Capital Asset Management

Capital asset management (CAM) is a systematic approach to tracking, accounting for, controlling, and reporting the performance and condition of an organization’s infrastructure, networks, equipment, and other facilities over its lifecycle. Hence, it aims to gauge whether the actual working condition of these assets matches the desired standards.

Capital assets comprise all non-consumable assets with recurring use in the firm’s production or operations. Therefore, such assets are recorded in the books for multiple reporting periods. Organizations constantly need to monitor the efficiency and condition of these assets to ensure safety and uninterrupted use for the production of quality goods or services.

Capital asset management refers to the mechanism of monitoring, controlling, accounting for, and reporting the performance, workings, and current condition of all tangible and intangible assets with recurring use and the power to create value over their lifecycle. Such assets appear on the firm’s accounting books for multiple reporting periods, such as land, buildings, property, premises, government, facilities, networks, machinery, and equipment.

Government bodies also need to ensure CAM closely follows the performance of their public utility assets and infrastructure, such as transportation, healthcare, communication, water supply, etc. Such measures are critical for ensuring safety, good health, and the continuous flow of public services. Businesses also focus on having a strong capital asset management system (CAMS) for seamless operations, lower maintenance costs, and proper regulatory compliance.

However, developing a robust CAMS presents several challenges. Organizations must face various technical glitches and system failure issues while tracking the real-time condition of their capital assets. Moreover, the installation of such systems involves cost, effort, and time since companies need to have a separate division for capital asset management and maintenance.

The capital assets can create value and are recorded in the books over different accounting periods until their disposition. These can be tangible or intangible assets used for investment, business operations, or government services. Let us now have a look at the broad categorization of capital assets:

1. Long-Term Capital Assets (LTCA): The assets that an organization holds for more than 36 months or 3 years before selling, transferring, or discarding them. Some of these assets are fixed deposits, bonds, land, buildings, infrastructure, networks, machinery, government facilities, and goodwill.
2. Short-Term Capital Assets (STCA): This category comprises assets that the organization holds for a maximum of 3 years immediately before their disposal or transfer date. Some examples of these assets are zero-coupon bonds, equities, unlisted stocks, and other property or equipment with less than 36 months of useful life.

CAM is a strategic approach to gauging the physical condition of the various capital assets at different stages of their lifecycle. To better understand the process, let us go through the following examples:

Example #1

Suppose a company engaged in the production of motors has installed an effective capital asset management system (CAMS) on its factory premises to monitor, control, and account for the performance of its machinery and other equipment. The system regularly assesses the condition of these capital assets and determines and reports the faults, productivity issues, or repair requirements, thus ensuring that the assets are in their best working condition. Further, it reports the need for replacement or disposition of a particular machinery after it has been optimally utilized or experiences frequent breakdowns.

Example #2

Let us assume that the municipal corporation has installed chips in their public transport, like trains and buses, to track their current condition. Since these transport vehicles are the capital assets for the government that facilitates public transportation, it is essential to constantly monitor their physical condition and performance as a part of public safety. Moreover, the government takes such measures to ensure that these assets are repaired promptly and that no significant issue arises that would otherwise hinder the provision of public services. Moreover, the transport regulatory authorities also require the service providers to have a proper system for the management of these public transport assets.

Organizations invest a lot of money in capital assets, which are the primary factor in production in businesses and public services. Therefore, it is essential to monitor and report the condition of these assets for the seamless functioning of these entities.

Given below are the various reasons for prioritizing CAM:

• Monitoring Performance: CAM helps organizations compare the actual physical condition and usability of capital assets with their desired performance to ensure their efficient working.
• Risk Mitigation: Upkeep and tracking of these assets can reduce the risk of their unexpected breakdown, which would otherwise result in operational risk.
• Safety: Government entities and business organizations constantly gauge and communicate the condition of these assets to assure the safety of public service users and workers.
• Better Productivity: When organizations properly maintain their capital assets, they can ensure uninterrupted operations and the production of goods or services.
• Transparency and Integrity: Whether assets are purchased, used, sold, transferred, or disposed of, CAM helps in capital planning and maintaining transparency and integrity in such a system.
• Timely Repair and Replacement: The entities can repair or replace the capital assets on time if they are not working properly.
• Regulatory Compliance: The regulatory bodies require the organizations to comply with the prescribed rules, laws, standards, and regulations for capital asset management.
• Low Maintenance Cost: When assets are kept in their best condition, the cost of maintenance automatically reduces.