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 inventoryand
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,
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.
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
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
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 obviousproper
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.
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 CFOs 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 BasicsGetting 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;
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
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
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?
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 recordnot 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:
Identification of the property population to inventory;
Planning the required data elements for your assets should be
considered in the context of four major applications:
Tax/regulatory characteristics; and
First, define the relevant asset characteristics to be recorded
(for example, description, manufacturer, vendor, model, serial
number, engineering/maintenance specifications, and other relevant
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
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
The efforts of ASTMs 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