Public asset mangiment

Chapter One
An Overview of Public Asset
 DEFINITION OF PUBLIC ASSET
Assets are probable future economic benefits obtained or con­trolled by a particular
entity as a result of past transactions or events.
Assets are any owned
 Physical object (tangible) or
 Right (in­tangible) having economic value to its owners;

Assets represents an item or source of wealth with continuing benefits for

future periods, expressed for ac­counting purposes in terms of its
 Cost

or
 Other value, such as current replacement cost.
1.Classification of Public Assets
Public asset classification is used to registry and establishing a man­
ageable public asset portfolio which is used to implement the valuation
methods necessary for efficient utilization of public assets.

The classification of public assets similar with pri­vate sector assets,

take the form of either tangible or intangi­ble
Tangible” assets may either be
 Financial (e.g. cash or government securities) or
 Physical (e.g. building, roads, national parks, and so on).

Intangible assets involves items such as copy right or mineral exploitation

rights and others”.
 Tangible/Physical Assets

Tangible assets are assets that one can touch, hold, or feel. It is typically called

fixed assets in accounting literature, tangible assets are the phys­ical things that a

business/government uses in the production of goods and services.

They constitute the production facilities, buildings, equipment, and ve­hicles and

operational assets of a business/government that constitute furniture, com­puters,

and similar items.

Physical items can be
 Financial assets,
 Held in inventory, in one business/government,

An example of such a financial asset would be

 Real estate held in inventory by a real estate investment and
 Sales organization or builder, which would be a fixed asset for everyone else.
 Equipment manufacturers have financial assets in finished goods or inventory
held for sale
Fixed assets are physical or tangible assets in nature.
They are any items
 Costing over a certain dollar/birr amount,
 Large or small, item that has a certain useful life.
Current physical assets
Current physical assets represents assets that are consumed during the
normal operation are current.

These are physical assets such as raw materials, work-in-progress

inventories, finished goods, and goods held for resale.
The costs of acquiring, maintaining, insuring, and replacing these assets have a
considerable impact on the operations of the entity.
Fixed assets
Fixed assets are not always found in one place and they are more commonly
thought as movable assets, property, or equipment.
Assets also tend to be used up or expended over time and their value declines to the
point where they are no longer thought of as assets

At the end of their useful life, most assets have some scrap or salvage value
depending on the asset and, therefore, become an interesting challenge for the fixed
assets manager.
 1.Supplies and Inventories
The meaning of the inventory is stock of goods or a list of goods.
In accounting language, inventory means stock of finished goods.
In a manufacturing point of view, inventory includes,
 Raw material,
 Work in process,
 Stores , etc.
Inventories constitute the most significant part of current assets of the business concern. It is
also essential for smooth running of the business activities. Inventories can be classified into
five major categories.
i. Raw Material: It is basic and important part of inventories. These are goods which have
not yet been committed to production in a manufacturing business concern.
ii. Work-in-Progress: These include those materials which have been committed to
production process but have not yet been completed.
iii.Consumables: These are the materials which are needed to smooth running of the
manufacturing process.
iv. Finished Goods: These are the final output of the production process of the business
concern. It is ready for consumers.
It should be emphasized that the General Fund and all other funds
classified as governmental funds account for only current financial
resources (cash, receivables, marketable securities, and, if material, prepaid
items and inventories).
Economic resources, such as land, buildings, and equipment utilized in fund
operations, are not recorded by these funds because they are not normally
converted into cash.
If a government is large enough to have sizeable inventories of consumable
supplies that are used by a number of departments, it is generally
recommended that the purchasing, warehousing, and distribution functions
be centralized and managed by an internal service fund.
•
In fund accounting perspective, Governments that account for their
supplies within the General Fund can use either the purchases method or
the consumption method.

Using the purchases method, expenditures for supplies equals the total
amount purchased for the year, even if the amount of supplies consumed is
less than or greater than the amount purchased.
Thus, the purchases method is consistent with the modified accrual basis of
accounting used by the General Fund and other governmental funds.
The purchases method is generally associated with a periodic inventory
system, so the balance of the Inventory of Supplies account is increased or
decreased as necessary at year-end to agree with the valuation based on a
physical count.
The consumption method is consistent with the accrual basis of
accounting, as resources (i.e., supplies) consumed in providing services is
the essence of an expense.
Thus, GASB standards require the use of the consumption method for
government-wide and proprietary fund reporting.
Using this method, the General Fund recognizes expenditures equal to the
amount of supplies consumed during the year rather than the amount
purchased.
Accordingly, budgetary appropriations for supplies are based on estimated
consumption rather than estimated purchases. When using the consumption
method, reporting of a reservation of fund balance is optional.
•

Inventory items, such as materials and supplies, may be considered

expenditures when purchased (referred to as the purchase method) or when
used (referred to as the consumption method).

However, when a government has significant amounts of inventory, it

should be reported on the balance sheet.
Inventories are most often associated with manufacturing and retail
operations, rather than not-for-profit organizations.

Many not-for-profit organizations do maintain inventories, which is

expected to be used in its operations but should not be reported as
inventories.
In general, an inventory is classified under a current in generally accepted
accounting principle.
Current asset
A current asset is one that will be converted to cash or used in the business within
one year.

Examples include cash, short-term investments, contributions and other

receivables, inventories, and prepaid expenses.
Current assets would not include those assets restricted for use in the
operation of the organization, meaning that many assets that carry donor
restrictions would not be considered current assets.

All assets that are not current are considered noncurrent assets.
Inventory are generally required to ensure production or service delivery can
continue as planned without interruption.

Like any asset, decisions need to be made whether they should be held, and how
much to hold, and they need to be efficiently managed.
Often the level of effort dedicated to inventory management will depend on
the level of inventory investment.

One of the key challenges in inventory management is to

 Hold the minimum level of stock,
 Tying up minimum cash resources to ensure delivery continues.
Managing inventory assets can be seen from two perspectives:
 Optimal planning in terms of levels of inventory required to be held,
timing of acquisition, and order sizes; and
 Physical and process control over inventory to ensure efficient handling
and prevention of losses (includes proper record keeping of transactions
and stock on hand).
 Objectives of Inventory Management
Inventory occupies 30–80% of the total current assets of the business concern. It
is also very essential part not only in the field of Financial Management but also it
is closely associated with production management.

Hence, in any working capital decision regarding the inventories, it will affect
both financial and production function of the concern.

Hence, efficient management of inventories is an essential part of any kind of

manufacturing process concern.
The major objectives of the inventory management are as follows:
a. To efficient and smooth production process;
b. To maintain optimum inventory to maximize the profitability;
c. To meet the seasonal demand of the products;
d. To avoid price increase in future;
e. To ensure the level and site of inventories required;
f. To plan when to purchase and where to purchase;
g. To avoid both over stock and under stock of inventory.
h.
Asset Management Organization and Policies
1.3.1. Organizational Placement for Public Asset Management
There is a need of standard organizational placement for the asset management
function in the public sector.
To understand the enormity of the task, one must gain insight to the organizing
function.
Increasing specialization of activities, projects, and skills demand that managers
look to elements within their control for gaining coordination by designing,
mapping out, and deliberately planning the duties and relationships of people in
the organization.
In summary, the organizing function seeks:
 To establish efficient and logical patterns of interrelationships among members
of the organization.
 To secure advantages of specialization whereby the optimum utilization of
talents can be realized.
 To coordinate activities of the component parts in order to facilitate the
realization of the goals of the organization.
In some organizations, the assets manager is responsible for the inventory and
tracking of assets, as well as, the assets accounting functions.

Regardless of the organizational placement of the asset management function,

there should be an organization chart that accurately shows the lines of authority,
responsibility, and accountability for the function.
The primary purposes to chart the organization structure is to show the
hierarchical way functions and individuals have been grouped together,
including the authority and responsibility lines which shows
 What is" as opposed to
 What should be.
1.3.2. Public Asset Management Policies
It is recommended that a suite of policies covering overall asset management
function be developed to facilitate internal control of the entire asset management
function. The asset management policy should cover the asset life-cycle,
management processes, and procedures.
The asset management policy should cover the following (but not limited to the
points indicated below):
 Authority, purpose and scope;
 Asset definition; ``
 Asset categories (classes);
 Single asset versus component approach (segmentation);
 Asset valuation (cost, contributed or donated assets, grants or donations, so on);
 Capitalization policies (buildings i.e. more than one building on a land parcel or
one building on several land parcels), library books;
 Capitalization thresholds;
 Capitalization of subsequent costs;
 Enhancements (rehabilitation) versus maintenance;
 Depreciation methodology and rates;
 Reviews of estimated useful life and write-down for impairment;
 Capital leases (finance leases);
 Asset registers (content, maintenance of the register-updating, physical
verification, register content (periodic));
 Control (asset base, maintaining records and documentation);
 Construction work-in-progress (when to start capitalizing, and when to stop
capitalizing and start depreciating);
 Surplus assets;
 Asset disposal (sale, abandonment, demolition, trade-in); risk management,
health and safety issues and environmental issues.
 Chapter Two
Public Stock Management
 1. Overview of Inventories and Supplies
•A private sector entity is interested in inventory management to ensure the most efficient
investment of resources in the pursuit of profit maximization and therefore return on
investment, whereas in a public sector the objective differs from profit or wealth
maximization. The importance of inventory management in the public sector is based on the
need to:
 Demonstrate accountability for public resources;
 Improve transparency and credibility of information used for making policy choices; and
 Improve efficiency.
•A public sector entity is looking to maximize return on
investment to deliver more services or a higher level of service to
the community and other stakeholders. Where services are paid
for by taxes, tariffs or service charges, the question of
accountability for public funds arises.
•Inventories are assets:

a. In the form of materials or supplies to be consumed in the production

process,
b. In the form of materials or supplies to be consumed or distributed in the
rendering of services,
c. Held for sale or distribution in the ordinary course of operations, or

d. In the process of production for sale or distribution.

•Inventories generally include:
 Materials and supplies awaiting use in the production process or provision of a service;
 Work in progress (in terms of materials and supplies currently in use in the production
process or provision of the service where the production process or service provision is
not yet complete);
 Finished goods not yet sold or otherwise distributed;
 Goods purchased and held for resale; and
 Goods purchased for distribution at no charge or nominal charge.
•Assets classified as inventory are current assets which are often
held in a warehouse or stockroom and issued to jobs or projects
or otherwise utilized as required. Examples might include such
items as spare parts for specialized machinery held a warehouse.
•Public sectors must progressively improve planning and budgeting for inventory.
This must include the following for all inventory operations:
 An assessment of cash flow implications of holding inventory;
 A review of items required to be held as inventory;
 An efficiency review of inventory operations;
 Detailed operational plans or material requirement plans which indicate
requirements for holding inventory;
 A review of inventory management policies and procedures.
1. Inventory Management Techniques
•Public organizations must progressively review inventory management techniques to minimize holding cost while ensuring
uninterrupted service. This may be done in conjunction with reviewing policies and procedures. The management techniques considered
must include:
 ABC inventory control to classify items for differential management;
 Just-in-time inventory control;
 Stock take;
 Physical protection from theft, damage, and abuse;
 Warehouse and stockroom organization;
 Competencies and training of staff;
 Determining quantities to be held, order size and order frequency – economic order quantity model;
Quantity discount model; and
Reorder point model.
•Financial management and related governance reforms being introduced in the public
sector are seeking to improve service delivery to all through securing sound and
sustainable management of the financial affairs of government. That is, improved
financial management will lead to:
 Improved information for making policy choices (allocation of resources to programs);
 More efficient use of resources in delivering the chosen programs;
 Increasing the rate of delivery of basic services and associated elimination of backlogs.
This is achieved primarily through:
 Enhancing transparency and credibility of information
contained in budgets, in-year reports and end of year reports
such as the annual financial statements and annual reports; and
 Improving financial management and internal controls.
•Transparency and credibility supports the concept of
accountability such that information with these attributes can be
more reliably used to hold government accountable for delivering
on promised service delivery within approved budgets. It is
critical to note the increased focus on measuring outputs and
outcomes and not just what was spent and what was received.
•
Improved inventory management in the public sector in terms of financial
management and internal controls can, for example, lead to:
 Increases in investment revenue or freeing up of resources to be used elsewhere
due to reductions in stock held in inventory; and
 A reduction in losses due to theft, wastage, damage, spoilage or misuse.
Reductions in losses or otherwise freeing up resources to be utilized in other areas may lead to
increasing the rate of delivery of basic services and associated elimination of backlogs.
 1. Accounting for Inventories and Supplies

•Manual III, of the EFG accounting system, volume III, accounting for
other assets and liabilities specify whenever the value of stock cannot be
determined; the value of the good is estimated based on the identical or
similar good value at the time of acquiring the good.8 This manual also
required to report the value of ending stock to the accounts unit.
Adequate store accounts are necessary for a variety of reasons, of which the
following are the most important to:
a) Indicate the value of goods in stock.
b) Provide a basis for material costing.
c) Provide the means of operating stock control by value.
Material costing is done at the receipt of materials, issue of materials and the stocks
held at the end of the fiscal year.
•According to the Financial Accounting Standard Board, the
primary basis of accounting for inventories is cost. This cost is
the sum of expenditures incurred to bring an item to its existing
condition and location according to Financial Accounting
Standards Board issued FASB Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.
•The factors that are to be included in the cost of materials received are material price, freight charges
insurance and taxes. Price usually refers to the price quoted and accepted in the purchase order prices
may be often stated in various ways, such as net prices, price with discount terms, free on boards, cost
insurance and freight.
•
•For costing purposes we have to work out the actual cost incurred by taking price quoted by the supplier
as the basis, subtracting the discounts and adding freight, insurance duties taxed and package charges.
•Stock accounting is important in terms of:
o The valuation of the cost of materials consumed by production and other departments.
o Estimation of the value of materials held in stock.
 1.Procedures and records for Stock Accounting

The main records involved in stock accounting are:

a)stock record for individual item
b)stock control account for classification of items
c)main stock account for the total stock
•Stock record for individual item shows the quantity, unit price, value of
each transaction and total value of the balance on hand. Receipts are treated
as debit entries and issues as credits, and the value of stock on hand is,
therefore, debit balance. Stock increases as a result of goods received and
goods returns to store. Stock decreases as a result of issue. The store clerk
should obtain a source document before the recording the increase (debit)
and the decrease (credit) of each transaction.
•For stock control accounts, the stock records should be kept in
classification order in accordance with the coding system, i.e.,
from 4400 to 4499 and for each classification there should be a
control account like for food one control account, for office
supplies another control account and so on.
•Receipts documents are summarized at interval, say weekly or monthly and one total posting is
made to each control account. Similarly, issues are aggregated each week or month and posted
to each control account.
•
•The main stock account shows for the whole public body the total value of receipts, the total
value of issues and the value of the balance of stock on hand. In the same way the stock controls
account-controls the stock records, the main stock account-controls the stock control accounts.
Its balance should, therefore, equal the sum of the balance of the stock control accounts.
Periodical check, preferably monthly should be made to verify that there is no discrepancy.
 1. Warehouse/Store Function
•The primary objective of store is providing service to operating functions and
controlling materials. The services provided by store may include the following.
 Making available and balancing the flow of materials;
 Receiving and issuing materials;
 Accepting and storing scrap;
 Accounting for all receipts, issues and keeping goods in stock.
Tangible” assets may either be
 Financial (e.g. cash or government securities) or
 Physical (e.g. building, roads, national parks, and so on).

Intangible assets involves items such as copy right or mineral exploitation

rights and others”.
According to Federal Government of Ethiopian Accounting system manual 3,
volume 1 chart of accounts, the assets of the Ethiopian Government constitute;
Cash and cash equivalents,
Receivables ,
Goods in transit,
Stocks ,
Fixed assets (construction in progress, and property and equipment), and
Investments .
The Public Procurement and Property Administration Proclamation No.
649/2009 of Ethiopia define public property as all public properties other
than public fund and land.
 Cont…
Supplies and materials include all public property other than fixed assets,
which can be consumed within one year. Supplies immediately not consumed
shall form part of supply inventories and presence of custodial responsibilities.
Fixed assets are tangible assets that have a useful economic life of more than
one year.
As it is stated in Federal government of Ethiopia stock management manual
(2010), stock (inventory) represents items that are purchased or produced or
donated and are not immediately consumed, which is temporally kept in a
storehouse until needed for use.