The Importance Of Asset Management Accounting Essay


Owners of large infrastructure portfolios have a responsibility over diversified set of constructed facilities having different complexities and sophistication (Vanier, 2001) and as organizations grow, business owners consider their buildings and installations as factors for production, a foundation for success and future growth (Frolov et al., 2010; Swallow and Chanter, 2007). In order to achieve the required level of success and growth, these factors, otherwise known as assets, must be managed effectively (Frolov et al., 2010).

Within this context the process of management known as asset management (Amadi-Echendu et al., 2007). According to Michele and Daniela, (2011) asset management has a big influence on infrastructure development and use. If the process is undertaken and executed without fully recognizing the complexity, diversity, social and technological evolution of the system, the process will almost inevitably have severe economic, environmental, social, and cultural resources consequences (Michele and Daniela, 2011)

Frolov et al., (2010) and Schneider et al., (2006) have described asset management…as a systematic, structured process covering the whole life of physical assets. It involves several activities in maintenance, repair and renewal decisions, as well as understanding the long-term economic life (Life Cycle Costing) of an assets' (Amadi-Echendu et al., 2007; Vanier, 2000).

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Mohseni, (2003) proposed that asset management is…a matter of understanding the risks…,developing and applying the correct business strategy and the right asset model to solve the problem, all supported and delivered by the organization processes and technology.

Research in asset management as noted by The Institute of Asset Management (2011) is a term derived from the financial industry, where its concepts are applied to financial investment portfolios and risk management (R.E. Brown and Spare, 2004). This has been substantiated by internet search of the key words "Asset Management" using academic and general search engines i.e.

As a result of this disparity, The Institute of Asset Management (2011) has put forward a definition of asset management, with reference to infrastructure, as "a process that converts the fundamental aims of the organization into the practical implications for choosing, acquiring, utilizing and maintaining appropriate assets while seeking the best total value approach (the optimal combination of costs, risks, performance and sustainability)".

In effect, asset management is the holistic practice of investing in an asset to the benefit of the organization taking into cognizance the cost, risk and performance of the investment. It plays a key role in the detection and evaluation of decisions leading to long-term economic success and best possible earnings (R.E. Brown and Spare, 2004; Schneider et al., 2006). Thus it is no longer sufficient to consider asset management as simply the maintenance of an asset but rather as a holistic approach to the management of assets, incorporating elements such as strategy, risk measurement, safety, environment and human factors (Amadi-Echendu et al., 2007; Frolov et al., 2010).

Importance of Asset Management

As asset management plays an important role in the overall strategy of an organization its practice possesses the potential to enhance the value base of organizations and institutions if implemented appropriately. This has been identified in the reports of organizations that has adopted a form of asset management strategy (Amadi-Echendu et al., 2007; Dixon, 2007; Holland et al., 2005; D. Leung and Q. Leung, 2011; Vanier, 2001). In a study carried out by Holland et al., (2005), the organization adopted an asset management methodology which enabled it connect its business processes with its suppliers to co-ordinate the maintenance, operation and repair of specialized exploration and production equipment. This methodology was termed 'strategic asset management' and utilized a 'multi-enterprise asset management system' methodology (Holland et al., 2005) where a shared enterprise system was used with suppliers to manage the full economic cycles across organizational boundaries.

(Vanier, 2001) highlighted several components embodied in the life cycle cost analysis method of asset management. These included: The current replacement value CRV, defined as the cost to replace an asset in present 'local currency';

As the number of built or acquired asset is set to increases in the United Kingdom in the future (Ravetz, 2008), it will be inevitable that organizations will have a large portfolio of assets to inspect or maintain. This phenomenon may cause the potential future deferred maintenance there by affecting the asset value (Ravetz, 2008; Vanier, 2000). Deferred maintenance as defined by (Vanier, 2000) is the cost of the maintenance…required to bring the asset to its original potential, typically constituting work that has been postponed or phased for future action. To avoid this sort of problem, proper asset management practice needs to be adopted.

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In order to properly utilize and manage this large portfolio of asset effectively, tools supported with robust methodology must be developed to suit the purpose of the asset management (Amadi-Echendu et al., 2007; Frolov et al., 2010; IAM, 2011; Vanier, 2000).

Method of Asset Management

The way asset management is performed will influence the availability of the service provided, the quality and cost (Tsang, 2002), but doing this present its self with some complexity (Frolov et al., 2010; Vanier, 2000) such as challenges of choice and decisions on what to manage, when to manage and how to manage, but it is non-the-less intractable (Vanier, 2000). This challenges can be attributed to constraints of adequate funding and appropriate support technologies (Michele and Daniela, 2011; Schraven et al., 2011; Vanier, 2000) as a result, certain components of infrastructure can be neglected and receive only remedial treatments.

Attempts to solve this problem would require an interdisciplinary approach, in which synergies should exist between traditional disciplines such as: accounting, engineering, finance, humanities, logistics, and information systems technologies for its success (Amadi-Echendu et al., 2007; Frolov et al., 2010) all driven by reliable data and information. Despite this interdisciplinary approach as highlighted by authors, a recurrent theme that presents itself as a challenge to effective asset management is lack of accurate data and information (Amadi-Echendu et al., 2007; Shien; Lin et al., 2007; Michele and Daniela, 2011; Too, 2008; Vanier, 2000) as many asset intensive organizations generate enormous amounts of data that can only be used in limited arenas (Shien; Lin et al., 2007; Vanier, 2000).

Information management technology can be considered as an enabler to manage this challenge. The implementation of an integrated information technology (IT) system could lead to better deployment of service and maintenance resources…thereby reducing costly maintenance tasks and increases the quality of service (Zhang et al., 2009). There are many existing tools and techniques that address part of these challenges, but there is no one solution that could readily be adopted or implemented holistically (Vanier, 2000).

Common technologies proposed include; Enterprise Resource Planning (ERP) Systems, Building Information Modeling (BIM) Systems, Geographic Information Systems (GIS), Computer Maintenance Management Systems (CMMS), Integrated Workplace Management Systems (IWMS) (Abudayyeh et al., 2005; Akcamete, 2011; R.E. Brown and Humphrey, 2005; Andy Koronios et al., 2007; Lewis et al., 2010; O'Donoghue and Prendergast, 2004; Shehab et al., 2004; Vanier, 2001; Zhang et al., 2009). Basically these technologies work by linking several enterprise wide applications to a centralized database where the information (in data form) is stored, organized, manipulated, and retrieved (Error: Reference source not found In asset management, this is termed "Enterprise Asset Management", and is discussed in the next section below.

Having this information technology system cannot ensure or guarantee that asset management will be effectively carried out hence it is essential to develop a methodology towards a comprehensive asset management practice that will incorporate information technology principles. Several authors and associations have proposed specific methodologies to enhance asset management (Amaratunga et al., 2002; R.E. Brown and Spare, 2004; Ebinger and Madritsch, 2012; IAM, 2011). Most commonly adopted is the Publicly Available Standard 55 (PAS55) (Dixon, 2007; IAM, 2011; Andy Koronios et al., 2007; Woodhouse, 2007). Koronios et al., (2007) summarizes the Publicly Available Specification (PAS 55) as a 21-point requirements specification that aims to be aligned or integrated with other related business system standards.

Figure 1. Schematic diagram of an enterprise IT infrastructure

Enterprise Asset Management System Development

An enterprise asset management system supports and enables the asset management strategy of an organization. Its historical development can be traced to the evolution of the enterprise resource planning (ERP) system (Figure 1. Timeline depicting development of ERP Technology). ERP evolved from the material requirement planning (MRP) philosophy in the 1970s and was predominantly utilized in the manufacturing industry (I.J. Chen, 2001; Chung and Snyder, 2000; Shehab et al., 2004; Slack et al., 2007). According to Slack et al., (2007) the MRP helps operations make volume and timing calculations…using a set of calculations embedded in the system. In the 1980s, technology in computer development improved (i.e. produced more powerful and sophisticated equipments), and new versions of MRP were developed know as Manufacturing Resource Planning (MRP II) which had the capability of modelling 'what-if' scenarios, planning and scheduling internal resources (I.J. Chen, 2001; Chung and Snyder, 2000; Shehab et al., 2004; Slack et al., 2007). As organizations expanded and became multinationals, the philosophy of 'just-in-time' and lean production were adopted (Shehab et al., 2004; Slack et al., 2007). Thus the need to pool resources from different geographic locations became imperative. This culminated in the development of the enterprise resource planning (ERP) system. The ERP system basic function was designed to integrate information from operation, finance and supply chain units (Chung and Snyder, 2000; Rao, 2000; Shehab et al., 2004) to satisfy the dynamic customer demand (I.J. Chen, 2001).

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Figure 1. Timeline depicting development of ERP Technology

Enterprise Asset Management (EAM) systems work on the same principles of ERP systems, the major difference being in what is managed - 'Assets'. According to Emerald Group Publishing Limited, (2002) EAM function refers to the acquisition, tracking, maintenance and disposal of the capital assets of an organisation. The system is designed to satisfy the function by handling effectively the physical assets typically owned by heavy industry organisations i.e. oil and gas, aerospace, utilities and manufacturing (Emerald Group Publishing Limited, 2002; Holland et al., 2005; Meng et al., 2008) and is mainly organised within the remit of maintenance, repair and operation (Holland et al., 2005).

Enterprise Asset Management System Architecture

Enterprise asset management systems have been identified as very important tools in the decision making process performed by asset managers in large asset intensive organizations (Holland et al., 2005; Shien Lin et al., 2006; Too, 2008; Vanier, 2001; Woodhouse, 2007). They are able to gather and hold vast amounts of data, perform complex business logic and present users with this information just as in the same way an ERP system would (Connolly and Begg, 2010).

Several enterprise asset management systems have been developed or proposed based on database technologies, RFID [1] , WebGIS [2] , WLAN [3] and LAN [4] methods (DAWSON et al., 2007; ITO, 2007; Meng et al., 2008; Nicastro et al., 2002; Spriggs et al., 2002). These conceptual systems are designed to automate the process of asset management by ensuring tracking, monitoring and information transfer are performed automatically with minimal errors (Meng et al., 2008)

The most commonly commercially available systems include IBM Maximo® (IBM Corporation, 2012), Oracle Enterprise Asset Management (Oracle Corporation, 2012) and SAP Enterprise Asset Management (SAP AG, 2012). These systems deliver a comprehensive view of all asset types, production and facilities etc across an enterprise and allows organizations to setup assets in a hierarchical structure with parent-child relationships (IBM Corporation, 2012; Oracle Corporation, 2012). This hierarchical structure makes it easier to find and group assets as well as roll up asset costs (Oracle Corporation, 2012).

EAM systems adopt an n-tier architecture to achieve optimum efficiency. An n-tier architecture in information technology system design consists of; the client user interface layer, the application layer constituting the business logic and data processing layer, and the database server layer which stores the required data in a structured and logical format (Error: Reference source not found) (Connolly and Begg, 2010).

This architecture is designed to allow enterprise scalability without the need to add more resources i.e. hardware (Connolly and Begg, 2010), hence as the organisation acquire or reduce asset data, the systems expands and contracts with it.

Figure 1. Enterprise Asset Management System Architecture (Connolly and Begg, 2010)