buyers can review the available e#uipment on an agency website and submit offers electronically up to the time of bid closing. ?ecause the internet offers access to a broader geographical base, agencies often report higher sales revenue than traditional auctions.
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v.

/mplo$ee Sales

,mployee 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. ,ven if a public employee pays a fair mar!et 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 ris!s to allowing public employee sales than are benefits. ;oupled with public ethics laws and policies, employee sales can be a ris!y business. /ow, 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 !nowledge that helped them. The best policy is to avoid public employee sales.

vi.

Market =nowledge

t is important for an organi8ation to have a sound !nowledge of the disposal mar!etplace. Hepending on the type of asset to be disposed of, the procurement professional may have a number of options available to them. =tili8ing outside industry experts can be of value to an organi8ation. Bften referred to as third party specialists, these firms are !nowledgeable in a specific industry and assist with property disposition, although they are neither the buyer nor the seller. They can include bro!ers, dealers, and auctioneers. *or example, a local agency with surplus tractors may decide to secure the services of an agricultural dealer to get the best price possible. 6uch a dealer has contacts within the industry, which can create a competitive environment for the e#uipment sale. Their professional fee is li!ely to be a good investment for the agency. Asset management is a broad function and includes a structured process of decision"ma!ing, planning and control over the ac#uisition, use, safeguarding and disposal of assets to maximi8e their service delivery potential and benefits, and to minimi8e their related ris!s 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 ac#uisition and3or construction, cycles of operation and maintenance and capital renewal, and finally disposal. 6o, the asset management duty is a structured process that see!s 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:

dentifies 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 !eep the assets in good repair, and gets that wor! done on time.

;uts down losses by minimi8ing the costs of the assets over its useful life span, preventing the loss of assets too soon, and maintaining their ability to provide services. ;an 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. 7ill consist of planning and policies that give framewor! of administration, monitoring and review, and encouragement of innovation. /eeds to be understood by everyone, and be able to be participated in by community members, ward committees, and other !ey people through forums and other cooperative approaches.

+ives a means of disposal when organi8ations 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 !now:

,very assets owned or controlled by the organi8ation on behalf of the public; The service the asset provides; The conse#uences 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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7hether 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 organi8ation; he3she should !now very well what and how to manage the organi8ation%s physical assets effectively and appropriately. &anaging physical assets means must !now in detail of any physical asset owned by the organi8ation and how it can provide benefits to every asset in order to provide benefits for the organi8ation in the return. n managing the organi8ation%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 o" assets. Asset management team will assist organi8ations and management to see what has been and is still available and then assesses what is needed by the organi8ation. Asset management team will find a variety of sources to then buy asset whose price is #uite affordable and efficient with an acceptable #uality. The second stage is how the asset management team to explain and convince each organi8ation to use an$ e.isting asset to ma.imi0e productivit$ or service provision. The third stage is "inancial management. The tas! of the team is to provide the calculation of asset management to the organi8ation 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. f the asset management team discovered that an asset is already outdated and really should be replaced, it must recommend to the organi8ation or management for these assets is being replaced in accordance with the re#uirements of environmental and security issues. Public +i/e Asset Accountability an Control Accountability is a !ey 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. *ixed 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. /o matter what the origin of financing might be, each public asset has its corresponding liability that has to be ta!en 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. Brgani8ations 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. t 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. 7hy are controls necessaryK The possibility of loss, of course, is ever present. tems can be misplaced, or misappropriated for other than the purposes of the organi8ation. 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 brea!down of e#uipment can be considerable. ;ontrol also has to do with ensuring that the best use is made of assets. &anagement must provide procedures that, if followed, will ensure that assets are used to their maximum and to the benefit of the organi8ation. They must have a plan in place to provide for re#uired maintenance of the fixed asset. &anagement must also provide plans and budgets for replacement and necessary additional ac#uisitions. ;ontrols need to be in place to ensure that someone is aware of underutili8ed resources, which can be reallocated or transferred to avoid the cost of purchasing new ones. ?oth 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 !ey 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 utili8ation of the public resources. Therefore, most programs and policies in government contain numerous control programs and a high degree of accountability. *ixed assets management is no exception. Bne of the primary purposes for fixed assets management is to ensure accountability of the significant investment in assets entrusted to the public sector administrators. &anagement body of an organi8ation 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. t is also necessary to ensure that capital assets are maintained to the extent necessary for optimal levels of effective, efficient and economical service delivery. 6o, asset manager (any official who has been delegated responsibility and accountability for the control, usage, physical and financial management of the organi8ationGs 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 organi8ationGs resources assigned to them are utili8ed 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 organi8ationGs asset register; o any unauthori8ed, irregular, fruitless or wasteful utili8ation 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 organi8ational re#uirements. Thus, asset manager is accountable for ensuring that organi8ational resources are utili8ed 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

(roviding all asset"related information as and when re#uired.

Au iting +i/e Assets There should be properly structured internal control system within an organi8ation and be in place to meet the intended targets. nternal control implies methods and procedures within the agency established to safe guard assets, chec! 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 &B*,H (455J), the internal control of an organi8ation that is related to asset management need to focus on procurement of assets, proper recording of assets, preservation and control of assets, inventory ta!ing, disposing of asset items and other issues related to the assets. Bn the other hand, audit duties that are related to asset management functions focus on examining the effectiveness of internal control of an organi8ation 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, stoc! records, and recording systems), having approved budget for asset ac#uisition and ac#uisition 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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;.@. ,is( %anage"ent of +i/e Asset >is! management was introduced into the /ew Tealand public sector in .2DD, when the +overnment of /ew Tealand established the /ew Tealand Hebt &anagement Bffice in order to improve ris! management associated with management of the government<s debt portfolio. ?esides 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. /ew Tealand%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.

7hen public asset management is concerned, a certain degree of managerial autonomy needs to be employed. n 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 !ic!"starts investment practice the same way investors in the private sector do, ta!ing into account future cost"benefit and ris!"return relations.

,perational risk: Bften, once the investment has been made, it can turn out that the operating cost is much higher than anticipated, thus !illing the benefit the technology originally was expected to have. f, for instance, an T 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 risk3 The cost of the new facility or e#uipment 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 risks3 The investment could face unexpected intellectual property or regulatory ris!s. n 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 ma!ing it obsolete. The current ;B4 abatement discussion, for example, has certainly made the planned lignite power plant investments in +ermany much more challenging economically, as lignite" based plants emit a high amount of ;B4 per !7h when compared to other power generation technologies.

4echnological risk: 6uch ris!s are commonly related to change of technology. There are long" terms highly sensitive to technological ris!s such as computer technologies. 6uch assets need a detail analyses before ac#uiring them.

Market demand risk3 &ar!ets very often pay a premium to the first mover that is able to bring a particular functionality to the mar!et. *ollowing in their footsteps or being late to mar!et can mean that the profit pool is already distributed and so the investment will never reach brea!"even point. ;ustomer adoption rates are inherently difficult to predict. f they are slow, then the premium to be first mover is wasted and a fast"follower strategy can be far more value creating.

4esting and implementation risks3 Bften, when new technology is first implemented it has only been tested in smaller pilot applications. 7hether it will wor! at the actual production si8e is often a #uestion of experience and judgment C and the outcome can sometimes bring nasty surprises.

i. !nsuring Public +i/e Asset &anaging ris!s that are associated to assets of the organi8ation should be an indispensable concern of the organi8ation since they hold bac! assets from fitting their intended purpose. >is!

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is an organi8ation%s asset exposure that creates the potential for loss. &anaging ris! is the process of identifying and controlling ris!s of all !inds: accidents, fire, thefts, and liability suits. A constructive initial step in ris! management is the development of policy(s) to guide governments% and not"for"profits% actions. Among the aspects that organi8ations should consider before articulating ris! policies include the following: o (rioriti8ed ris!"management program goals; o ;lear articulation of the authority and responsibilities of the ris! manager; o @ow the ris!"management activities are to be coordinated among departments; o ;lear guidelines relating ris! retention through the use of deductibles or self"insurance;
o 7hether and how insurance"purchasing responsibilities are to be centrali8ed; and

prevention rather than reimbursement for loss. To be most effective, ris! management must be understood and accepted by the highest level of leadership and every employee must buy"in. Aeadership must set the tone and demonstrate its continuing and unwavering commitment to ris! prevention. The organi8ation 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 prioriti8es ris!s. Though it should not be the only orientated around insurance ris! management, the asset items that should be insured should have ade#uate insurance coverage. The head(s) of an organi8ation 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. *or this purpose, the organi8ation will outsource its insurance needs to registered insurance companies.
ii. %anaging ,is(s of Public +i/e Asset

>is! management is an organi8ed method of identifying and measuring ris! and developing, selecting, and managing options for handling these ris!s. There are several types of ris! an agency should consider as part of ris! management. These include: 6chedule ris!;
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;ost ris!; Technical feasibility; >is! of technical obsolescence; and Hependencies between a new project and other projects or systems (e.g., closed architectures).

>is! management should be central to the planning, budgeting, and ac#uisition process. *ailure to analy8e and manage the inherent ris! in all capital asset ac#uisitions may contribute to cost overruns, schedule shortfalls, and ac#uisitions that fail to perform as expected. *or each major capital project, a ris! analysis that includes how ris!s will be isolated, minimi8ed, 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 ris!. Public Private Partnership 6everal departments are contracting private service providers through public "private partnerships ((((s) to improve service delivery. ;urrently, 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. t is important to stress that (((s are not a means to circumvent the budget. (lanning and submissions for (((s should be integrated into the annual budget process. Three criteria of public private partnership guide the project%s feasibility. The project:

&ust be affordable; (rovide good value for money; &ust transfer appropriate technical, operational and financial ris! to the private party.

Ai!e for other programs, the baseline for public "private partnerships in the third year of the medium"term expenditure period, 455135J, is 0 per cent above the baseline for 455-351 in 6outh Africa. This is based on the preliminary /ational Treasury inflation forecast of 1,J per cent for 455135J.
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Affordability means that the cost of the ((( 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 value8for8money, which means that private provision of a government function 3 service results in a net benefit to government in terms of enhanced #uality, #uantity and accessibility of services and 3 or less exposure to commercial and operating ris!. A ((( contract may therefore be unaffordable, even though it provides 'value for money). f a project is unaffordable, it jeopardi8es the +overnment%s ability to deliver other services. =nless +overnment%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. t is necessary to distinguish between projects that involve cash outflows and ones that include cash inflows. ;ash outflows could either be aimed at new capital expenditures or occur within the existing baseline. 7here 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 ((( from the outset or a conventional procurement that has been transformed into a (((. 7ith the transformation to a (((, it may be necessary to roll out the amount over a longer period than the medium"term expenditure period. The department will re#uire /ational Treasury approval for this. 7here the project is a ((( from the outset, the initial expenditure is li!ely to be spread in smaller amounts over a longer period. f there is no budgetary provision, the department will have to enter the next budgetary cycle to find the funds. t is advisable to enter into public private partnership (((() only if such agreement:

(rovide value for money; and Transfers appropriate technical, operational, and financial ris!s to the private party.

*urthermore, government should underta!e a feasibility study broadly including:

The strategic and operational benefits of the ((( 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 ((( agreement and what other forms of ((( agreement were considered;
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,xplanation of the government%s capacity effectively to enforce the agreement, including monitoring and regulating implementation and performance of the agreement.

?efore a capital project is included in the budget for approval, the asset manager should demonstrate that he3she 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 subsidi8ation re#uirements;

All preliminary costing"projected timeframes, cash flows and other re#uirements; and Alternatives to this capital purchase.

;.1A. !nventorying an ,eporting Public +i/e Asset >outine 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. /ew fixed asset issuance will continue; assets under construction are finali8ed and capitali8ed, transfers of assets from one custodian to the other can be made, damaged and unwanted assets will be returned to the used"stoc! store. *or 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 re#uirements for depreciation were established by A(? Bpinion /o. .4: 1. Hepreciation expense for the period,
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2. ?alances 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. *ixed assets are purchased li!e any other stoc! item following the government purchase policy. This is part of the purchasing activity of the public bodies. (urchased fixed assets are ta!en to store. t does not matter how the fixed asset is ac#uired; 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. /o one should be allowed to use fixed asset that has not gone through the store system. 7hen the store receives the asset the store!eeper issues >eceipt for *ixed Assets >eceived (>*A>). The history of the asset should be !ept with the fixed asset management unit. As the store is getting copy of all documents li!e the copy of the supplier invoice, copy of the contract, copy of the pac!ing list, copy of tax declarations, those copy are copied and attached with the third copy of the >*A>. This &odel together with the supporting documents shall be filed in box files in the fixed asset management unit. 7hen one wants to refer to the history of the asset, it can easily be obtained in those files. 7hen fixed assets are issued from the store, >eceipt for *ixed Assets >e#uested and ssued (*A >>) is used. As soon as the issue voucher is received, the fixed asset management unit performs the following tas!s:
1. dentify the appropriate category of the fixed asset C fixed asset categories are as explained

in the previous sections. The correct category should be identified so that the #uality of information on the fixed asset is enhanced. f there are uni#ue 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 ( / for the asset C (?s shall maintain ( / register. The purpose of this register is to

indicate the last number issued to a certain category of fixed assets. =sing this register avoids assigning the same ( / to different assets or jumping ( / numbers unused. The person assigning the ( / to newly issued fixed asset should refer to this register and put a mar! on the register. ( / is assigned to all fixed assets including those that are below the minimum amount given in the definition for fixed assets (currently ?irr 455) but that can be used for more than a year.
3. >egister the asset on the =; C 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 re#uired by the =; should be filled.
4. >egister the asset on the *A> 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 *A>. Bnly those assets that clearly satisfy the definition of fixed assets are registered in the *A>.
5. (rint the ( / 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 (?. 7hatever method is selected for printing the ( / on fixed asset, it is important that ( / is printed before the asset is issued to the user. This is helpful to avoid delay in assigning ( / to assets because of distance of the user%s location. f can also be forgotten.
6. ssue the fixed asset to the user. This is the last tas!. All the previous tas!s 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"stoc! store. The following steps are followed: .. The surrendering user and the recipient user should come to the *A&= to explain their intention. 4. f the *A&= accepts the re#uest, a *AT* shall be filled in three copies by the two users and presented to the *A&=.

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-. The *A&= assigns one of its staff members to inspect the asset in person and to finali8e the transfer. 1. The *A&= head approves the transfer by signing on the *AT*.
5. The *A&= is filled in three copies and distributed as .st ;opy" for the surrendering user,

4nd ;opy C for the recipient user, and -rd ;opy C for *A&=
6. =sing the third copy, the *A&= ma!es the necessary correction in the =;. The name of

the user is changed to the new user. Bther changes are not re#uired. The ( / should not be amended unless there is a change of location. N. Amendment is made in the *A> too. 7hen there is a change of department or location that is the major change that is made in the *A>. The detail of the new location and the new ( /, if it is changed because of the change in location, shall be entered in the *A>. t is advisable to prepare new *A> instead of overwriting on the old *A>. n the fixed asset management system, return of the used asset to the store is the final step. 7hen an asset is returned to store, it stops being fixed asset and becomes part of stoc!. Bther actions on the fixed asset, such as disposal and cannibali8ation might continue. Those actions should not affect the fixed assets system. A voucher called >eceipt for Articles or (roperty >eturned (>A(>), is introduced in the fixed asset management system (it can also be used in the stoc! management system) to be used when fixed assets are returned to the used"stoc! store. The following steps are followed: .. The user who wanted to return the assets shall come to the *A&= and re#uests for the return of the asset. The department in which the user wor!s should write a note to the *A&= or a clearance letter or e#uivalent should be copied to the *A&= so that the process could go to the next step.
2. The *A&= assigns one of its staff members to physically inspect the assets.

-. The =; of the particular user should be referred to ensure that the asset is in the name of the user.

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1.

f assets are as per the =;, the >A(> shall be filled in four copies and presented for the approval of the head of the *A&=.

J. The cost that is filled in the >A(> shall be the boo! value of the asset at the time it is returned to store. 0. The assets are transported to the used"stoc! store. N. =sing the copy of the *A&=, the fixed asset records shall be amended. The =; is amended if the user returned only some of the assets he was using. The =; shall be voided if the user has returned the entire asset under his custody. D. The *A> shall be segregated and !ept in a separate file under the name '*ixed Assets >eturned to 6tore).
9. 7hen fixed asset are reissued, =sed Assets >eissue >eceipt (=A>>) shall be used to

document the issuance. The cost to be filled in the =A>> shall be the boo! value of the fixed asset. .5. n case the fixed asset is reissued to a different user but under a similar location li!e the previous user, then the *A> shall be reactivated. ... 7hen assets are reissued, the ( / written on the asset could be used unless the location is different from the previous location of the asset. .4. f the asset is reissued to a different location, the *A> shall be amended (preferably replaced) by a new *A>. Assets may be ta!en outside the premises of the (? for repair, on temporary lending purpose and so on. A voucher called +ate (ass for *ixed Assets (+() shall be prepared. The re#uesting user shall go to the *A&= and re#uest the form. *A&= shall study the condition and allow the form to be filled. The re#uesting user and his3her immediate supervisor shall sign the +( and bring it to the *A&=. *A&= shall authori8e the delivery of the assets and gives one copy of the +( to the user who is carrying the asset. That copy of the +( is given to the security staff at the gate.
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?oth the security and *A&= shall !eep file of +(. 7hen the assets are returned, the +( shall be cancelled by the security staff who allowed the goods to get in. 6imilarly the *A&= shall cancel the copy of +( it !ept to certify the return of the assets. ;ancellation is done by writing '>eturned) on the face of the +(. To manage effectively the resources of an organi8ation, the management must have information regarding the current location, use, state of repair, and future usefulness of its productive assets as well as re#uirements. The manager of an entity has a responsibility to ensure a system is in place to provide this information. @owever, creating this system is not just an accounting; it will re#uire 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 ;ouncil of &inisters *inancial >egulations /o .N3.22N, Article 0.(N) provides that 'Vcost of fixed assets shall be included in the (ublic Accounts in accordance with directives of the &inister of *inance.) This section explains how this can be achieved. n 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 ,thiopia is the Trial ?alance, including the supporting schedules or reports. The balance of fixed assets and the corresponding fund balance should appear only in the Trial ?alance for the month of 6ene so that &o*,H can incorporate the balance of fixed assets of each and every public body in its consolidated report. n the month of @amle of the following year, the public bodies shall reverse the entry that was passed in the month of 6ene. This will ma!e the ledger balance of fixed assets nil. Again at the end of the following year, physical count of asset is ta!en, A66 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 ?alance for 6ene.

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n addition, fixed asset management unit shall prepare different reports on demand during the year. t can prepare report on: .. Aost and damaged assets and action to be ta!en; 4. Hisposed assets, indicating the value at which the assets were sold for or the way they were disposed of; -. Assets that need maintenance, the budget re#uired for the maintenance, the planned time for the maintenance; 1. And other such reports.

Chapter +ive
An Overview of !ntellectual Property
After successfully completing this chapter, you should be able to:
o Understand what intellectual property is o !xplain 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 !thiopia and its drawbac s o Tell the intellectual properties currently in place in !thiopia

<.1. !ntangible Assets

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f an asset is something that can be not touched, then it is an intangible asset. ?y definition, it is a thing that cannot be touched. 7hat are the characteristics that ma!e some types of intangible assets $intellectual property% in the eyes of the lawK A way to answer that #uestion is to consider the concepts behind the two words included in the phrase $intellectual property%, which will be discussed hereafter. <.2. Definition of !ntellectual Property 7hat are the characteristics that ma!e some types of intangible assets $intellectual property% in the eyes of the lawK A way to answer that #uestion is to consider the concepts behind the two words included in the phrase $intellectual property%.

i.

#ntellectual

A common way of classifying those intangible assets that constitute ( 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 ( are primarily derived from human intellectual activity C hence the word intellectual in the title. The particular human intellectual activities that commonly result in most ( are innovation and creativity.

nnovation 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 trademar! law. Thus, it can be seen that many of the assets that are considered to be ( can be identified by the fact that they are an innovative or a creative product of the human intellect.

ii.

Propert$

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 li!ely 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. (ut 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 !ey entitlement one may have in relation to something is the right to possess it exclusively C the corollary of which is the right to exclude others from accessing it. This right of exclusivity is a hallmar! of property.

The above descriptions of $intellectual% and $property% provide a basis for describing ( as an intangible subject matter emanating from the human intellect in respect of which a legal right of exclusivity may be granted. Types of !ntellectual 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 mar!eting or promotion of products or services. ,xamples are trademar!s or trade names, newspaper mastheads, nternet domain names, and noncompetition agreements Customer-related intangible assets They occur as a result of interactions with outside parties. ,xamples are customer lists, order or production bac!logs, and both contractual and non"contractual customer relationships *rtistic-related intangible assets They involve ownership rights to plays, literary wor!s, musical wor!s, pictures, photographs, video and audiovisual material (motion pictures and television programs), and > M H. 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. ,xamples 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. 4echnolog$-related intangible assets They relate to innovations or technological advances. ,xamples are patented technology, trade secrets (such as secret formulas and recipes), and computer software. To illustrate, patents are granted by the =.6. (atent and Trademar! Bffice. The two principal !inds of patents are product patents, which cover actual physical products, and process patents, which govern the process by which products are made. Goodwill t is often referred to as the most intangible of the intangibles because it can only be identified with the business as a whole. ntellectual (roperty ( () is an increasingly important aspect of business today. As we move further into the F!nowledge economyF, the embodiment of !nowledge in the form of ( forms a crucial part of the value of a business and ( 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. n 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 re#uirements may be re#uired in order for a patent to be granted.

6ubject to several important exceptions, a patent enables the patent holder to exclude unauthori8ed third parties from ma!ing, using, offering for sale, selling or importing for those purposes a product, a process, or a product obtained by a patented process. +enerally, this right

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is offered for a period of 45 years from the date of filing an application for a patent. n recognition of the lengthy period for the development and mar!eting approval process for bringing some products in the life sciences to mar!et (chiefly, pharmaceutical products), certain jurisdictions offer 6upplementary (rotection ;ertificates or patent term extension3restoration, through which the term of patent protection may be extended for a period of time.

4rademarks A trademar! 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 #uality, indicated by its uni#ue trademar!, meets their needs.

A trademar! provides protection to the holder of the mar! by ensuring the exclusive right to use that mar! to identify goods or services, or to authori8e another to use it in return for payment. The period of protection varies, but a trademar! may be renewed indefinitely on payment of additional fees. Trademar! protection is enforced by the courts, which in most systems have the authority to bloc! trademar! infringement.

Cop$right and Related Rights ;opyright provides the right to exclude others from copying expressive wor!s C including software C but does not cover ideas, procedures, and methods of operation or mathematical concepts as such. The !inds of wor!s that may be covered by copyright include: literary wor!s such as novels, poems, plays, reference wor!s, newspapers and computer programs; databases; films, musical compositions, and choreography; artistic wor!s such as paintings, drawings, photographs and sculpture; architecture; and advertisements, maps and technical drawings. =nli!e patents, copyright does not depend on official procedures and exists from the moment of creation of the literary and artistic wor!. +enerally, these rights have a time limit, according to the relevant 7 (B treaties, for example J5 years after the creator<s death. As with other ( rights,

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authori8ation from the rights holder or his or her authori8ed representative is re#uired in order to copy, publish, distribute to the public or broadcast the protected wor!.

4rade Secrets A trade secret may be considered as any confidential business information that provides a business with a competitive edge. 7hat is considered to be a trade secret is broad and can encompass manufacturing, industrial or commercial secrets. *or 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 !ept secret.

Hepending on the legal system, the legal source of protection of trade secrets may include legislation and case law on the protection of confidential information. 7hile there are no procedural re#uirements for the protection of trade secrets, in practice, trade secrets are often protected through confidentiality or non"disclosure agreements and3or non"compete clauses.

5.3. !ntellectual Property 8s !ntellectual Property ,ight

t is critical to understand the difference between intellectual property ( () and intellectual property rights ( (>); many poor businesses decisions have been made because of such a misunderstanding. ntellectual (roperty describes what it is; ntellectual (roperty >ights describe what you can do with it, an important distinction. Bwnership of ( is not necessarily important; it is #uite possible to own ( but not to have the rights to use it. ,#ually, you may have all the rights you need to use the ( as you wish without needing to own it.

&ost tangible assets can be possessed exclusively by virtue of the fact that they are tangible C 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 loc!ing it within a house; and an immovable tangible asset (such as land) can be possessed exclusively by fencing it. t is, of
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course, the case that most, if not all, means of physical security can be overcome C that is, most tangible assets can be stolen. To counter this, the law imposes legal prohibitions on the overriding physical means of securiti8ation C for example, the law ma!es theft of another%s goods a crime.

,xclusive 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 bac!ing of the state, against third parties by way of legal action in the courts.

Characteristics of !ntellectual Property n general terms, intellectual property rights have certain common characteristics. *irst, the rights apply only in relation to a sub"set of all innovative3creative emanations from the human intellect C this sub"set being specific types of ( subject matter defined in the (> laws. 6econd, the rights apply only to those defined subject matters that satisfy a specific innovation3creativity threshold. Third, the rights are not absolute; third parties remain free to engage in certain types of activity with the (, even without the consent of the ( owner. *ourth, the rights are generally of limited duration. *ifth, the rights are generally freely transferable to other parties. 6ixth, the rights are usually, but not always, created under statute. ,ach of these characteristics of (>s is considered in some detail below.

i.

Speci"ic Sub>ect Matters

9ust as not all intangible assets are (, not all ( is protected by (>s. >ather, only those ( 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 (> regimes specify the sub"set of ( to which they are applicable. *or example, only $inventions% may be granted a patent, and only $signs% may be registered as trademar!s.

ii.

#nnovation Creation 4hresholds

The laws that create (>s 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. Ai!ewise, it is only a literary wor! that is $original% which will be protected by copyright law.

iii.

%imitations on /.clusivit$ o" Rights

The exclusivity provided by (>s is not, as a rule, absolute. >ather, certain activities in relation to the ( remain free for all to underta!e, even though the (> owner does not consent. n patent law, for example, it is generally recogni8ed that uses of an invention for $experimental purposes% are not within the exclusive entitlements of the patent owner. Ai!ewise, in copyright law, certain uses of a wor! are considered $fair uses% or $fair dealings% and thus permitted without the consent of the copyright owner.

iv.

%imitations on duration o" rights

&ost (>s do not subsist indefinitely; rather, they last for set period of time. n the case of patents, for example, the duration of the patentee%s exclusive rights is 45 years from the date of filing the application for the patent. 6ome (>s, however, may last indefinitely. A good example is provided by trademar! registration, where the exclusivity continues so long as the registration is maintained C and there is no limit on how long that may be.

v.

4rans"erabilit$ o" Rights

ntellectual property rights are assets li!e other property rights. Accordingly, they may be transferred to other parties at the will of the owner. The rights may be assigned C that is,
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transferred absolutely from one person to another (the e#uivalent of selling title to land). Alternatively, the rights may be licensed C that is, granted for a limited duration but not absolutely transferred (the e#uivalent of leasing land).

vi.

Statutor$ 'asis o" Rights

The majority of (>s are created by statute C that is, by legislation enacted by (arliament. The statutes usually are titled by the name of the (> C hence, the ;opyright Act, the (atents Act, and so on. n some cases, however, the (>s arise not by statute but by the $common law% or by $e#uity%; that is, by the unwritten law recogni8ed by judges. ,xamples of common law and e#uity (>s are the entitlements protected by the actions for $breach of confidence% and for $passing off%. <.;. The !ntellectual Property Syste" in 0thiopia

The existing laws and Hirectives in ,thiopia in the field of ( are The (atent (roclamation and the mplementing >egulation The ;opyright and >elated >ights (roclamation The Trademar! >egistration Hirective

The (roclamation ;oncerning nventions, &inor nventions and ndustrial Hesigns is ssued in .22J. *our forms of (rotection: .. (atents 4. (atents of ntroduction -. =tility &odel ;ertificates 1. ;ertificates of >egistration of ndustrial Hesigns The Bbjectives of the (roclamation 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:

?y 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:

t must be new " it should never have been published or publicly used before; t should be capable of industrial application C it must be something which can be industrially manufactured or used; t must be Fnon"obviousF " it should not be an invention which would have occurred to any specialist wor!ing in the relevant field.

The proclamation excludes the following from patentability: nventions contrary to public order or morality, (lant or animal varieties or essentially biological processes for the production of plants or animals, 6chemes, rules or methods for playing games or performing commercial and industrial activities and computer programs, Hiscoveries, scientific theories and mathematical methods, &ethods for treatment of the human or animal body by surgery or therapy as well as diagnostic methods practiced on the human or animal body. >ights of a patentee include:

&a!ing; =sing; and ,xploiting the patented invention in any other way.

Any person who wants to use the patented invention has to get the authori8ation of the owner. The patentee does not have import monopoly right over the products of the patented invention in ,thiopia. 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 ,thiopia, Acts in respect of patented articles which have been put on the mar!et in ,thiopia 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 e#uitable remuneration to the patentee.

The duration of a patent is .J years which may be extended for a further period of five years if proof is furnished that the invention is properly wor!ed in ,thiopia. (atents of ntroduction are granted to inventions which:

@ave been patented abroad; /ot expired; @ave not been patented in ,thiopia.

(rotection is valid for a period of .5 years. !n ustrial Designs ;riteria of protection for industrial designs:

Briginality; ndustrial Applicability; ndustrial 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. &ost the applications for industrial design protection are for shoe and furniture design =tility model protection is given to inventions which are:

/ew in ,thiopia;
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ndustrially applicable.

>eason for inclusion of =tility &odel (rotection in the law:

&ost of the inventions in ,thiopia involve small adaptations of existing technologies which do not #ualify for patent protection; These inventions can have a positive impact on the growth of productivity in the country.

Trademar! directive issued in .2D0 and its objectives are: .. To centrally deposit trademar!s that is used by local and foreign enterprises to distinguish their goods or services. 4. To distinguish the products or services of one enterprise from those of other enterprises and prevent consumers from being victims of unfair trade practices. -. To provide information on trademar! ownership and right of use when disputes arise between parties; 1. To provide re#uired information on trademar!s to government and individuals. (rotection is granted after publication of cautionary notice. Copyright ;opyright is protected on the basis of the copyright and related rights proclamation issued in 4551. The proclamation gives protection to literary, artistic and scientific wor!s which include:

?oo!s, pamphlets, articles, computer programs and other writings; 6peeches, lectures, addresses, sermons, and other oral wor!s; Hramatic, dramatico"musical wor!s, pantomimes, choreographic wor!s, other wor!s created for stage production; &usical wor!s, with or without accompanying words; Audiovisual wor!s and sound recordings; 7or!s of architecture; 7or!s of drawing, painting, sculpture, engraving, lithography, tapestry, and other wor!s of fine arts; (hotographic and cinematographic wor!s; and

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llustrations, maps, plans, s!etches, and three dimensional wor!s related to geography, topography, architecture or science; Herivative wor!s; ;ollection of wor!s, collection of mere data (databases) whether readable by machine or other form.

The (roclamation gives protection to:

7or!s of authors who are nationals of or have their habitual residence in ,thiopia; 7or!s first published in ,thiopia; or wor!s first published in another country and published within thirty days in ,thiopia; Audio"visual wor!s whose producer has his head#uarter or habitual residence in ,thiopia; and 7or!s of architecture erected in ,thiopia and other artistic wor!s incorporated in a building or other structure located in ,thiopia.

The author of a wor! shall be entitled to protection, for his wor! upon creation where it is:

An original wor!; and 7ritten down, recorded, fixed or otherwise reduced to any material form.

Iuality of the wor! and the purpose for which the wor! may have been created is not ta!en in to consideration. The rights of performers, producers of phonograms and broadcasting organi8ations are also protected by law. (eriods of protection:

;opyright is protected for the life of the author plus fifty years; *ifty years for the rights of performers and producers of sound recordings; 45 years for the rights of broadcasting organi8ations.

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Chapter Si/
!ntellectual Property %anage"ent
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 !xplain the value of respecting others intellectual property o Describe how to manage intellectual property effectively 119

o Describe the benefit of considering and managing ris s that are associated to intellectual property o Design the system to effectively manage intellectual property

t is in the last 4J 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, trademar!s and brands have long been recogni8ed as significant contributors to corporate value creation. 7hat 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. &any of the familiar and traditional sources of differentiation among competitors have been neutrali8ed by the emerging globali8ation of trade and developments in information technology and communication. +eographical advantages have been diminished, distinctions between products have been blurred and many new mar!et 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.

*hy !ntellectual Property %anage"entB

ntellectual property and rights in ( (and in particular their future promised value) are often a crucial factor in the value of a company. ntangible assets, of which ( is often the major part, represented almost three #uarters of industrial mar!et capitali8ation in =6A by the end of the .225s. n 4555, licensing and royalties earned the =6A S-N billion, compared to S42 billion for aircraft sales. There is no doubt that it is worth managing and protecting.

i.

Confi entiality Policy

Any business that considers its ntellectual (roperty 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 re#uirements 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.

Tra e Secrets

Trade secrets are the most important and, in many ways, the simplest way of protecting (. Anything stays a secret if you don<t tell anyoneW @owever, !eeping your information secret is not as simple as it may sound. There are a number of ris!s and problems. t is unli!ely 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. Pou will also need to mar!et your product or service, usually a process that begins before the development is completed. Bften your mar!eting program re#uires you to divulge some details about your product that you may have preferred to !eep as a trade secret until the product is launched. Pou could choose to release no details about your product, but there is a real danger of protecting yourself out of business. Pou need a mechanism to allow you to release some secrets to your !ey 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. ;onfidentiality agreements offer a way forward.

iii.

Confi entiality Agree"ents

Aegal protection of trade secrets can allow you to tell people about your secrets without ma!ing them public. ;onfidentiality agreements, often !nown as /on"Hisclosure Agreements (or /HAs), are a common way of protecting your information as trade secret while still allowing detailed discussion with third parties. >emember, though, that a secret shared with many people is no longer a secret. Above all, remember that /HAs are only as strong as the management that

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signs them. 7hen you consider signing an /HA, or review your portfolio of existing /HAs, it is useful to as! yourself the following #uestions: s this transfer of confidential information necessary for the business purposeK 7ho, individually, is involved in the transfer and who needs to !now the informationK ;an be sure that the information is restricted to those individuals that need to !nowK

<.>. i.

2egal =roun of !ntellectual Property 2egal protection

Aegal protection of ( can exist in a number of forms, the most important of which are: (atents Trade mar!s ;opyright Hesign >ight Hatabase >ight

ii.

:enefits an Costs/Proble"s of 2egal Protection

:enefits of legal protection Aegal protection allows you to see! the protection of the courts against infringement. The courts can re#uire payments, including royalties, license fees and damages; the courts can also grant injunctions to stop the infringement. Aegal protection is also a clearly demonstrable ( right; it is registered with an independent body and can be a measurable, albeit intangible, asset of the company.
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Costs/Proble"s of 2egal Protection 6ome protections, e.g. patents, re#uire publication of the (, which may not always be appropriate or desirable. The famous ;oca";ola recipe is protected as trade secret and not protected by any legal protection.

Aegal protection can be expensive, particularly in the cost of policing, detection of infringers and litigation against infringers. f you will never be able to ta!e action in the courts against infringers, is the legal protection of any real valueK Again, these decisions must be ta!en on a business, not legal, basis, by management, not your lawyer. <.?. ,especting Other PeopleCs !ntellectual Property

An important consideration, not least through your obligations in /HAs, is to respect properly other people<s ( rights. 6uch rights include copyright, trademar!s and patents, as well as confidentiality. A major infringement of a third party<s ( rights could result in litigation that might severely damage your company.

f 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 (, that includes not sharing it internally except where there is a reason to do so. >emember that there may be additional constraints applied through the /HA covering the transfer.

f there is no /HA in place before a discussion with a third party, it is your responsibility to ensure that you are not given any confidential information X 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.

,is( %anage"ent of !ntellectual Property

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A good ris! management process is proactive, not reactive. 7ithout this systematic process in place, obtaining insurance coverage may be difficult. There is insurance for intellectual property ris!. @owever, insurance is not the primary tool for protection of intellectual property, but it can be protection for the asset. n the consideration of the issue, it is critical to decide what exactly need to be covered and from what perils. ntellectual (roperty is far more vulnerable to ris! than most organi8ations or governments reali8e. Brgani8ations purchase insurance for their tangible assets such as buildings and e#uipment, but what about an organi8ation<s or governmentGs intangible assets"the right to protect their creative efforts and the freedom to sell their product in the mar!etplaceK According to the American 6ociety for ndustrial 6ecurity, the theft of ( cost /orth American businesses and taxpayers over S-55 billion in the year 4555 (all amounts in =.6. dollars). A researcher for *ortune maga8ine estimated that .5 to -5 per cent of ;hina%s entire manufacturing economy thrives on producing !noc!offs of brand"name articles produced in other countries. f you are a producer or licensing agency for pharmaceuticals, foods or beverages, the value of your good name is at tremendous ris! if people are poisoned by counterfeit products. @ow did an organi8ation or government become vulnerableK (erhaps it is because the organi8ation or government doesn%t identify the ris! to ( at a strategic level; perhaps it is because the organi8ation or government doesn%t measure that ris!. t is true that you can%t manage what you don%t measure. *or example, does your organi8ation !now the #uantitative value of its brand e#uityK Hoes it !now the #uantitative impact of losing a !ey employeeK There are four types of ( insurance that can help organi8ations better manage ris!s associated with intellectual property. They are:
o

Hefensive ( insurance: (rovides protection in the event your product is accused of patent, trademar! or copyright infringement. ,nforcement (Abatement) ( insurance: (rovides capital in the event another entity is infringing on your intellectual property rights. *irst (arty >iders: (rovides 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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>epresentations and 7arranty insurance: (rovides satisfaction for indemnity agreements in contracts such as supplier agreements.

n general, there should have ade#uate ground to manage ris! of ( and it should be ta!en into account as other areas of ris! management

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