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2011 NPMA National Education Seminar
Wayne Norman, CPPM CF Earl Evans, CPPM CF
Northrop Grumman Corp. Northrop Grumman Corp.
AgendaCapital Asset Definition
Capitalization Practices
Responsibility for Capital Assets
Capital Records
Capital Identification
Capital InventoryApproachesRolling Wave
DefinitionsCapital asset, n—asset purchased for use in production over
long periods of time rather than for resale. It includes (a) land, buildings, plant and equipment, mineral deposits, and timber reserves. (And Meets acquisition $ thresholds of the entity)
Capital Fabrication: A capital asset resulting from a combination of labor and purchased materials and/or multiple components configured together. The labor portion includes design, fabrication and testing of the asset.
Personal Property: Tangible and intangible assets other than real estate. In general, personal property is capital equipment and/or property used or capable of use in the conduct of research and test activities, in the performance of services, manufacturing, or for any administrative or general plant purpose.
What constitutes a Capital Asset ?Acquisition Cost at or above an established
capital threshold (see note) Expected usage life of 2+ yearsWill not be consumed in the production process
Note:Items of equipment with an acquisition cost less than the capitalization threshold (as established by the individual entity) will have their acquisition cost expensed in the current accounting period (office/minor equipment, desktop computers, monitors, overhead projectors, etc.)
Capitalization thresholdsWhat is in your Entity policy / Disclosure
statement ??Capital Asset = Acquisition value of ??? Typical thresholds - $ 1k , $2k, $5k or more
The trend is higher threshold values Expense more cost in current periodLess pending depreciation and asset balance on
balance sheet (Net Book Value)
InflationLess administration of minor equipment items
Responsibility for CapitalWho Manages your capital property
Property Accounting - Just the Property Accounting role?
FacilitiesProperty Management No One?
What constitutes Property ManagementShould your org be the one stop shopping source
for the entity on management of assets company and customer
FAR 45 Concept Use industry leading practices to manage
government property…. in a manner similar to how the contractor manages their own property (from Rewrite road show)45.103 (b) “Agencies will not generally require
contractors to establish property management systems that are separate from a contractor’s established procedures, practices, and systems used to account for and manage contractor-owned property.”
ASTM E2279- Guiding Principles of Prop Mgmt
ASTM E2279 - Guiding Principles of Property
Management
5.4 Property management and accountability books and records shall be kept in reasonable detail that accurately and fairly reflect the transactions and dispositions of the property of the owner or owner’s agent (Securities Exchange Act of 1954)
5.5 Property management activities should strive for and adopt best-in-class management practices and integrated management systems that are expected to withstand external audit.
Single ProcessThis suggests (in my opinion)
One PM group to manage all propertyOne Property Management records systemSimilar consistent processes (without all the
regulations)Interface shadowing between your
Accounting/Capital records system and Property Management system
Supports Sarbanes-Oxley Control requirements
Benefits of One Process /SystemOne Focal point group for Management of all
assets under all ownershipsKeep it simple (KISS) for custodians, property
focal points, coordinators, employees and management
One place to go for reports, move documents, tagging, surplus, etc, etc, etc
With an interface between systems, single entry for any key strokes
Is your capital really managed by Property Accounting? Their financial role has priority.
Roles- PA vs PMProperty Mgmt
Tag property Identify/record asset
unique fieldsSetup or modify
accountability record*Manage life cycle, including
movement, inventoryCoordinate reutilization
reviewsHandle Disposition method
and actions for the property and trigger retirement
Property Accounting
•Track capital planning•Establish depreciation lives/methods
•Assign cost, establish capital accounting record* and trigger depreciation
•Manage depreciation and tax
•Retire assets and settle remaining cost
Capital Asset RecordsConsiderations:
What Accounting system are you depreciating assets in?
Does this system provide Property Mgmt functionality?
If not- what is your Customer property system?Why not track your capital in that system too?Consider creating an interface between your
accounting records and property records
Issues to AvoidAccounting system tracking only and no
robust updates by PM or custodiansTwo independent records, disconnects of
dataDual record creation and change data entryReconciliation requirementStatus problemsLocation disconnects (may affect taxes)Possible retirement disconnects
Two systems for different types of propertyCapital vs Customer property
What to Tag on a Capital ProjectBest Practice concept
Tag items that need to be controlled due to life cycle activities
Property control advantages Asset maintenance and disposition control
Example- Cap Fab decisionsTest Check-out system- Capital Fab asset project
Value $50,000 √Expected useful life = 8 years √Company money = yes………. capital- yes √
Isolator Analyzer – purchased $20k- tagged/cap recordOscilloscope – high end $9k- tagged/ cap recordOscilloscope- smaller $ 4K- tagged/ cap recordData Server- $4K- tagged/ cap recordRack- $1k - not taggedMonitor- $500 - not taggedMaterial and labor- $11,500; non tangible cap record
along with items costing $1K or less
Current Practice in some placesTest out Equipment- Capital Fab asset project
Value $50,0001 cap record
Issues, all tangible component ignoredSome need to go to calibration, maintenanceSome could be swapped outIdentification issue on the floor for PM processOwnership and trace could be lostComponent sent to surplus, would be hard to
write-down related capital cost
When to tagBest Practice-
At Receiving ( before it moves)Data availability from purchasing systemRecord item peculiarities (manufacturer plate
info)You can record as WIP (pending) if necessary
until it goes into serviceYou can tie to a Capital Fab project via the
accounting info ( if your accounting system flags such)
For Capital Fab taggingSet a rule- no QA buyoff if the item is not
tagged.No Capitalization until PM supplies the tag
data to PAHave a notification form or process for the
Capital process to notify PM when an project is completed and the buyoff is ready to occur
PM then review items for determination of what needs to be tagged
Capital Asset Inventory methodsWall- to- wall (every 1, 2, 3 years)Inventory by exception (every 2, 3 years)
(go find items not otherwise touched during processes which have recorded an inventory touch date)
Situational Inventory- touch all items in certain locations triggered by events (building closures, remodeling events, organizational relocations)
Rolling wave inventory by exception(discussed on next set of slides)
Inventory Rolling WaveCurrent- 2 Year cycle- wait until year two and
touch/validate all our exceptions, perhaps conduct a wall to wall
Proposed- 3 year cycleEverything is touched in some manner every 3
years by exceptionRolling wave-
Each year, the oldest year items are touched if they have not recently been touched (still have an inventory date that will exceed 3 years by current year end)
Every year some those results are turned in Continuous yearly activity
Benefits of Using the Rolling Wave Inventory
Year
ExistingSystem
Assets to Find
RollingWave
Assets to FindCum Delta
1 3,200 600 2,6002 0 600 2,0003 3,200 600 4,6004 0 600 4,0005 3,200 600 6,6006 0 600 6,0007 3,200 600 8,6008 0 600 8,0009 3,200 600 10,60010 0 600 10,000
Wall-to-Wall vs. Rolling Wave Inventory
0
2,000
4,000
6,000
8,000
10,000
12,000
1 2 3 4 5 6 7 8 9 10
Tag
ed A
sset
s A
ud
ited
ExistingSystemAssets to Find
RollingWaveAssets to Find
Cum Delta
•Cost Effective•We would use our own people and not out source to outside companies which is a cost savings.
•The total amount of assets to “Find” is significantly fewer than the Wall-to-Wall Inventory System.
•Resource Sensitive•Only looking for assets that haven’t been “touched” or inventoried in record within the past 3 yrs.
•Wall-to-Wall system there is much duplication efforts
•More Efficient•Keeps a steadier stream of go-finds on a yearly basis interval
•Fewer resources are required to find a smaller amount of assets
22
3 year Rolling Wave IllustrationFor 2007- by year end:
Valid Inventory Dates07 06 05
items with an '04 date need to be touched/verified
For 2008 by year end:
Valid Inventory Dates08 07 06
items with and '05 date need to be touched/verified
For 2009 by year end:
Valid Inventory Dates09 08 07
items with and '06 date need to be touched/verified
23
Current scenario-Previous cycle 04- 05,
reported after 2005 completion
Current cycle 06-07, to be reported after 2007 completion
Current Inventory cycle processValid date during calendar 200707 06 05 04
Valid during 200808 07 06
Valid dates during calendar '0909 08 07 06
24
Summary- Rolling WaveReduces disruption to contractor (steady
state)Reduces redundant touchesLevel sets workload over 3 yearsDoes not increase risk to the customerContinual annual feedback- more frequent
partial inventory results.