Property Management for Capital Assets

1. Property Management for Capital Assets 2011 NPMA National Education Seminar Wayne Norman, CPPM CF Earl Evans, CPPM CF Northrop Grumman Corp. Northrop Grumman Corp.

2. Agenda • Capital Asset Definition • Capitalization Practices • Responsibility for Capital Assets • Capital Records • Capital Identification • Capital Inventory • Approaches • Rolling Wave

3. Definitions • Capital 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.

4. What constitutes a Capital Asset ? • Acquisition Cost at or above an established capital threshold (see note) • Expected usage life of 2+ years • Will 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.)

5. Capitalization thresholds • What is in your Entity policy / Disclosure statement ?? • Capital Asset = Acquisition value of ??? • Typical thresholds - $ 1k , $2k, $5kor more • The trend is higher threshold values • Expense more cost in current period • Less pending depreciation and asset balance on balance sheet (Net Book Value) • Inflation • Less administration of minor equipment items

6. Responsibility for Capital • Who Manages your capital property • Property Accounting - Just the Property Accounting role? • Facilities • Property Management • No One? • What constitutes Property Management • Should your org be the one stop shopping source for the entity on management of assets company and customer

7. 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

8. 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.

9. Single Process • This suggests (in my opinion) • One PM group to manage all property • One Property Management records system • Similar consistent processes (without all the regulations) • Interface shadowing between your Accounting/Capital records system and Property Management system • Supports Sarbanes-Oxley Control requirements

10. Benefits of One Process /System • One Focal point group for Management of all assets under all ownerships • Keep 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.

11. Roles- PA vs PM • 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 Property Mgmt • Tag property • Identify/record asset unique fields • Setup or modify accountability record* • Manage life cycle, including movement, inventory • Coordinate reutilization reviews • Handle Disposition method and actions for the property and trigger retirement

12. Capital Asset Records • Considerations: • 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

13. Issues to Avoid • Accounting system tracking only and no robust updates by PM or custodians • Two independent records, disconnects of data • Dual record creation and change data entry • Reconciliation requirement • Status problems • Location disconnects (may affect taxes) • Possible retirement disconnects • Two systems for different types of property • Capital vs Customer property

14. What to Tag on a Capital Project • Best Practice concept • Tag items that need to be controlled due to life cycle activities • Property control advantages • Asset maintenance and disposition control

15. Example- Cap Fab decisions • Test 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 record • Oscilloscope – high end $9k- tagged/ cap record • Oscilloscope- smaller $ 4K- tagged/ cap record • Data Server- $4K- tagged/ cap record • Rack- $1k - not tagged • Monitor- $500 - not tagged • Material and labor- $11,500; non tangible cap record along with items costing $1K or less

16. Current Practice in some places • Test out Equipment- Capital Fab asset project • Value $50,000 • 1 cap record • Issues, all tangible component ignored • Some need to go to calibration, maintenance • Some could be swapped out • Identification issue on the floor for PM process • Ownership and trace could be lost • Component sent to surplus, would be hard to write-down related capital cost

17. When to tag • Best Practice- • At Receiving ( before it moves) • Data availability from purchasing system • Record item peculiarities (manufacturer plate info) • You can record as WIP (pending) if necessary until it goes into service • You can tie to a Capital Fab project via the accounting info ( if your accounting system flags such)

18. For Capital Fab tagging • Set a rule- no QA buyoff if the item is not tagged. • No Capitalization until PM supplies the tag data to PA • Have 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

19. Capital Asset Inventory methods • Wall- 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)

20. Inventory Rolling Wave • Current- 2 Year cycle- wait until year two and touch/validate all our exceptions, perhaps conduct a wall to wall • Proposed- 3 year cycle • Everything is touched in some manner every 3 years by exception • Rolling 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

21. Benefits of Using the Rolling Wave Inventory • 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 Illustration

23. Current scenario- • Previous cycle 04- 05, reported after 2005 completion • Current cycle 06-07, to be reported after 2007 completion

24. Summary- Rolling Wave • Reduces disruption to contractor (steady state) • Reduces redundant touches • Level sets workload over 3 years • Does not increase risk to the customer • Continual annual feedback- more frequent partial inventory results.

25. Questions?