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Reinventing Inventory

Utilizing Property Management Standards to Reduce Risks and Costs in All Industries

by William Golz, Jr. and Marsha Campbell

One of the first standards development efforts of new Committee E53 on Property Management Standards is a standard for the inventory of assets. William Golz, Jr., and Marsha Campbell, of American Appraisal Associates explain the value of a good inventory—and the added value of inventory performed to a standard method.

What are property management standards? They are standards that govern the life cycle of property management from the first determination of need (when, for example, preparing a capital expenditure request, grant equipment budget, transfer request, etc.), to the final determination that the property no longer is needed, has no value to the enterprise, and is ready for disposal and write-off.

There are many steps along the path of the life cycle of property and asset management. Property management is a business process that includes many other processes that interact to build an effective property management system. The interactive processes include budgeting, acquisition, inspection, receipt, identification, marking, distribution, storage, inventory, record-keeping, property accounting, maintenance, movement, utilization, transferring, screening, disposition, and retirement.

Do standards exist for all of these business practices? To our knowledge, there are no standards for these practices although there are general bodies of knowledge for some of the processes. So the new ASTM standards development activity for property management standards represents an important step toward providing a common, clear measure for property management processes. One of the first activities of the new committee is the development of a standard for inventory, which is ongoing as we go to press.

Inventory

Nestled in the middle of the property management life cycle is the need for an accurate inventory of assets. Physical inventories do not ensure the sound management of property or the proper stewardship of property. Best practices occur in property management when each step in the life cycle is performed well and interactively. However, without an accurate inventory of assets, sound management and proper stewardship are not possible. The inventory establishes a baseline and can assess the accuracy of the asset records as well as identify systemic problems in the property management life cycle.

Standards as Best Practices

What is a standard business practice or purpose? Sometimes the standard purpose or practice is called “commercial” practice. This generally refers to the fact that the practices are not being performed in a specific manner for a specific industry such as healthcare, government contracting, a public entity (city, school, county, etc.), industrial, or other. This means it is a generic or standard business practice that can be used in any industry. This is also referred to at times as “best practice.”

In an industry such as government contracting, there are specific requirements and published standards and guidelines for managing property. A more general need found in most industries is to insure property. As property insurance has no industry boundaries, we have selected insurance as a venue to discuss property management standards.

If property management is accomplished in accordance with standards for a standard purpose, we will get a measurable process that can support varied business or institutional needs. This would allow the establishment of quality property management processes within an organization.

Standard Property Management Value for Insurance

It is common knowledge that over- or under-insuring property can have disastrous results on an operation. This can result from incorrect replacement values, which can be produced by property management deficiencies, such as “phantom assets” (assets that have been disposed of but not retired from the record) or other deficient documentation of assets. The price of under-insuring could be a threat to the business if critical equipment or facilities are not replaceable due to lack of proper coverage or co-insurance problems. The results of over-insuring are higher-than-needed premiums: wasted money.

A good number of businesses do not reopen after a significant loss when they have been improperly insured. The advantages of good property management for insurance purposes are obvious—proper coverage and proper documentation in the event of an insured loss.

What can lead to these benefits and also reduce risks? Sound property management and a good inventory performed in accordance with standards.

Asset Control

“Lost and out of control” is a frequent response from senior loss control engineers when asked to describe their property loss control programs. In these cases, it may be difficult to answer two very important questions: What is owned and where is it?

Given the existing market conditions for property insurance, often the last item on a CFO’s priority list is property and/or fixed-asset loss control. Most companies invest little in such programs. So how do you take control of a weak or faltering property control program for insurance purposes?

The operative word here is “control.” Implicit in any effective risk management property insurance program is control over the insured property. This is typically left to an internal fixed-asset accounting system, which unfortunately, has as its underpinnings a historical cost basis. The definition of property in this system is outlined in a capitalization policy that is driven by financial and tax reporting requirements and strategies, not by property insurance policy requirements and replacement costs.

For insurance purposes, property that must be identified and controlled includes that which would have to be replaced if a loss occurred. Many insurable assets do not have to be “controlled,” or tagged and tracked along the entire property management life cycle under standard fixed-asset accounting procedures. Some of it is not purchased under capital funding. Much of the property is definitely not fixed, but it all has to be identified and its insurable value must be documented. According to the inventory standards, the results of the inventory and the population of property to be inventoried must be identified in the planning phase.

Fixed-asset records also represent the ultimate oxymoron, since the “fixed” assets are usually in a state of flux as a business grows and restructures. Property changes such as transfers between facilities, trade-ins, disposals, and dismantlings are often not reflected in the accounting and/or tax records. Location can be critical for property insurance purposes considering different risk areas and maximum exposures.

Back to Basics—Getting Control

There is clearly a need for an organized approach to evaluating the needs of all users of property information in an organization, and for a system to address those needs. In addition to insurance needs, accurate property information is required for:

• Financial reporting and depreciation;

• Federal and state income tax reporting and depreciation;

• Property tax reporting;

• Capital planning and budgeting;

• Purchasing;

• Scheduled maintenance and repairs; and

• Compliance to regulations and exemplary audits.

Individually, none of these needs warrant an allocation of significant resources to establish a comprehensive property management system. However, taken as a whole, the benefits grow quickly. An accurate record and an effective fixed-asset system can help reduce processing time, simplify tax reporting, reduce taxes by eliminating “phantom assets,” improve asset utilization and turnover, provide a basis for proper property insurance coverage, and improve property control for purchasing and maintenance. The benefits of passing an audit in an exemplary manner can also result in intangible value added through asset stewardship and avoidance of negative implications.

The performance of an inventory in accordance with standards provides point-in-time accurate records and identifies issues that require management attention. This brings the focus full-circle back to the understanding of the comprehensive property management life cycle.

A Comprehensive Property Management System

A comprehensive property control system for insurance purposes contains a number of factors that must be considered. Sound business practices are needed throughout the property management life cycle. Among other standards, Committee E53 is addressing the actual inventory of assets.

Factors to be considered include, among other things:

• An accurate inventory and list of assets;

• Identification of un-owned assets that must be insured;

• Proper classification of assets;

• Identifying the current location of assets;

• Calculating accurate replacement cost and accounting basis;

• Proper segregation of special policy exclusions and special coverages;

• Appropriate support and documentation for value; and

• An efficient system for perpetuating an accurate record.

Two basic premises for the comprehensive system are:

• Are the records accurate?

• Is the accuracy perpetuated?

Data Recording

Over the past two decades, computers have revolutionized data management. Today, companies large and small boast a computerized fixed-asset system, but this does not ensure accuracy. Often accuracy is assumed to be implicit in a computer record—not so!

A physical inspection of facilities and thorough verification of the asset data is necessary to establish an accurate inventory. This will require careful planning and timely completion. A quick turnaround will eliminate the need to backtrack (by recording data elements not initially considered) and to minimize the need to record interim property changes taking place during the inventory and inspection phase.

Standards for inventory planning should include:

• Responsibilities;

• Procedures;

• Identification of the property population to inventory;

• Timing;

• Resources;

• Equipment;

• Training; and

• Schedules.

Planning the required data elements for your assets should be considered in the context of four major applications:

• Asset characteristics;

• Accounting characteristics;

• Tax/regulatory characteristics; and

• Insurance characteristics.

First, define the relevant asset characteristics to be recorded (for example, description, manufacturer, vendor, model, serial number, engineering/maintenance specifications, and other relevant data).

Second, outline the accounting information required, including account code, date of acquisition, depreciation method and convention, department/cost center, historical cost, purchase order, capital expenditure approvals, and other information that may be meaningful for financial reporting and control.

The third major application is tax or regulatory reporting. This will include data for property tax and income tax reporting at the federal and state level, such as depreciation methods and conventions, cost basis, state codes, property classifications, and other relevant data.

The fourth and most important application is the property insurance reporting, which will require a number of additional data elements. Specific location data is required to reflect different risk areas that may have different rates. Property classifications consistent with the property insurance policy must also be recorded for each asset or group of assets. Current replacement cost is the foundation for insurance placement as well as the basis for documenting insured losses, and is not the same as historical cost for accounting and tax purposes. Depending on specific insurance coverage, there may also be a need for depreciated replacement cost, which should not be confused with accounting or tax depreciated cost.

A Final But Vital Step

The final step is to establish a complete and efficient process supplemented with training for the maintenance of an accurate record within a sound property management system. Although this “final” step wraps it all up, planning for an efficient and effective perpetuation program must be initiated at the beginning of the process and allowed to evolve based on decisions as the property management is developed.

It must be recognized that a team effort is required to implement the system, as well as to maintain records. Responsibility must be assigned to a manager who will coordinate the ongoing reporting requirements and assure timely maintenance and updating. Given the multifaceted nature of the record, there are now a number of individual areas dependent on the record in addition to risk management. Accounting, tax, and other departments will be involved. This shared interest further enhances the priority in the record maintenance and the value of property management standards.

Corporate management finds it advantageous to focus efforts on the effective management, utilization, and return on investment in fixed assets rather than routine accounting and record-keeping. A comprehensive property management system allows management to manage.

Control: Accomplished

An ongoing verification and re-inventory process will enhance control and provide proper audit data. The results of the inventory should be measured by an annual loss rate by number or value, thereby providing a consistent measure to assist in identification of possible corrective actions necessary to ensure ongoing property control.

The efforts of ASTM’s newest committee to standardize the important asset-control mechanism of inventory will result in firm answers to those important questions: What is owned and where is it? //

Copyright 2000, ASTM

William Golz, Jr., is a vice president and principal of American Appraisal Associates, Chicago, Ill. He has been a guest speaker and course leader for organizations on valuation techniques, requirements, and procedures covering mergers, acquisitions, stock valuations, financing, real estate valuation, and other subjects.

Marsha Campbell is the engagement director for the Property Management Services Group at American Appraisal Associates, Wellsville, Utah, and actively participates in the National Property Management Association. Campbell has over 20 years of experience in property and material management and business systems analysis.

For additional information regarding Committee E53, please contact Pat Picariello (610/832-9720). Individuals interested in joining E53 may complete an application.