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BEST PRACTICE

Role of the Finance Director in Capital Asset Management (2011) (CEDCP)

Background.  Finance officers often work with engineers and project managers during capital project planning and construction to provide insight on budget and funding questions and to report financial information during construction.  Once a project has been completed, this working relationship needs to continue, because capital assets are likely to have substantial ongoing impact on operating budgets.  Ongoing considerations include planning for the costs of ongoing asset management, optimizing maintenance and renewal expenditures, coordinating renovation projects, and sustaining long-term asset performance.  The finance officer should play a key role in asset management throughout an asset’s life cycle.  Managing the asset throughout its lifecycle from both a financial and operational perspective will help the government to achieve the best return on the asset, reduce unnecessary service interruptions, and maintain asset condition and service level.

Recommendation
.  The Government Finance Officers Association (GFOA) urges state and local government officials to extend the involvement of the finance director through all phases of asset management.   In working to develop sustainable and high performing asset management plans, finance officers should be involved by understanding and providing information to support decisions on:

  1. Asset Management Policies: Asset management is a function best shared between the finance office and operational/engineering office.  Governments should develop policies to guide capital asset management practices that are supported by both finance and operational/engineering expertise.
  2. Status and Understanding of the Asset Inventory: Asset management is dependent on a clear understanding of each asset.  A good asset inventory includes a description of the asset and its location, condition, age and remaining useful life, and economic value.
  3. Asset Valuation: While replacement costs are critical for asset management purposes, adding a new asset and including a historical cost for the financial system’s fixed asset database for reporting purposes is just as vital. The process of creating an asset registry or inventory of assets provides a systematic way to identify new assets. Each asset needs to be assigned a replacement value and expected asset life for repair and replacement decision making.   
  4. Business Procedures:  Accounting requires the proper communication and recording of asset additions, deletions and adjustments.  As a result, it is important to understand the hierarchy of assets and each asset’s relationship to the fixed asset database in order to apply appropriate accounting procedures consistent with capitalization policies.
  5. Level of Service and Condition:  Finance officers must understand what the demands are for each asset in terms of service level and regulatory requirements.  Additionally, measurement of how well the asset is performing against those service levels must be understood.
  6. Contribution of Asset to Overall Performance: Understanding how critical the asset is to the government, the likelihood and consequence of failure of that asset, and similar factors can help the government identify the true value of the asset to effective service delivery and ensure appropriate resource allocation for maintenance.
  7. Budgeting for Repair, Replacement, and Retirement: Finance managers and asset managers must have a clear and objective view of asset condition, remaining useful life, cost of maintenance, and other factors to make informed decisions about when to repair, replace or retire an asset.  Simply budgeting for the historical acquisition value of the asset may not take into account changes in price for a new asset or cases where the asset may not need full replacement based on the condition assessment.  Making sound repair/replacement/retirement decisions based on condition and use of the asset can provide savings.
  8. Integration of Asset Management to Financial Models Used for Planning, Budgeting, and Procurement: Finance officers need to make sure that information from asset management processes are used in financial models and decision making.  Asset information, funding sources, debt, revenue, and budget data are all necessary to assets are managed appropriately across their entire lifecycle. 
  9. Use of Automated Tools: To ensure that information is relevant, systems should meet both operational and finance needs of the organization. Information needed to make effective asset management decisions may need to be accessed from multiple automated systems, for example, in enterprise resource planning (ERP) systems, geographic information systems (GIS), computer maintenance management systems (CMMS), or other systems.  Asset management dashboards or other integrated decision support tools can help provide access to information for improved decision making and ensure that financial decisions are supported by current and relevant data.  

References.

Approved by the GFOA’s Executive Board, October, 2011.