Bean counters must take note

Comprehensive asset management boosts the bottom line and can improve a company’s credit rating, as Chris Johnston discovers

In the troubled economic times in which Britain remains mired, asset-intensive companies both large and small have been under pressure, having to squeeze maximum value out of physical assets. But some bean counters in the back office have been slow to realise the benefits of asset management, according to Daniël Pairon, head of KPMG’s global asset management team.

Doing so can improve financial performance by optimising maintenance costs, replacement expenditure, asset performance and asset risks, as well as give better documentation of asset decision-making, he says.

An asset management system also provides a better understanding of the total cost of ownership, whole asset life cycles, return of assets employed or financial-technical reporting, all of which are important to corporate financial controllers and board members.

Britain is further down the road than Europe in asset management, he believes, while asset-intensive companies in most countries on the Continent are still finding out what the discipline involves and the benefits it can bring.

The danger of failing to involve finance in asset management is that, over several years, the financial accounts fail to reflect the true value and condition of physical assets

“Asset management needs to be positioned as high as possible in an asset-intensive organisation as a strategic function,” Mr Pairon explains. “It is not just about maintenance and neither is it just an accounting function. It is multi-disciplinary and, for it to be successful, must involve operational and technical staff, as well as those from finance, and be supported by IT.”

Being able to prove that an organisation has a lean and effective asset management system can also allocate resources, support funding or help improve its credit rating. “It will definitely lead to more accurate and transparent financial-technical reporting,” he adds.

Investors are likely to have more confidence in an asset-intensive company with an asset management system in place, Mr Pairon says, because executives are able to give assurance that they are in control of managing their assets. Physical assets can easily account for between 60 and 80 per cent of such companies’ balance sheets.

A recent KPMG study, which examined 52 listed, asset-intensive companies from different sectors and geographic areas, found there was very little information given by management about their control of physical assets. “All we found was information they were required to report by local regulatory or legal requirements. Almost none of those companies went any further, which demonstrates the need to emphasise the financial and non-financial advantages of involving finance in asset management,” Mr Pairon says.

The insights formulated by KPMG about financial-technical reporting and transparency have been translated into the current ISO 5500x (International Organization for Standardization) final draft international standard for asset management, which is due to be published by early-2014.

The danger of failing to involve finance in asset management is that, over several years, the financial accounts fail to reflect the true value and condition of physical assets.

While understating or overstating the value of a disposal by £10 million seems not to be material to a company with a £50-billion balance sheet, Mr Pairon points out that over time such discrepancies will add up and result in an inaccurate financial picture.

Therefore, one of the key conditions is employing reliable technical asset data linked to identifiable and auditable accounting records. While that may be a challenge for many asset-intensive companies, it could be well worth the effort.