By Arthur Kurland, CHAMP & CITAM
ITAK V7 I11
As a Certified IT Asset Manager (ITAM) and member of a few property management professional groups, I’ve seen many requests for help from those looking for the best way to start an ITAM program at their company. Since I’ve helped implement more than one ITAM program, I want to share an effective approach with you. But first, you need to bear with me while I take you through some very boring accounting theory because therein lies the basis of what I am about to reveal.
Finance managers would like to feel confident that they have an accurate listing of company owned assets, but for one reason or another, many of them don’t have one that they can rely on. By the same token, most IT managers would enjoy reaping the benefits of an ITAM program, but for one reason or another, can’t get the sponsorship required to start one. It would seem that there would be a very simple common sense solution to satisfy the desires of the two departments. Here’s why it’s not so simple: ITAM has different meanings for the finance and IT professional!
As an IT professional who understands the payoff of ITAM, you need to communicate with the Finance Department in their own language. So, here comes the boring, but critical, part.
Capital and Expensed Assets
Businesses possess a means by which they record “expensive” IT (and other) purchases and present those values as assets on the company balance sheet. These expensive assets are also known as “capital assets.” Capital assets are recorded and maintained on what is known as a “sub-ledger” or “property listing.” Purchases that do not meet the threshold of what is considered capital are expensed and presented on the company income statement under the category of expenses. Every company defines its own capital threshold limits. That means that what may be capital for one company may be an expense for another.
Capital assets are depreciated, which means they are expensed periodically over their useful life. Companies can set their own useful life schedules for reporting purposes, but must follow Federal tax guidelines (unless it is an exempt organization). Like non-capital purchases, depreciation expense is also presented on the company income statement under the category of expenses. That means that as the asset depreciates, the value of the asset presented on the balance sheet declines accordingly. In this manner, all depreciable assets eventually flow through the income statement as an expense. Depreciation expense is used as a deduction by taxable entities to lower their Federal tax liability. Most organizations realize that if they claim more depreciation than they’re entitled to, they may suffer penalties in a tax audit. Once the asset is fully depreciated, its value is zero and will remain part of the property listing until it is disposed of.
Knowing about this property listing is extremely important in supporting your case for an ITAM program. As described above, the property listing primarily serves as the support for the value of capital assets presented on the balance sheet and depreciation expense deduction for Federal income tax purposes. With the passing of the Sarbanes Oxley Act of 2002, corporate officers must certify the validity of the financial statements. This exposes executive management to the risk of endorsing inaccurate financial statements. Since the fines and penalties for misrepresentation can amount to millions of dollars and/or imprisonment, this risk alone may help you get the support of executive management.
More Uses for the Property Listing
If for some reason it doesn’t, the property listing serves two additional very key purposes. Not only does the property listing serve as support for the balance of assets on the organization’s balance sheet and depreciation expense deduction for Federal tax purposes, it also serves as the basis for property tax valuation, and property insurance coverage.
In most states, taxing authorities request a property listing annually to evaluate the taxable value of the business. Then, they submit a tax notice and the company pays the bill (unless it is an exempt organization). In order to insure that the taxing authorities are collecting the proper tax revenues, some states have imposed statutes that require a periodic audit be conducted of the taxpaying company. Inaccurate property tax reporting can also lead to hefty penalties and fines. According to Chris Richter, a Managing Director in the Dallas office of the financial advisory firm Duff & Phelps, companies that do not keep accurate property listings may be submitting arbitrary values to the taxing authorities well in excess of actual values in order to avoid penalties.
For insurance purposes, the insurance agent/broker needs to understand the basis of property exposures when assessing the proper amount of coverage to recommend to their clients. They typically start their assessment with the information presented on the property listing. Chris Brandt, Managing Director at Wortham and Risk Management, a Texas based independent insurance agent/broker, calls maintaining an accurate property listing “Risk Management 101” because in the event of a claim, the property list becomes a critical document that the insurance adjuster will ask for as evidence of loss..
It now should be clear that the accuracy of the property listing plays an important role on exposed risk and the bottom line of an organization.
Accounting for Assets
To fully understand the financial impact IT assets have on an organization, we need to dig just a little deeper into accounting. When acquired, many IT assets include multi-year maintenance agreements. These types of agreements are also presented on the company balance sheet as assets and are called “prepaid expenses.” Like depreciation, the maintenance agreement is expensed periodically over the life of the agreement. Without proper ITAM, disposed assets can continue to carry prepaid balances.
To a finance professional, an asset is disposed of when it is removed from the property listing. However, to an IT professional, an asset is disposed of when it is physically discarded. Unless the finance department is notified about the discarded asset, it will remain part of the property listing.
Sometimes equipment is constructed and in those cases, the equipment is neither depreciated nor being expensed. This is known as “work in progress” and the balance of the account is also presented on the balance sheet. Work in progress is the accumulation of items that, when completed, make up an asset. From a financial perspective, the collective parts may simply sum up to the total cost of one line item on the property listing. From an IT perspective, all of the separate pieces may be reusable individually and should be accounted for that way.
Many finance professionals mistakenly confuse their depreciation systems for ITAM. For example: to a finance person, it is within the accounting guidelines to record the purchase of 10 laptop computers that cost $1,000.00 each as one line item on the property listing. It would look something like this:
Hopefully, you see how a depreciation system and the property listing derived from it, along with accounting for IT maintenance agreements, might easily be interpreted as ITAM to the finance professional. On the flip side, the value of an asset generally has little impact on the IT professional. Instead, the IT professional would typically be more concerned about the individual asset record and the whereabouts of the assets that true ITAM provides.
Why Executives Launch ITAM Programs
Organizations will not normally eagerly engage in developing new programs like ITAM unless one of two things occurs. First, it is a top down idea that makes economic sense. Second, and more frequently, the decision maker is hit with what is commonly referred to as a “pain point.” A pain point can come in several varieties and when executive management or decision makers feel a pain point, they spring into action. Here are some examples of a pain point:
- A security breach, exposing equipment or confidential information to the general public. This type of bad press usually erodes the image and public confidence in the organization and may lead to years of litigation
- A standard or regulation that places the organization out of compliance. Internal control standards, debt requirements and Sarbanes Oxley are examples that can lead to audit findings, penalties, or fines
- A man-made or natural disaster strikes and the company realizes they were not adequately prepared for such an event. From the website www.complianceofficer.com, attorney and licensed adjuster John Ruskin offers tips on filing a claim for contents damage and states: “Prepare to show your adjuster all the details of the loss. …your preparation and documentation remains the most important tool in restoring your business…”
- Financial, budgetary, or knowledge constraints that prevent technical upgrades. I was actually once called upon to conduct a physical inventory for an organization where the CFO denied any new IT purchases until the IT department could provide a listing of owned IT assets, which they did not have. Talk about springing into action, the IT department manager offered his entire staff to my beck and call.
A successful ITAM program can significantly reduce the risk of feeling a pain point like these from taking place. Benjamin Franklin famously proclaimed that an ounce of prevention is worth a pound of cure. Making the case to prevent a pain point from happening is a great catalyst to implementing an ITAM program.
As an individual looking to start an ITAM program at your organization, use the language of the Finance Department and offer to help them reconcile the company’s property listing to the actual physical inventory in exchange for the ITAM tools you need. Then, don’t be surprised at the positive response you’re likely to receive.