Attachment: Asset Management Framework (Accounting for Non-Financial Assets)

Introduction

This guide covers the department’s policies and decision making framework for the acquisition and management of non-financial assets (i.e. items held for production of goods and services or for administrative purposes, and expected to be used over more than one financial year). It provides guidance on the key definitions and principles for asset recognition and accounting, the asset lifecycle and on a number of complex asset issues impacting the department.

Further Help

Work areas requiring any additional information concerning the department’s non-current asset policies and/or guidance on the acquisition, management and/or disposal of non-financial assets should contact FMB via the Financial Management inbox.

Core Principles

The department’s non-financial asset infrastructure is dynamic in nature and needs to expand, contract and/or be renewed to meet the day-to-day operational needs of the department.

The core principles applied to the financial and operational requirements of the department’s non-financial asset infrastructure are:

• FMA Act and Regulations and the Finance Minister’s Orders (FMO);
• Chief Executive Instructions (CEI) and the department’s Finance Management Manual (FMM); and
• Australian Accounting Standards (AASB).

The key non-financial asset references in the Australian Accounting Standards which came into effect from 1 January 2005, are:

• AASB 102: Inventories

AASB 116: Property, Plant & Equipment

AASB 117: Leases

AASB 136: Impairment of Assets

AASB 138: Intangible Assets

FMM Chapter 13 “Assets and Public Property” outlines key asset practices and provides general guidance on their application. Additionally, the following Administrative Circulars provide current policy advice on asset and property related issues:

• P0636: Commonwealth Procurement Guidelines
• P0541: Australian Made Vehicles
• P0839: Artworks Management
• P0539: Management of Laptop Computers

What is an Asset?

Accounting definition of an asset

AASB 116 recognises the cost of an item of property, plant and equipment as an asset if, and only if:

• it is probable that future economic benefits associated with the item, beyond the year of purchase, will flow to the entity; and
• the cost of the item can be measured reliably.

Dissecting an asset

A key underlying principle of accrual accounting is the matching of expenditure to the period in which the associated economic benefit is derived (i.e. the ‘matching principle’). Expenditure is capitalised when the economic benefit derived from the expenditure incurred extends beyond the current financial year and can be reliably measured. Capitalised expenditure is recognised as a non-financial asset in the department's balance sheet. The asset is then progressively expensed over the period of its useful life which corresponds to the period the economic benefit is derived (ie. depreciated).

This guide applies to the capitalisation of expenditure relating to the department's non-financial assets (listed below) and stocks of inventory. Financial assets are cash, or cash equivalent such as accounts receivable, and are not covered in this guidance.

DFAT recognises two broad categories of non-financial assets (excluding inventories):

• Tangible (physical) assets; and
• Intangible assets.

These categories comprise asset classes which are used to recognise the asset by type in the department's finance system (ie. SAP) and which are consolidated in the financial statements balance sheet.

Asset Category	Asset Category per DFAT Annual Report	Asset Class Description in SAP
Tangible Assets	Land and Buildings	Land and Buildings
	Infrastructure, Plant and Equipment (IPE)	Vehicles
		Plant and Equipment
		IT Equipment
		Furniture and Fittings
		Office Equipment
		Laptops
		Works of Art
		Assets Under Finance Lease
		Leasehold Improvements
Intangible Assets	Intangibles	Purchased (Externally Acquired) Software
		Internally Developed Software

What DFAT expenditure should be capitalised?

Expenditure for an asset item should be capitalised when:

• It is probable that future (ie beyond the current financial year) economic benefits associated with the item will flow to DFAT; and
• The cost of the item can be measured reliably, and this amount is equal to or greater than AUD $ 2,000 at the spot rate and excluding any refundable taxes (GST, VAT, etc).

The initial cost of an asset should include the following items (AASB 116 para.16):

• Purchase price, including import duties and non refundable purchase taxes, after deducting trade discounts and rebates;
• Any directly attributable costs associated with bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and
• Initial estimate of costs of decommissioning, dismantling and removing the item and restoring the site on which it is located, where the department is under an obligation to do so and the amount can be reliably measured (ie. make-good).
• Costs to include in asset price
  • Labour costs, such as salaries and on-costs for employees and contractors arising from the construction or acquisition of the asset
  • Costs of site preparation
  • Initial delivery and handling costs
  • Directly attributable tendering/procurement costs
  • Installation and assembly costs
  • Costs of security supervision of contractors installing, assembling, constructing, etc. assets within the department’s designated secure areas/zones
  • Costs of security inspections of new capital works projects prior to commissioning/operation
  • Costs of acceptance testing
  • Professional fees
• Costs not to be included in asset price
  • Research costs
  • General overhead, training and other administrative costs
  • Costs of promoting a new service (including costs of advertising and promotional activities)

What is future economic benefit?

An item satisfies the requirement of having future economic benefit if it is expected to have a life or service potential beyond the current financial year.

Example: blast film glazing applied to glass windows on an existing building should be capitalised as a leasehold improvement as the glazing is expected to last a minimum of five years (or the life of the lease). However, the cleaning of the windows should not be capitalised and is an operating budget expense

Assets acquired at no or nominal cost

An asset should be initially recognised and capitalised at its total purchase/construction cost (see the section on “What DFAT Expenditure should be Capitalised?”)

Where an asset is acquired at no or at a nominal cost, the cost to be recognised is deemed to be the item’s fair value as at the date of acquisition by the department (and is accounted for as a resource received free of charge). Fair value is essentially defined as “market price” – what price could reasonably be obtained from selling it in the open market.

Work areas in receipt of resources received free of charge should consult with FMB for advice on the recognition of such assets in SAP.

Example: an overseas host government gifted land to the department to build a new embassy. While the land was received at no cost we would need to recognise it as an asset and record it as a “resource received free of charge” at its market value.

Asset recognition date (capitalisation date)

Assets should be capitalised in the SAP Asset Register as at the date of a correctly rendered invoice. Work areas are prompted to enter the invoice date for asset acquisitions as part of the SAP Accounts Payable process. Capitalisation flags the availability of an asset to perform its intended function and the commencement of the asset’s useful life to the department.

Where a down payment or deposit is made on a new asset (eg a vehicle), the work area will need to estimate the expected future date of arrival/availability for capitalisation commencement purposes.

The costs of an asset or those costs associated with the development of self-constructed assets (ie Assets Under Construction (AUCs)) should be capitalised at the date when the asset (or sub-asset) is capable of being used in the manner intended by management.

Refer to Attachment B for more specific coverage of AUC accounting and disclosure issues.

Depreciation (‘expensing’ assets)

Depreciation is the cost of consuming the service potential of an asset over time, and provides a means of progressively recognising the cost of an asset over its useful life. The recognition of depreciation charges is essential in identifying total cost of services and the current value of the department’s asset holdings at any point of time.

AASB116 requires that the depreciation method used must reflect the pattern in which an asset’s future economic benefits are expected to be consumed by the department.

The department considers the straight line depreciation method best reflects the consumption of its asset’s future economic benefits across all asset classes. Under this method, the depreciation expense is constant each period and therefore represents the systematic consumption of the economic benefit derived from using the asset over its default useful life.

Depreciation of an asset begins at the point of capitalisation (ie the asset’s recognition date). The rate of depreciation expense is determined by reference to the expected useful life of the asset class. The table below provides the default useful life for each asset class.

A more detailed table is attached.

Asset Class	Useful Life
Land	Indefinite (not depreciated)
Leasehold Improvements	15 years or Lease Term (including any options, where there is a reasonable expectation at the commencement of the lease that the option will be exercised), whichever the shorter
Buildings	20 years or Lease Term (including any options, where there is a reasonable expectation at the commencement of the lease that the option will be exercised), whichever the shorter
Vehicles	5 years
Plant and Equipment	5 or 10 years
IT Equipment	6 or 10 years
Furniture and Fittings	10 years
Office Equipment	5 years
Laptops	5 years
Works of Art/ Antiques	100 years
Internally Developed Software	6 years
Assets Under Finance Lease	Lease Term
Purchased (Externally Acquired) Software	6 years
Special Assets	As Directed

Technical obsolescence, accelerated wear and tear (operating conditions), etc are all factors that can lead to the need for adopting a shorter useful life than those given in the table above. To ensure that the useful life of an asset is accurately reflected, the following factors should be considered prior to seeking FSB approval to amend the default useful life period:

• The expected usage of the asset. Usage is assessed by reference to the asset’s expected capacity or physical output;
• The expected physical wear and tear, which depends on operational factors such as the repair and maintenance programme, and the care and maintenance of the asset while idle, environmental conditions, etc;
• Technical or commercial obsolescence arising from future changes or improvements in production, or from a change in the market demand for the product or service output of the asset; and
• Legal or similar limits on the use of the asset, such as the expiry dates of related leases.

In locations overseas where political, environmental, or economic conditions are highly unstable, it would be considered prudent to capitalise assets and apply depreciation rates that more accurately reflected these conditions - matching of expense to the actual consumption of the asset’s economic benefit.

Example: a post purchasing a vehicle in a region of high humidity, poor road conditions and basic standards of servicing might consider seeking approval to reduce the vehicle’s expected useful life from five to three years.

Threshold – reporting vs recording

Reportable non-financial assets are recorded in the department’s SAP Asset Register and are reported in the department’s financial statements.

The department reports all non-financial assets with a purchase price equivalent to AUD 2,000 or more. Examples are motor vehicles, furniture, computers, PABX, software and leasehold improvements.

The AUD 2,000 threshold is applied to the total cost of the item (excluding any refundable taxes) at the spot rate of the invoice date.

For assets falling under the above threshold (eg portable and attractive items, residential inventories, mobile phones, laptops, etc), work areas are responsible for ensuring that appropriate controls are in place to record and manage such items. Work areas should refer to FMM Chapter 13 for policy and guidance on these items.

Asset grouping

Any group of assets purchased and maintained as a unit are to be valued on a group basis. A unit is defined as requiring its components to perform its functions. Similarly, where there is a large number of assets which individually fall under the department’s reporting threshold, but which, when grouped together represent a significant value then approval from FSB should be sought to group the items for capitalisation purposes.

Where items are purchased in bulk, such as furniture ordered as a houselot, all items must be assessed individually to determine whether they form part of a group/set. The key determinant is whether individual items are capable of independent function to provide a service. in such cases, only those items or sets of items that meet the reporting threshold of AUD 2,000 should be recorded in the SAP Asset Register.

Examples of groups of assets that should be considered as a unit are component parts of a personal computer (monitor, keyboard, mouse, etc), dining settings and curtains for a residence/office where purchased as a set.

Asset ownership and control

Work area managers are responsible for all non-financial assets under their control. A work area controls an asset if it makes all decisions and takes all actions concerning the day-to-day operation of an asset; the work area may not have necessarily purchased an asset under its control.

Example: a post has been provided with an armoured HOM vehicle. Although the vehicle was purchased by Canberra, the post has control of this asset and is accountable for its day-to-day management.

Due to their specialised nature, work areas are encouraged to consult with the Diplomatic Security Branch (DSB) for any repairs and maintenance of security-related assets.

Asset Register maintenance

Finance Managers are to ensure that all reportable assets purchased by their work areas, including those purchased from budgets provided by other areas of the department (eg from approved security funds, public affairs, etc.), are recorded in the SAP Asset Register. On-going maintenance of a work area’s asset register includes ensuring asset locations are up to date, asset descriptions are sufficient to aid identification and stocktake and that disposal/deactivation of assets is undertaken in a timely manner.

FSB is responsible for general maintenance and quality assurance of the department’s SAP Asset Register as a result of the global annual stocktake process, asset revaluation and impairment management.

Asset Lifecycle

The diagram below shows the asset lifecycle.

Planning

Asset planning requires consideration of how to best meet the requirements of current and future output and business requirements. Planning needs to address all activities in the asset life cycle from identifying a need, the life costs of acquiring and maintaining the asset, through to the timing of final disposal and consideration of replacement.

Acquisition

Asset acquisition practices need to ensure the department is obtaining “best value for money” and that acquisition decisions are made with appropriate consideration of transparency and accountability principles. It in case of IT assets, acquisitions must comply with the broader IT framework and standards of the department.

Operations

Maintaining the service potential of assets over their useful life involves day-to-day decisions concerning the risks associated with asset non-performance. The decision to repair, maintain, upgrade and/or replace an asset requires work areas to consider the risks associated with unexpected failure of an asset to meet its service potential.

Asset operations also include accountability responsibilities, such as stocktaking and control over portable and attractive items. Accounting decisions such as expected useful life, revaluation and impairment need to be continuously reviewed over the course of an asset’s life.

Disposal

Assets that are surplus to requirements, have reached the end of their useful life or are unserviceable should be disposed of so as to gain the best net outcome for the Commonwealth. The decision to dispose of an asset should not be based on the item having completed its accounting book life, but on whether the best outcome in meeting the work area output or business requirements is to dispose rather than retain the item. in the decision process, work areas should consider the risk to service levels if an asset becomes unserviceable or unable to maintain its capacity. The cost of on-going maintenance is another important consideration.

Planning: Meeting business needs

Asset Strategic Planning

Assets are an essential component in the delivery of the department’s outcomes and have a significant impact on the cost of the department’s outputs.

Effective asset management is more than “rolling over” assets at the end of useful life, but requires work areas to consider future asset performance issues such as:

• Expected purpose and utilisation levels;
• Technological changes and obsolescence;
• Capacity of existing/remaining assets;
• Risks associated with non-performance of existing and/or replacement asset(s); and
• Matching requirements to the future business strategy of the work area.

Work area asset planning processes should focus on identifying current and future output and business requirements and developing an asset strategy to meet these requirements.

Capital acquisition planning is important because of the need for work units to use resources efficiently, effectively and ethically in delivering outputs. The Capital Management Plan (CMP) is the tool the department utilises to drive strategic asset management decisions.

Capital Management Plan (CMP)

The CMP is a strategic review of the department’s current and future capital investments for the subsequent four out years, including disposal for cash, trade-in, write-off of existing assets and proposed acquisitions, improvements and work-in-progress (WIP) or Asset Under Construction (AUC) projects.

Work areas are required annually to prepare and submit CMPs for consideration by the Capital Expenditure Coordination Group (CECG) and Senior Executive. Managers responsible for assets should understand the asset acquisition process before submitting the Capital Management Plans (CMP) as part of the annual Budget Allocation Review (BAR) process. Work areas will be advised each year by Administrative Circular of the forthcoming financial year’s BAR/CMP process.

CMP approval procedure

Work areas are required to submit bids in March/April as part of the BAR process for the forthcoming financial year and in October /November for midterm review (for urgent, unavoidable and unforeseen items only). Changes to capital allocations outside these deadlines should be only for exceptional circumstances and approval must be sought initially from FMB, for subsequent consideration by the Secretary.

The Budget Development Section (BDS/FMB) provides analysis on the affordability of each new asset by forecasting the total depreciation and operating expenses using the Capital Budget Forecasting Model (CBFM). The affordability analysis assists the Capital Expenditure Co-ordination Group (CECG) to make recommendations to the Senior Executive for approval, based on the strength of the business case. The CECG is comprised of the CFO, FAS CMD and FAS DID.

Proposed IT assets will be considered by the IT Steering Committee (ITSC) in terms of their compatibility with the broader IT departmental plan. The ITSC will provide advice to the CECG on priorities and appropriateness of IT bids.

Capital Budget Forecasting Model (CBFM)

The CBFM model is designed to forecast the depreciation expenses using the data obtained from individual CMPs submitted in the BAR, as well as asset information available within SAP. The main focus of this model is to analyse the affordability of new assets.

The CBFM also enables performance monitoring between the approved (planned) asset acquisitions and disposals against actual asset movements. This allows future budget decision making to be as informed as possible as well as providing the basis for variance reporting.

Acquisition: Best value for money

Procurement

The acquisition of assets generally represents the most significant single item expenditure undertaken by work areas in the department. in making asset acquisition decisions, work areas need to consider their current and future business requirements, corporate policies and objectives, budgetary limitations, ethical standards and compliance with government procurement requirements. Business cases justifying the need and the proposed acquisition should be prepared.

The Commonwealth Procurement Guidelines, the DFAT Procurement Manual and Chapter 8 of the FMM cover requirements relating to the spending of public money and are applicable to the purchase of assets.

Leasing

in those locations where there is an active commercial leasing market, work areas should consider the option of leasing versus buying to meet future output and service requirements.

An operating lease is similar to a rental agreement and results in the lessor essentially retaining all the costs of ownership of the asset (other than consumables) and the cost of the lease is treated as operating expenditure.

A finance lease is a lease where the work area is effectively the owner of the leased item and assumes all the risks and benefits of ownership. Finance lease payments equate to the purchase price of the asset and a finance (interest) charge. Assets under finance lease that meet the reporting threshold of AUD 2,000 are reportable non-financial assets and require approval under the CMP approval process.

The decision to lease an asset is a complex one and work areas must seek FSB agreement before entering into any leasing arrangement. Leasing should not be seen as a way to by-pass the department’s capital processes.

Leasing is a complex area of accounting, subject to the accounting and disclosure requirements of AASB 117 “Leases”. Finance Managers (divisions, state offices and posts) are responsible for ensuring information on all finance leases entered into are provided to FMB for inclusion in the SAP Asset Register.

An example of a finance lease arrangement is a motor vehicle where the department assumes responsibility for maintenance, repairs and servicing and has the option at the end of the lease to purchase the vehicle at a pre-determined residual value.

Operations: Maintaining service potential

Repairs and maintenance

The maintaining or restoration of an asset’s service potential through repairs and maintenance is a day-to-day cost of operation, is an expense and should not be capitalised. “Like for like” replacement of components of an asset is also considered as repairs and maintenance and the cost should be expensed.

Example: the cost of regular replacement of the batteries for a chancery’s Uninterrupted Power Supply (UPS) is maintaining its service potential and is an operating expense

Upgrades and improvements

Where expenditure results in an asset having an increased service capacity, higher service quality or extends the service life of the asset, it is considered an upgrade or an improvement to the asset and the expenditure should be capitalised.

Where an asset has been upgraded, and the gross value of the upgrade is AUD 2,000 or more, it must be recorded in the SAP Asset Register. The value of an upgrade is to be added to the value of the original asset and not recorded as a separate item. Where an upgrade is less than AUD 2,000 it should be treated as an operating expense.

Repairs and maintenance do not constitute an upgrade and should always be expensed.

Example: a new $5,000 alternator for a generator would be considered to be an upgrade and capitalised where the new alternator has extended the operating life of the generator. However, a new exhaust for the generator is just restoring the unit back to its normal operating capacity and should be expensed as a repair or maintenance.

Revaluations

Under AASB 116, the department must regularly re-assess the carrying amount of its assets to their fair value. Fair value is the cost for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. Fair value is the market value unless there is no market based evidence of fair value. In such cases, fair value is estimated using depreciated replacement cost.

For specialist items/groups of assets, such as security equipment or security enhancements to chanceries, fair value may be estimated using a depreciated replacement cost approach to recognise significant delivery, installation, inspection, etc. costs included in such assets, which may not be reflected in the commercial market value.

The standard does not allow for individual assets within an asset class to be reviewed for revaluation; a whole asset class must be subject to revaluation at the one time. in the context of an asset class revaluation, the carrying value of individual assets could be increased, decreased or remain unchanged.

In accordance with AASB116, the department has in place a five year cyclical revaluation program of all asset classes (with the exception of land and buildings which are revalued annually), undertaken by an independent commercial valuer under the management of FMB. Work area input may be required in the revaluation process through providing advice on local operating conditions, commenting on local market conditions, and/or taking digital pictures of particular assets as requested.

Following completion of the independent valuer’s review, FSB will centrally adjust any revised asset values in the SAP Asset Register.

Impairment and useful life

Under AASB 136, the department must assess whether its assets are impaired (ie. assets are recorded in the asset register at higher than their recoverable amount). Recoverable amount is defined in AASB136 as the higher of fair value less disposal costs (amount in a sale of an asset in an arm’s length transaction between knowledgeable, willing parties less the costs of disposal) and value in use (an estimate of the present value of the future cash flows expected from an asset).

To address this requirement, the department requests work areas to assess impairment of assets as part of the annual stocktake process. Work areas are asked to determine whether any assets are impaired and to categorise impairment under one of the following categories:

• physical damage & obsolescence impairment – the asset has suffered physical damage or is shortly to become obsolete earlier than anticipated;
• usage impairment – significant changes have impacted on the work area resulting in the asset previously used becoming idle, significantly under-utilised or there are plans to dispose of the asset ahead of its normal useful life; and
• economic performance impairment – the performance/capability of the asset is/will be worse than expected.

Where an asset is determined to be impaired, work areas are required to assess whether the carrying book value accurately reflects the fair value of the asset given local conditions and/or whether the remaining lifespan of the asset remains valid.

The department must also consider, each financial year, whether there are external indicators of impairment of individual or groups of assets. Indicators that should be considered include:

• significant decline in an asset’s market value a result of the passage of time or normal use;
• significant changes with an adverse effect in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated; and
• increase in market interest rates or other market rates of return on investments which are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.

The impairment testing undertaken by the department is independent of any revaluation reviews.

Example: usage impairment would exist where office furniture (which has 5 years remaining) will not be used in a new chancery opening in six months time. An example of an external indicator of impairment would be where a country has lifted all import restrictions on motor vehicles. This may result in the market being flooded and driving the prices of vehicles down significantly and severely impacting on the market value of a post’s vehicle fleet.

Stocktaking

Correct stocktaking on a regular basis is an essential element of asset management and accountability. Stocktakes of reportable non-financial assets are an annual requirement except for ISB/IPB assets located overseas which are subject to stocktake on a three year cyclical basis. Work areas may need to undertake more frequent stocktakes as a result of their risk profile.

FMB provides advice of when the annual stocktake of the department’s reportable non-financial assets should commence and the timetable for completion.

The objectives of the stocktake are to:

• Ensure that all DFAT-owned, non-financial assets valued at AUD 2,000 or more are recorded in the SAP Asset Register;
• Ensure that all assets recorded in the SAP Asset Register are in existence and in use;
• Identify assets which have not been recorded in the SAP Asset Register;
• Identify assets that are surplus to requirements that may subsequently be transferred within the department;
• Identify obsolete and/or damaged assets that should be disposed of and removed from the SAP Asset Register; and
• Identify assets that have been missing for two consecutive stocktakes that should be removed from the SAP Asset Register.

Any apparent discrepancies between the stocktake and the SAP Asset Register listing are to be thoroughly investigated. All stocktakes should be undertaken independent of SAP Asset Register records and then compared to the SAP Asset Register to ensure unrecorded or missing items are properly identified.

Any assets that have been identified as missing for two consecutive stocktakes must be investigate, reported and, if adequately explained, subject to formal write-off action (as per the requirements of the FMM).

Loss of assets

In Australia, loss or damage to an asset must be reported to the Branch Head (Canberra) or the Finance Manager (State/Territory Offices) as soon as possible. Overseas, loss or damage to an asset must be reported to the Finance Manager, or to the Head of Mission at a one officer post, as soon as possible.

Loss of any security related assets must be reported to DSB as soon as possible.

Where a Branch Head or Finance Manager had nominal custody of an asset at the time it was lost or damaged, the loss or damage must be reported in writing to their immediate supervisor. The immediate supervisor is responsible for ensuring that all appropriate procedures in FMM Chapter 13 are complied with and, if fraud or misconduct is suspected, report the incident to the Conduct and Ethics Unit (CEU).

The employee who had nominal custody of the asset at the time of its loss or damage may be liable to pay to the Commonwealth the amount of the loss or damage. However, if the employee took reasonable steps to prevent the loss/damage, it may be determined that the employee is not liable to pay for the loss/damage.

Where an employee’s misconduct or deliberate and serious disregard of reasonable standards of care caused or contributed to the loss/damage the matter is to be referred to the CEU for investigation. If the employee’s misconduct or disregard was not the sole cause of the loss/damage, the employee is only liable to pay an amount that is just and equitable having regard to the employee’s share of the responsibility for the loss/damage.

Disposal: Best outcome for business needs

Disposal methods

Effective management of asset disposal ensures that the expected service and output requirements are maintained while minimising the holding of surplus and/or under-performing assets. Decisions taken on the method of disposal should result in the best net outcome for the department. The best net outcome does not necessarily mean the highest dollar return.

Departmental assets may be disposed of through the following methods:

• Sale;
• Transfer;
• Trade-in;
• Write-off (where assets are determined to be unserviceable, worn out or obsolete; or where assets have been lost or damaged); or
• Gifting.

The decision to dispose of an asset needs to be considered in light of any asset replacement strategy, as this will impact on the potential net outcome (in the case of trade-ins) and the timing of the disposal. Disposal of any security assets must be approved by DSB.

FMM Chapter 13 details disposal procedures to be followed by work areas. It is important that employees, or others involved in the disposal process, do not gain a personal benefit through any proposed asset disposal method.

Identifying assets for disposal

in determining the most appropriate method of disposal, work areas need to consider security issues, the potential external market, the potential to support other programs (ie public diplomacy), environmental issues, transfer costs, etc.

Additionally, work areas should consider factors such as:

• Technological obsolescence;
• Items beyond repair, or where the cost of repair outweighs the expected future service benefits;
• Items not expected to be utilised in the medium to long term; and/or
• Conformity with workplace and/or OH&S requirements.

Example: a post may consider the gifting of obsolete IT equipment to a charity or its retention at a residence for contingency purposes as representing the best outcome for the department.

For assets that are surplus to requirements and have historical or cultural significance, FMB should be advised, and full details of the asset provided, before any action is taken.

Profit/Loss on sale of assets

Current department policy is that for assets purchased from capital funds, any profit/loss on subsequent sale of assets is to be returned to Canberra. FSB will monitor the disposal of these assets to determine whether returns on disposals are in line with that advised as part of the CMP process (where applicable) and whether work areas have consciously pursued the best net outcome for the department from the disposal. FMB should be advised as early as possible if a significant loss on sale of an asset is expected and/or where the loss will be greater than forecast by the work area as part of the CMP process.

Profit/loss on asset sale is determined net of any direct sales costs (eg auctioneer costs, documentation transfer costs, freight, etc). Direct sales costs are usually deducted from the final sale price, however where these are expected to be significant, FSB should be consulted before any disposal action is undertaken.

Intangible Assets and Intellectual Property

AASB 138 defines an intangible asset as “an identifiable non-monetary asset without physical substance”. While intangible assets often do have a physical component, their value to the department generally derives from the intellectual property they contain (software), or the rights they confer (patents, copyrights, etc).

Some examples of intangible assets are computer software, patents, copyrights and customer lists.

For the department, intangible assets generally relate to software purchased ‘off the shelf’, and software that has been developed ‘in house’.

Accounting for externally developed software

for externally acquired/licensed software there is currently a great deal of variability in the pricing models used by software companies and the amount to be capitalised should reflect the particular contractual conditions of the software. Generally, the installation costs and associated expenses incurred in getting the software ready for use are capitalised along with the initial acquisition price. Costs incurred prior to purchase and after installation, such as support or maintenance fees, should not be capitalised.

For some categories of externally acquired software there is an upfront charge that enables the department to have ongoing access to the software product for a specified period of time. If this amount is over the general asset threshold of AUD2,000, then the costs associated with this purchase should be capitalised and depreciated over the lesser of five years or the expected life of the software package.

For some enterprise based arrangements (eg the Microsoft Office suite) the asset may not be the software itself – but the right to use multiple copies of the software. Once again the decision as to what to capitalise should be considered in light of contractual arrangements.

Ongoing annual maintenance and licensing costs need to be separated from the initial acquisition licensing and should be expensed as incurred (or a prepayment recorded if payment is made in advance). If the maintenance/licence payment is for an extended period (egg more than one month) then the payment should be treated as a prepayment and expensed over the course of the maintenance/licence period.

Accounting for internally developed software

Work areas should initially capitalise software at the full cost of development or acquisition. All costs directly traceable to the asset should be capitalised, such as:

• Full labour costs (salaries and on-costs) for employees and contractors who are associated with and who devote time to develop the asset; and
• External direct costs of materials and services consumed in developing (eg. contractor and consultant fees, travel expenses incurred by staff and contractors working on the project).

Software development phases

An Accounting Guidance Note (2007/1) issued under the Australian Accounting Standards and the FMOs, identifies three stages of a software development project and details the recognition points for where a payment meets the requirement for capitalisation:

Stages of Software Development Life Cycle	Expense or Capital?
Research stage
Consultants Fees	Expense
Staff Costs	Expense
Development stage
Off the Shelf System	Capital
Consultants Fees – Design & Construction	Capital
Equipment - specifically required to develop and/or test asset	Capital
Data Migration – test data for developing and/or testing the asset	Capital
Staff Costs – Development	Capital
Staff Costs - Testing	Capital
Implementation stage
Training – Staff Costs	Expense
Manuals	Expense
Maintenance & Support	Expense

Criteria for capitalising internally generated intangible assets

Expenditure during the research stage of a project must not be recognised as an asset. Expenditure during the development stage should be capitalised only where the entity can demonstrate all the following:

• The technical feasibility of completing the intangible asset so that it will be available for use or sale;
• The intention to complete the intangible asset and use or sell the asset;
• The ability to use or sell the intangible asset;
• How the intangible asset will generate probable future economic benefits or service potential. Among other things, the entity shall demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
• The ability to measure reliably the expenditure attributable to the intangible asset during its development.

Administrative and other general overhead costs associated with internally generated intangible assets are usually expensed, unless the expenditure can be directly attributed to preparing the asset for use. in such cases, the costs can be capitalised as a component of the intangible asset. Prior to the commencement of the project, a work area would need to establish what costs could be directly attributable to the development of the asset and determine the method(s) to reliably measuring such costs. Proposals to capitalise administrative and general overhead costs should be clearly detailed in the work area’s CMP submitted for approval, if these costs cannot be absorbed.

The table below provides further detail of the nature of software development expenditure over the course of its development and release.

If a decision is made for a project to be cancelled or not to be completed, the costs are expensed immediately.

Stage	Description	Capital or Expense?	AASB Ref
General	Non-Project Specific Allocation Non-productive administrative time (for example filling out flex sheets, team meetings etc) Leave and public holidays. Other overheads (rent, etc)	Expense	AASB 138.29 AASB 116.19
General	Project Management (research through to project acceptance) Project planning Project co-ordination Project management Scoping and planning for the project	Expense	AASB 138.54
Research	Development of business case (until approval has been given this is not a project) Requirements Analysis (Feasibility and Pilot) Change and communications management activities Business Requirements and functional specifications Scoping - The process of defining the scope of exactly what tasks the system is going to be required to perform. Quality Assurance/Review	Expense	AASB 116.21 AASB 138.29 AASB.138.54
Development	Design Specification (Applications Development Stage) Design - Creation of the Design Specification. Prototyping and piloting to test feasibility prior to developing final system to be utilised Quality Assurance and Review Test Planning - The process of planning a regime whereby the functionality and accuracy of that which is to be tested can be assessed to the fullest extent possible with the resources available.	Capital	AASB 116.17 AASB.138.57
Development	Building and Testing software Using the Design and Architecture Creating the software Documenting the building process Any directly attributable tendering/procurement costs Test (including costs of data migration for specific test data only used for system testing)	Capital	AASB 116.17 AASB.138.57 AASB.116.16
General	Directly Attributable Project Management Costs (from project acceptance, development through to completion) Project co-ordination Project management	Capital	AASB 138.27 AASB 116.16
Development	Test and Integration Build and test assets individually and within the context of a system	Capital
Development	Acceptance Testing & Integration into Production Formal acceptance and migration into a production environment system.	Capital
Implementation	Data migration (outside of that undertaken for system testing)	Expense
Implementation	Training – The delivery of training to the end user	Expense	AASB 116.17
Implementation	Development and dissemination of user manuals	Expense
Implementation	Operation and Maintenance – Continued use and maintenance of the system	Expense

When should capitalisation occur?

Amortisation is the accounting term for the depreciation of an intangible asset, such as internally generated software. Amortisation of the final software asset begins when the asset is completed and ready for its intended use. For example, computer software is considered ready for its intended use after all substantial testing is completed and the system has been transferred from the development or testing environment to the operational environment. At this stage the Asset Under Construction (AUC) is settled to the appropriate asset class in SAP which allows amortisation to commence.

Note that after capitalising the software asset, the project may continue and further costs may continue to be captured. Any capital costs captured after capitalising the asset will only be added to the value of the asset if it can be shown that they are costs that were not able to be captured earlier or where there is significant development work being done immediately after the initial asset implementation.

If a software project is completed and ready for use but actual use is deferred (eg. because of logistical problems or because legislation (for which it was written) has not been passed or come into effect) then amortisation will not begin until such date as it does come into effect or the problem is rectified. If an item is completed and ready for its intended use but it is not operational then amortisation will begin from the date of availability.

Accounting for intellectual property

Intangible assets are not restricted to software, and can cover intellectual property (IP) developed and/or purchased by the department. IP Australia defines IP as an entity’s “proprietary knowledge”, and in the department’s case would commonly relate to the copyright of original material in literary, artistic, dramatic or musical works, films, broadcasts, multimedia and computer programs.

Example: the department may hold the intellectual property in the form of copyright for a video produced detailing officer security awareness.

The recognition of and accounting for intellectual property as an intangible asset is complex. Work areas need to consult FMB as soon as they consider IP may have been generated and application of AASB 138 will be considered.

Assets Under Construction

Any project of a capital nature, occurring over an extended period of time, will require the creation of an asset under construction (AUC) in SAP. This allows costs associated with the project to be held in the balance sheet without depreciating until such time as the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management.

All capital projects should be assessed to determine whether or not it is appropriate to create an AUC account. Usually where an asset is being built, enhanced or deployed over a period of time the use of an AUC account will be appropriate.

Examples of capital projects where an AUC account should be utilised are:

• Leasehold improvements and fitouts;
• Post openings;
• Internally developed software;
• Satellite communications installations;
• Emergency radio network installations; and
• Purchased software requiring configuration, testing, documentation or implementation to occur before it is ready for intended use.

Capitalising AUCs

The department adopts the accounting principle of progressively recognising revenues and expenses associated with non-financial asset projects over the period of acquisition or construction. Project costs are recognised at the time the related project activity has been performed and are determined by reference to invoices received and/or as a proportion of work performed to date (for accruals).

As a general rule, capitalisation should occur at the point when the asset (or sub-asset) is capable of being used in the manner intended by management. Only when assets have reached the point of capitalisation will depreciation commence. Until the asset recognition date criterion is met, costs incurred for the development of self-constructed assets are to be accounted for against the AUC’s General Ledger (GL) Account.

Where a project relates to a number of separately identifiable components, each component may be capitalised upon completion where ready for use and/or the economic benefit associated with the component is expected to flow to the department. This capitalisation process can occur even though other components of the project are not completed. Depreciation commences from the time the completed component of the project is capitalised and first put into use or held ready for use by the department.

Example: where a residential compound is being constructed, individual residences should be capitalised as completed and held ready for use by the department.

It is important that work areas regularly review AUC balances under their control to ensure timely capitalisation and recognition of the final asset or its components in the SAP Asset Register. It is not possible to capitalise and depreciate AUC items in the SAP Asset Register for financial periods prior to the current financial year.

Prior to the commencement of a major acquisition/project, work areas need to establish in the SAP Asset Register an AUC shell to carry all relevant project costs. SAP facilitates two forms of AUC class:

• Direct Capitalisation AUC (Asset Class 8500): this is the simplest form of AUC, where costs are directly charged to the AUC and are capitalised as required to reflect the availability of the asset to perform its intended function(s). A statistical posting against the work area’s capital internal order is recognised at the time of the initial posting against the AUC; and
• Project Controlled AUC (Asset Class 8000): this form of AUC should be considered for complex projects, where a project’s various components can be facilitated by using specified project Work Breakdown Structures (WBS) within SAP’s project accounting module. Multiple WBS can facilitate the tracking of expenditure for an asset’s significant parts (i.e. sub-assets). Depending upon the nature of the asset being constructed, sub-assets may be separately recognised and capitalised as assets at one or more points in time. It is, however, important when creating a new WBS to ensure the master data fields covering the area managing the project and the type of funding utilised are completed in SAP. Asset capitalisation only occurs once settlement for a WBS to the AUC GL has been undertaken and the statistical posting against the work area’s capital internal order only occurs at this point in time.

Work areas considering the use of an AUC to record and manage a project should seek prior advice from FSB.

Leasehold Improvements

Leasehold improvements include fitouts, security enhancements and/or renovations of leased office accommodation or leased residential property. Examples are recarpeting, painting and structural improvements to a leased property upon commencement of a lease (initial office/residential fitout), and any subsequent refurbishment of office/residential leased accommodation. Leasehold improvements also include immoveable fixtures (eg the installation of air-conditioning or CCTV security systems).

If the value of a leasehold improvement is AUD 2,000 or more it must be recorded as an asset. Leasehold improvements are initially recorded, at cost, as one (grouped) asset per leased property, with further improvements being added to the asset as they occur.

• The asset value of a leasehold improvement is determined as follows:
  • Initial fitout or refurbishment/renovation of a leased property:
  • The value is the total cost of the components of a fitout, refurbishment or renovation project. If the cost of the project totals AUD 2,000 or more, the fitout/refurbishment is to be recorded on the Asset Register as a leasehold improvement;
  • The value of a fitout or refurbishment is the total cost of the freight, materials, installation and labour for carpeting, painting, lighting, window treatments of a fixed nature (tinting, security features), plumbing and any other structural alterations (barriers, security doors, counters, etc.); and
  • The initial estimate of the costs of dismantling and/or removing the fitout and the costs of restoring/making good the leased property at the end of the lease.
• Immoveable fixtures:
  • The value for immoveable fixtures consists of the total cost of freight, materials, installation and associated labour costs.

Leasehold improvements do not include moveable furniture and fittings. Items such as whitegoods and furnishings like rugs, including where ordered as part of an initial “houselot”, do not form part of a leasehold improvement. These items should be assessed individually and recorded separately (ie. as furniture and fittings) in the Asset Register, if their cost is AUD 2,000 or more.

If, at the commencement of a renovation project, the projected cost is AUD 2,000 or more, all payments contributing to the cost of the associated leasehold improvement, even where payments individually may not equal AUD 2,000 or more, are to be recorded against a leasehold improvement asset.

Also note that maintenance and repairs do not fall within the definition of a leasehold improvement and should be expensed. For example, the repainting of offices undertaken as maintenance, rather than as part of a refurbishment project, would not be considered a leasehold improvement.

Example: if an item can be easily dismantled and/or moved to another location, it should not be classified as a leasehold improvement.

Depreciation of Leasehold Improvements

Leasehold improvements must be depreciated over the unexpired period of the lease or 15 years, whichever is the shorter. The term of lease includes any options, where there is a reasonable expectation at the commencement of the lease that the option will be exercised.

Example: new partitioning installed in a chancery where the lease expires in two years, will need to be depreciated over the two year period only.

Inventory

The department holds physical inventory for sale or distribution (such as blank passports, printer cartridges, blank paper, etc). Under AASB 102, these inventory items must be considered for recognition as a non-financial asset.

Like other non-financial assets, the cost of inventory should include the purchase price (excluding any refundable taxes), transport, handling and other costs directly attributable to the acquisition of the finished goods.

for inventory held at locations in Australia and at overseas posts, the cost of inventory should recognise all freight costs associated with distributing the inventory to the point of production/sale.

The department’s asset recognition threshold of AUD$2,000 applies to each category of inventory items. for reasons of practicality, an inventory asset is not recognised for small quantities of low value materials and supplies (eg work area stationery holdings).

Where work areas identify potential items of inventory held for sale or distribution, they should contact FMB so that an assessment can be made on the appropriate accounting and disclosure treatment. Recognition of items of inventory as reportable non-financial assets must be cleared through the CFO.

Inventory Held for Sale

AASB 102 requires inventory held for sale as part of the department’s ordinary course of business to be valued at the lower of cost and net realisable value.

Regular assessment of the value of carrying stocks of inventory held for sale should be undertaken by the owning work area.

Inventory is usually written down to net realisable value on an item by item basis, however it may be appropriate to group similar items and value them accordingly.

Inventory Held for Distribution

in addition to inventory held for sale, the department holds materials/supplies for distribution or consumption as part of its ordinary course of operations. For example, passport blanks, printer cartridges, printing supplies, bulk stationery, brochures, pamphlets, etc.

AASB 102 states that where inventory is held for distribution in the ordinary course of business or for consumption in the rendering of services, both at no or nominal consideration, then such inventory is recognised as a non-financial asset which must be valued at the lower of cost and current replacement value. Current replacement cost is the cost the department would incur to acquire the asset on the reporting date (30 June).

in identifying items of inventory, work areas need to assess whether any materials/supplies held meet the general definition of an asset (that is, a resource controlled by the department as a result of past events and from which future economic benefits are expected to flow to the department) and will be consumed by the department in rendering of services. Due regard must be given to the total cost of any inventory held for distribution to determine whether the asset threshold is exceeded for recognition as a non-financial asset.

Inventory Stocktake and Disposal

Inventory items are subject to the same management and accountability principles and practices as other non-financial assets.

Stocktake

Stocktakes of inventory should be undertaken, at a minimum, annually as part of the department’s asset stocktake process, however, work areas may need to undertake more frequent inventory stocktakes as a result of their business processes and/or risk profile.

Disposal

Decisions on the disposal of inventory should address the best net outcome for the department. The best net outcome does not necessarily mean the highest dollar return.

Inventory may be disposed of through the following methods:

• Sale;
• Transfer; or
• Write-off (where stocks are determined to be unserviceable, worn out or obsolete; or where inventory has been lost or damaged).

FMM Chapter 13 details disposal procedures to be followed by work areas. It is important that officials involved in the disposal process, do not receive a personal benefit through any proposed asset disposal method.

List of Asset Classes

Class		Description	Useful life / Depreciation	Evaluation Group	Description
1000		Vehicles	5 yrs/20%	4WD	4-wheel drive
				BOAT	Boats
				BUS	Buses
				CARS	Sedan, station wagon
				HOMV	HOM vehicles
				MCYL	Motorcycles
				OTHR	Other vehicles
				TRLR	Trailers
				TRUK	Trucks (2 to 10 ton)
				UTES	Utilities, trucks (less than 2 ton)
				VANS	Vans
2000		Plant and equipment	5 yrs/20%	AIRA	Air conditioners (mobile)
				OTHS	Other plant and equipment
				VIDO	TV, VCR, stereo, audio-visual equipment
2100		Plant and equipment	10 yrs/10%	AIRB	Air conditioners (split), heaters
				GENR	Generator
				GYM	Gym equipment
				LAWN	Lawnmower
				MEDI	Medical equipment
				OTHR	Other plant and equipment
				PHOT	Photographic equipment
				PURI	Air purifiers and humidifiers
				SAFE	Safes
				SECY	Security systems
				WHIT	White goods (refrigerators, ovens, etc)
2500		Furniture and Fittings	10 yrs/10%		Excluding antique furniture
3000		Office equipment	5 yrs/20%		Fax machines, photocopiers, etc
4300		IT Equipment	6 yrs/16.6%	COMP	Desktop/office computer
				FILE	File servers
				LAPT	Laptop
				HUBS	Hub/Repeater
				MISC	Misc computer equipment
				MONI	Monitor (specialised)
				MULT	Multiplexer
				PRIN	Printer
				ROUT	Router
				SCAN	Scanner
				TAPE	Tape drive
				UPS	UPS
				PKTS	Packet switch
				SATE	Satellite equipment
				TEST	Test equipment
				TXRX	Transceiver
				XMIS	Misc communication equipment
4500		IT Equipment	10 yrs/10%	MAIN	Mainframe computer
				ENCL	Enclosures
				ENCR	Encryption equipment
				PABX	PABX
				COMP	Desktop/office computer
				FILE	File servers
				LAPT	Laptop
				HUBS	Hub/Repeater
				LAPT	Laptop, notebook
				MISC	Misc computer equipment
				MONI	Monitor (specialised)
				MULT	Multiplexer
				PRIN	Printer
				ROUT	Router
				SCAN	Scanner
				TAPE	Tape drive
				UPS	UPS
				PKTS	Packet switch
				SATE	Satellite equipment
				TEST	Test equipment
				TXRX	Transceiver
				XMIS	Misc communication equipment
4600		Laptops	5 yrs/20%	LAPT	Laptop, notebook
4800		Software	6 yrs/16.6%
5000		Works of Art	100 yrs/1%		Includes antique furniture
5500		Library stock	20 years/5%
6000		Leasehold improvements	15 years/7% or lease term (including any options, where there is a reasonable expectation at the commencement of the lease that the option will be exercised), whichever the shorter.		Indicate location of improvement and remaining term of the lease
6500		Buildings	20 yrs/5% or lease term (including any options, where there is a reasonable expectation at the commencement of the lease that the option will be exercised), whichever the shorter.		Indicate location of building and remaining term of the lease
6600		Land	Not applicable
8000		Assets under construction	Not applicable		Refer to the Director, FPS if use of this asset class is required.
8500		Assets under construction – direct capitalisation	Not applicable		For use in Canberra only.
Assets under finance lease:			Lease term/ assessed individually
9000	Leased vehicles
9100	Leased plant and equipment
9200	Leased furniture and fittings
9300	Leased office equipment
9400	Leased IT equipment
9900	Special Asset		To be assessed individually		Manual depreciation

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