Unit Standard 116362 – Manage a municipality's assets
and liabilities
Group 2: Municipal accounting and Risk management
Module 8: Cash, investment, asset and liability management
Karel van der Molen
Purpose of this Unit Standard
This unit standard is intended for all people who
contribute to strategic planning, budgeting and
resource use performance related policy –
planning processes. Learners completing this
unit standard will be able to develop and
implement asset and liability management
policies for South African municipalities.
On completion of this Unit Standard
you should be able to:
• Provide advice to a municipality on optimising
relationships with the financial community
• Describe and prepare proposals to accessing
bank finance
• Consider the merits of hire purchase
transactions and leasing of municipal assets
• Plan for contingent municipal liabilities
• Develop a municipal asset management plan
Chapter 1. An overview of municipal
assets and liabilities
Learning outcomes:
• Being able to distinguish between an asset
and a liability, and their classification between
current and non-current.
• Being able to identify and interpret relevant
legislative requirements for management of
municipal assets and liabilities.
Definition of Assets
• In financial accounting, assets are economic
resources. Anything tangible or intangible that is
capable of being owned or controlled to produce
value and that is held to have positive economic
value is considered an asset
• The statement of financial position of a muni
records the monetary value of the assets owned.
Current assets and non-current assets.
• Intangible assets are for example software, IP
Definition of Municipal Assets
• Resources controlled by a municipality as a
result of past events, from which future
economic benefits or service potential are
expected to flow to the entity.
Assets found at a municipality
ASSETS
Non-current
tangible
MOVEABLE
Equipment
Machinery
Furniture and
fittings
Computer
hardware
Motor vehicles
current
intangible
IMMOVEABLE
investment
property
Land
Buildings
Infrastructure
assets
Heritage assets
community assets
Computer
software
Trademarks
Licenses and
patents
Capitalized
development costs
Inventory
Receivables
Deposits
Cash and bank
Asset types
Current
• Will be used (sold or consumed) in the normal
operating cycle
• Is held primary for the purpose of being traded
• Is expected to be realised within 12 months (after date
of reporting)
• Is cash or a cash equivalent asset (per GRAP definition)
Non-current
• All assets other than above. Includes tangible,
intangible, and financial assets of a long term nature.
Definition of Municipal Liabilities
• A present obligation of the municipality
arising from past events the settlement of
which is expected to result in a sacrifice of
potential service provision or an outflow from
the municipality of resources embodying
economic benefits.
Liability types
• Current
A company's debts or obligations that are due
within one year. Current liabilities appear on the
company's balance sheet and include short term
debt, accounts payable, accrued liabilities and
other debts.
• Non-current
Debt not due to be paid within the next year.
Legislative provisions for asset and
liability management
MFMA
Sections: 63,96,14/90,48,75
Sections: 78,84,94,154
Treasury Regulations
Section: 168,173
(pg. 21-27)
Other directives
National Treasury Asset Management guide
Municipal Asset Tender Regulations
Municipal Asset Transfer Regulations
Accounting Standards
GRAP 17
Asset management
Good asset management is critical to any business
environment – and more so in the public sector.
Good asset management ensures that the entity obtains
the most out of its assets, and that assets are:
• Safeguarded
• Maintained
• Utilised for serving the public
Liability Management
Municipalities require short, medium and long term
financing for operations and for the acquisition of assets.
Incurring liabilities may expose the municipality to a
number of related risks, which may render a municipality
unable to service the debt, repay the capital or comply
with the terms and conditions of a loan and rising interest
rates.
Liability management will ensure that the municipality
has adequate liquidity to meet its operational expenses,
repay its short term commitments and service the cost
(interest) of the debt.
Chapter 2.
Relationship between the
municipality and the financial community
Learning Outcomes:
• Be able to explain the benefits of a good relationship
between the financial community and the
municipality – including all the advantages and
disadvantages of that relationship
• Be able to identify the key role players that
contribute to important relationships in a
municipality’s financial community
• Be able to select and analyse information in terms of
a municipality’s credit worthiness
• Be able to prepare a plan to improve the credit
rating of a municipality which will enhance the long
term borrowing capabilities of that municipality.
Comment
A municipality requires a range of financial services
from the financial community.
A municipality collects millions of rands each month
and therefore needs access to good banking
facilities.
A municipality also sometimes needs to access
financing for the construction of or purchase of
assets and for short term cash shortfalls
Therefore a municipality needs to have good
relations with the financial community.
The relationship
Rates, Taxes,
Service Fees
Deposits &
Banking revenue
Financial
Community Municipality Community
Service
Delivery
Banking
Facility and Debt
Financial role players
Discuss:
i. The Role Players
ii. Services offered
Pg. 35-36
Benefits of a good relationship
Access to services
Accessing the necessary financial services allow a
municipality to function effectively.
For example:
• Bank accounts
• A ”sweeping facility” - to maximise interest
earnings and minimise overdrafts costs.
The range of services from the financial sector/
community
pg.. 38
Disadvantages of a poor relationship
• Non responsiveness by the financial
community to a municipality’s funding
requirements
• A failure to access facilities and loans at good
terms and rates
• Receive low interest for its investments
• Restrictions of financial transactions
• High service charges
Key role players – in the relationship
• Bank Managers
• Accounts Managers
•
•
•
•
•
•
•
•
Municipal Manager
Mayor
Treasury Department (of the municipality)
Accountants
National Treasury
Development Banks
Credit Rating Agencies
Provincial Government
Determining a municipality’s
creditworthiness
A municipality’s ability to raise loans etc. will
depend on its creditworthiness.
Creditworthiness is determined by quantitative
and qualitative parameters.
Quantitative parameters refers to the ability to
pay debt when it is due – which is largely a
function of the municipality’s financial position.
These are established through :
• Liquidity ratios (pg.. 42-43)
• Other quantitative information
Determining a municipality’s
creditworthiness
Qualitative measures. Creditworthiness is also a
function of qualitative characteristics. Examples of
these:
Commitment to implement and constantly review
internal controls
Good governance
Adherence to legislation
Use of sound policies and procedures
Honouring debt commitments – (re credit
references)
Having a good relationships with the financial
community
Classroom activity
• P48 group work
Credit Rating
The credit rating of a municipality is an
important factor in assessing long term
financing which it may require to acquire assets
necessary for effective service delivery. A rating
is defined as:
• A credit rating is an opinion with a future
focus on the ability and willingness of a debt
issuer (borrower) to repay its obligations in
full and on time.
• There are a number of local and international
rating agencies. (see pg.. 49)
Benefit of Credit ratings
• They assist the CFO to manage any perceptions of risk
• They enable a municipality to diversify its funding sources –
causing providers to compete
• They strengthen the municipality’s position when
borrowing terms are negotiated
• They serve as a benchmark for peers and other competitors
for funds
• They can be used as tools for improved communication
with stakeholders
• They provide an independent and reliable gauge of the
credit risk of an entity
Improving a municipalities credit rating
To improve its credit rating a municipality should
improve its financial position. How should it do this?
– Improve its liquidity or current ratio
– Improve operating surplus or reverse an operating
deficit
– Improve the financial community’s perception of
the municipality
– Improve financial position
pg.. 52-54
Learning Activity
Chapter 3 – Bank Finance
Learning outcomes:
• Compare bank overdrafts and bank term loans and
identify the benefits and disadvantages of each
• Calculate the credit limits a municipality should apply
for considering prevailing financial and economic
conditions using internationally recognised methods
• Prepare applications for credit for more than one
financial institution including motivations for
extending credit
• Describe term structure of interest rate, including the
reasons for the term structure
• Compile and analyse information on maturity
structure of municipal debt to inform the debt
management process.
Comment
All businesses (municipalities) need access to
finance to fund short-term cash shortfalls.
Cash flow is essential to the survival of any
business (municipality) and failure to access
finance when required can have serious
consequences.
Bank overdrafts and bank term loans are
amongst the most common ways of obtaining
short-term financing.
Bank Overdrafts
An overdraft occurs when the bank allows withdrawals from a
bank account to exceed the available balance - to a predetermined amount which is agreed to by the bank.
An overdraft facility does not necessarily have to be used –
but is available when required.
The amount borrowed on overdraft must be paid back
together with interest.
Other features of an overdraft
• Bank account (current)
• A requested facility
• Security required
• High interest – calculated on daily balance
• Usually for an undefined period
Bank (term) Loans
With a bank term loan a municipality borrows an agreed sum of
money and pays the loan back with interest over a certain length
of time. The municipality receives the full amount of the loan
upon approval
These loans are a common kind of lending for funding capital
projects or other long term funding.
Banks classify loans into intermediate and long term loans
Features of bank loans:
• A fixed amount
• A fixed period – but can be short, intermediate of long term
loan
• A fixed interest rate ( often linked to prime rate)
• Borrower receives full amount upon approval of loan.
• Security required
Bank Loans
Bank Loans
Long-term loans
Intermediate Loans
Run for more than
3 years
Run for less than 3
years
Overdraft
Current
Comparison between bank term loans
and a bank overdraft
See page 62-63
Calculation of interest
• Simple Interest
PxRxT
Calculated on the original principal amount
only
pg.. 64
• Compound interest
Calculated at the end of each period on the
original principal amount plus all interest
accumulated to date – and unpaid during past
periods
pg.. 65
More on Compound Interest
What Does Compound Interest Mean?
Interest that accrues on the initial principal and the
accumulated interest of a principal deposit, loan or
debt. Compounding of interest allows a principal
amount to grow at a faster rate than simple interest,
which is calculated as a percentage of only the
principal amount.
Investopedia
“Compound interest is the most powerful force in the
universe”
Albert Einstein
Bank Overdrafts vs Bank Loans
• Comparative advantages
• Comparative disadvantages
pg.. 65-68
Credit Limits
A credit limit is the maximum amount of credit that a financial
institution will extend to a municipality.
The limit is based on the municipality’s:
• ability to make interest payments
• Cash flow and/or ability to repay the principal
• Meeting of the credit standards imposed by the lender
• Recoverable assets – in the event of default
Sometimes it is difficult to access funding – because of the
unique risks and circumstances of municipalities, when
compared to other borrows. These risks include:
• A municipality may need to borrow money when it is
making operating losses
• A change is political leadership may cause a loan terms not
to be honoured
Appraisal and lending process
The appraisal process when a municipality
wants to apply for funding is underpinned by a
credit model which focuses on all the major
components impacting the ability of the
municipality to meet its commitments to the
lender.
Credit evaluation process
Involves assessing the following elements:
Financial
viability
Socio-economic
conditions
management
Credit
Evaluation
process
Environmental
awareness
economic
Calculating the credit limit that the
municipality should apply for
Background:
• Most countries place limitations on the use of
debt by local governments
• Municipalities may borrow long-term for
capital expenditure which has been budgeted
for and approved by council
• Currently there is no limit set in legislation as
to the maximum long-term debt that a
municipality may occur
Calculating the credit limit that the
municipality should apply for
There are a number of numerical guidelines that
can be used to identify prudent borrowing ceilings –
based on a municipality’s capacity for debt
repayment. For example:
Calculation of credit limit - based on Total Revenue
pg.. 71-73
Calculation of credit limit – based on Projected
Surplus
pg.. 73-74
Preparing an application for credit
• Short term debt
– MFMA
• Long term debt
– MFMA
– Other MFMA provisions
see pages 74-79
Applying for credit from financial
institutions
Before a municipality can approach a financial institution to
apply for credit there are procedures to be followed in terms
of section 45 and 46 of the MFMA. These include:
• A proposal or motivation must be prepared on the need for
the financing
• This must then be submitted to Council for consideration
and approval. A Council resolution is required
• In the case of long term financing, the accounting officer
make public an information statement on details of the
proposed debt – 21 days prior to the Council meeting to
approve the proposal.
• Once Council approval is received, applications for the
finance can be made to financial institutions.
• Application forms will require information such as financial
statements, budgets and cash flow projections, business
plans, trade and credit references, etc..
Term structure of interest rates
The “term structure of interest rates” refers to the relationship
between bonds of different terms. When interest rates of bonds are
plotted against their terms – this is called the “yield curve”.
The Yield Curve
Economists and investors believe that the shape of the yield curve
reflects the markets future expectations for interest rates and other
economic conditions.
see pg.. 82
What Does Yield Curve Mean?
A line that plots the interest rates, at a set point in time, of bonds
having equal credit quality, but differing maturity dates. This yield
curve is used as a benchmark for other debt in the market, such as
mortgage rates or bank lending rates. The curve is also used to
predict changes in economic output and growth.
Term structure theories
What Does Term Structure Of Interest Rates Mean?
A yield curve displaying the relationship between spot rates of zerocoupon securities and their term to maturity. The resulting curve
allows an interest rate pattern to be determined, which can then be
used to discount cash flows appropriately. Unfortunately, most bonds
carry coupons, so the term structure must be determined using the
prices of these securities. Term structures are continuously changing,
and though the resulting yield curve is usually normal, it can also be
flat or inverted.
The three main perspectives on term structure are the expectations
theory, the liquidity preference theory and the market segmentation
theory
pg..
83
Source: http://www.investopedia.com/
accessed on 21 June 2014
• For information only:
• There are three main theories that try to describe the
future yield curve:
• Pure Expectation Theory: Pure expectation is the simplest
and most direct of the three theories. The theory explains
the yield curve in terms of expected short-term rates. It
is based on the idea that the two-year yield is equal to a
one-year bond today plus the expected return on a oneyear bond purchased one year from today. The one
weakness of this theory is that it assumes that investors
have no preference when it comes to different maturities
and the risks associated with them.
For information only
• Liquidity Preference Theory: This theory states that investors want
to be compensated for interest rate risk that is associated with
long-term issues. Because of the longer maturity, there is a greater
price volatility associated with these securities. The structure is
determined by the future expectations of rates and the yield
premium for interest-rate risk. Because interest-rate risk increases
with maturity, the yield premium will also increase with maturity.
Also know as the Biased Expectations Theory.
• Market Segmentation Theory: This theory deals with the supply
and demand in a certain maturity sector, which determines the
interest rates for that sector. It can be used to explain just about
every type of yield curve an investor can came across in the market.
An offshoot to this theory is that if an investor wants to go out of
his sector, he'll want to be compensated for taking on that
additional risk. This is known as the Preferred Habitat Theory.
Municipal debt management
What is debt management?
• Debt management is the process of establishing and
executing a strategy for managing debt in order to raise the
required amount of funding - while achieving the cost and
risk objectives.
• Poorly structured debt (in terms of maturity or interest rate
composition and large unfunded contingent liabilities) are
often important factors in inducing a financial crisis in many
public entities.
• The main objectives of debt management is to ensure that
the financing needs and payment obligations are met at the
lowest possible cost – consistent with a prudent degree of
risk.
Risks encountered in debt management
Market risk
Refers to risks associated with changes in the market prices, such as
interest rate, commodity prices, on the cost of debt servicing.
Rollover risk
The risk that debt will have to be rolled over at an unusually high
cost or, in extreme cases, cannot be rolled over at all.
Liquidity risk
There are two types of liquidity risk. One refers to the cost or
penalty investors face in trying to exit a position when the number
of transactions has markedly decreased or because of the lack of
depth of a particular market. The other form of liquidity risk, for a
borrower, refers to a situation where the volume of liquid assets can
diminish quickly in the face of unanticipated cash flow obligations
and/or a possible difficulty in raising cash through borrowing in a
short period of time
Theories of Debt Maturity Structure
Debt Defined
A debt is also referred to as a liability and is a loan that an organization must repay.
Examples include taxes due, accounts payable and bonds payable.
Debt Maturity Defined
Debt maturity is the date on which a liability becomes due for payment. Debt
maturity is otherwise known as debt maturity date.
Debt Maturity Structure Defined
Maturation of debt is when the debt comes due. Loans can be structured to
mature at different times. This is called the maturity structure of the debt.
Maturity matching Defined
In asset management, the coordination of an organization's cash inflows with cash
outflows by matching the maturity of income generating assets (such as
certificates of deposit) with the maturity of interest incurring liabilities (debts).
pg.. 86
Calculating debt maturity structure
pg. 87
Learning activity
Chapter 4 – Leasing and hire purchase
contracts for municipalities
Learning outcomes:
• Outline approaches to hire purchase transactions and
explain appropriateness for a municipality
• Identify municipal assets suitable for purchase and
use through a leasing agreement and give a
motivation for the acquisition through leasing
• Identify and explain the risks associated with leasing
municipal assets
• Outline and explain the key elements of a lease and
hire purchase agreement
• Outline legislative requirements for borrowing and
apply these in lease agreement evaluation
The purchase of assets
Municipalities do not always have enough cash resources to
purchase assets and therefore need to consider financing
arrangements.
Leasing and hire purchase form part of the financing arrangements
available. Leading up to a decision in this regard, there are a few
steps to go through – which concern:
What to buy? To decide on the best asset for the purposes
required
How much will it cost? To decide what is affordable and what the
budget allows
When to purchase it? This concerns giving efficient and effective
services
How to finance it? To decide while considering issues of timing,
cash flow considerations, what makes the most economical sense.
The decision-making process
.
Begin
What is the best
Asset requirement
Determine the cost
When is the asset
required
lease/HP
Financing
End
Purchase
Appropriateness of hire purchase
contracts for municipalities
• A hire purchase is a legal agreement between the
purchaser of an asset and the financial institution
which finances the purchase. The financial institution
lends the money to the purchaser who repays the
financial institution at specified intervals the full
amount plus interest. The asset purchased can be used
as security by the institution.
• Owner ship of the asset is vested in the purchaser
• The useful life of the asset usually exceeds the hire
purchase term – thus a benefit term exceeds the
• purchase term
• Outright purchase of many assets allows for a standard
warranty/maintenance programme
Appropriateness of hire purchase
contracts for municipalities – cont.…
• Hire purchase agreements are less complicated than
leasing agreements
• As repayments are usually monthly for the length of
the term, cash flow planning is possible
• The interest rate may be fixed or fluctuating
• Insurance can be purchased separately or with the
same institution
• The purchaser has the right to chose the asset and its
specifications
• The repayments can be structured to be escalating or
de-escalating
• The asset is disclosed on the balance sheet therefore
giving a better picture than off balance sheet financing
Appropriateness of lease agreements
for municipalities
• A lease or a rental agreement sets out the terms
between a lessor and lessee during the period of
the lease contract.
• It is a legal contract which sets out for how long
the lessee will use the equipment, the lease
payment, penalty clauses, termination and
responsibilities of lessor and lessee. Can include
an ownership clause (at the end of the lease)
• The lessor owns the asset and the lessee agrees
to use it for a specified period for a specified sum
of money. Payments are usually made monthly
Appropriateness of lease agreements
for municipalities cont.…..
• Flexibility in assessing need and suitability of the asset. i.e.
initially lease on a short term basis.
• Flexibility in assessing obsolescence. The lease conditions
can include the upgrading, replacement etc.
• Under some leases the lessor can be responsible for the
maintenance of the asset.
• It could be appropriate for a municipality to lease assets
where:
– The usage period is shorter than the useful life of the asset
– There is uncertainty about the assets capabilities and
functionality
– Specialised skills are required for repairing and maintaining the
asset
– The assets are prone to rapid technological improvements
– The assets have low residual values.
Risks associated with leasing municipal
assets
OVERALL COSTS
These costs include not only the capital amount and
interest, but also financing costs and compensation for
the lessor taking the risk of continued ownership
FIXED COMMITMENT
Lease payments have to be made even if the asset is no
longer used during the term.
NO OWNERSHIP
The lessor never owns the asset – but there can be an
option to buy it at the end of the lease.
OFF BALANCE SHEET FINANCE
Both the asset and the liability do not appear on the
balance sheet – which gives a less favourable financial
picture.
Legislative requirements for borrowing
Section 46 of the MFMA contains provision for
long term borrowing. i.e. both leasing and hire
purchase
pg.. 99-100
Examples
Study the hire purchase and leasing examples on
pages 100 - 102
Chapter 5 – Contingent municipal
liabilities
Learning outcomes:
• Identify contingent liabilities facing a
municipality
• Estimate the probably financial implications of a
municipality’s contingent liabilities
• Recommend changes to policies to limit the
financial implications of the contingent
liabilities
Defining Liabilities
“Liabilities are present obligations of the entity
arising from past events, the settlement of
which is expected to result in an outflow from
the entity - of resources which embody
economic benefits or service potential”.
Defining Contingent Liabilities
A contingent liability is a possible obligation that arises from
past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity, or
A present obligation that arises from past events but is not
recognised because
It is not probable that an outflow of resources embodying
economic benefits and service potential will be required to
settle the obligation, or
The amount of the obligation can not be measured with
sufficient reliability
Contingent liabilities facing a municipality
Municipalities face 4 types of fiscal risks. i.e. explicit vs. implicit and direct vs.
contingent:
Explicit liabilities. These are specific obligations of the municipality
established by a particular law or contract. The municipality is legally
mandated to settle the obligation when it becomes due. E.g. loans
Implicit liabilities. The involve a moral obligation or expected responsibility of
the municipality that is not established by law or contract – but is based on
public expectations, political pressure – and regards the role of government as
the public sees it. E.g. disaster relief
Direct liabilities. These are obligations that will rise in any event and are
therefore certain. They are predictable and based on specific underlying
factors – and are not contingent on any discrete event.
Contingent liabilities. These are obligations triggered by a discrete event that
may not occur. The probability of the contingency occurring and the cost of
the resultant obligation are difficult to forecast. E.g. a natural disaster
Fiscal risk matrix
See pages 106 and 107
Also study example of “Provisions and
contingent liabilities” on pages 107 and 108
Estimating the probable financial
implications of contingent liabilities
Why contingent liabilities should be measured.
Contingent liabilities can have a significant financial
and economic impact of a municipality – by
conferring certain rights or obligations that may be
expected in the future. If the impact is not known,
this could allow for financial difficulties for the
municipality. Therefore ways should be sought to
put measures in place to limit the impact of
contingent liabilities – should these materialise.
Estimating the probable financial
implications of contingent liabilities
Maximum potential loss
This method values contingent liabilities at full face value.
This method tends to overstate the liability as there is no
information on the likelihood of the contingent liability.
Expected loss
This method tries to estimate the probability that the
contingency will occur – and can be used when reliable
data is available. The full value of the loss is multiplied by
the probability factor.
Use of market information
Option pricing techniques
Disclosure of Contingent Liabilities
Information to be disclosed for each class of contingent
liability. Financial statements should disclose contingent
financial liabilities that face the entity. The following
information must be disclosed for each category of
contingent liability.
• An estimate of financial effect
• An indication of the uncertainties relating to the
amount of timing or any outflow
• The possibility of any reimbursement
Limiting financial implications of contingent liabilities
To reduce the implication of contingent liabilitiesmunicipality needs to take appropriate measures
– to ensure that its programs and its exposure to
fiscal risks are consistent with government
policies. Below are some of the policy changes
that could be implemented to limit the fiscal
risks. But before the municipality admits an
obligation, its policy considerations/analysis
could include:
Limiting financial implications of contingent liabilities
1. Assess how the obligation fits the pronounced
role and strategic priorities of the municipality.
What types of support the municipality decides to
offer both outside or through the budget – define
the actual role of the municipality. Before
establishing contingent support programmes such
as guarantees, the municipality should check
whether these fit within their announced role and
priorities – and therefore if these justify the
potential fiscal costs
Limiting financial implications of contingent liabilities
2. Consider the choices of policies and forms
of support relative to the associated
financial risks and the municipality’s risk
preference and risk management capacity. In
addition to using potential cost and benefit
considerations, municipalities should also
apply the extents of uncertainty around a
policy decision which concerns limiting a
fiscal risk
Limiting financial implications of
contingent liabilities – cont….
3. Define and communicate the
standards for and limits of the
municipality’s involvement to minimise
the moral hazard. The more formally and
clearly the municipality defines and
communicates its responsibilities, the
less of a problem public and market
expectations will be as to what amounts
to a contingent liability
When the obligation is held, the
municipality should:
1.
1.
2.
Stick to the preset limits of its responsibilities. The public and market
should come to understand that the municipality will not give support
beyond the announced limits.
After the obligation falls due, policy considerations could include:
Execute the obligation within its preset limits and identify lessons for
future policy choices. By sticking to its announced obligations and limits,
the municipality is more free to reconsider these obligations and limits
at the time of the next budget – when revised obligations can be
announced
If an obligation is implicit, assess whether it coincides with the
municipality’s announced role and promotes desired market
behaviours in the markets. When a municipality is asked to extend more
support than was originally specified policy makers need to consider the
implications of this on future behaviour in the markets – and the
possible long tem damage it could cause.
Learning activity
Chapter 6 – A municipality asset
management plan
Learning Outcomes:
• Develop a project to update and prepare an accurate
municipal asset register
• Compile information that can be used to assess asset
performance
• Analyse and interpret current asset performance against
planned performance to ensure proper utilisation of assets
• Analyse and interpret an asset’s performance against
planned performance to validate quality of inputs,
processes, and outputs against recognised standards
• Identify principles for managing assets using recognised
accounting practices
Asset Management
Asset management is the process of guiding the
acquisition, use, safeguarding and disposal of assets
– to make the most of their service delivery
potential and manage the related risks.
To this end, the role of the asset register is vitally
important. Asset registers should properly prepared
and should be kept up-to-date. It is also important
to conduct assessments of asset performance.
Asset Registers and municipalities
• The importance of keeping good records of
public assets – as many of these assets are
infrastructural assets with long life spans and
enormous capital outlay that are vital to
service delivery.
• Proper asset management and control is not
possible without an accurate asset register.
• Municipalities are required to maintain an
asset register – as part of the accounting
system
Asset Registers - definition
• A municipal asset register is the asset database
that provides the basis for figures in the financial
statements and is maintained in the format that
complies with the requirements of GRAP and
Treasury Regulations.
Asset Registers – details of each asset
• Date of acquisition (date brought
into use)
• Description
• Serial number/bar code – for
identification
• Division and department in which
the asset is used
• Location
• Original cost
• Revaluation date – if necessary
• Opening accumulated
depreciation
• Depreciation for current year
• Closing accumulated depreciation
• Carrying value of the asset (fair
value)
• Opening accumulated
impairment loss
• Impairment loss for current year
• Closing impairment loss
• Book value
• Useful life (number of years)
• Residual value
• Insurance cover
• If asset is used for the provision
of services
• If used as collateral
• Price and date of disposal
Establishing an Asset Register
i.e. when migrating from a cash to an accrual
system of accounting.
• Physical counting of assets. This includes the
existence of the asset, its description, its location,
serial number, condition, type, etc.
pg.. 120
• Determining the Carrying value. GRAP 17 says
that assets must be recognised at cost or
revaluation. When using the cost basis, the
original invoice amount less the number of years
of depreciation should be used.
Pg. 121
Asset Performance
Protecting service delivery and addressing health and safety
concerns are priorities when making decisions about asset use
and maintenance. It is therefore important that be regularly
reviewed and evaluated to verify that required outcomes are
being achieved. There are a number of methods used to
measure asset performance.
per its physical condition. This involves inspecting the asset
and comparing it to what it should be and what is required.
per its functionality. This involves monitoring and assessing
the effective functionality of the asset in relation to what is
required of the asset to support specified activities. It is the
appropriate asset for the job?
Asset Performance
per its utilisation. To measure how effectively the
asset is being used – against predetermined criteria
and benchmarks. The asset might be under or over
utilised – for various reasons.
per its financial performance. This must be
measured to establish if the asset is providing
economically viable services. The current and
projected economic return of the asset should be
assessed.
Asset Management
In order for assets to meet their service delivery
objectives
The Asset Life Cycle (4 key phases)
Acquisition
Planning
Asset Life
Cycle
Disposal
Operations,
maintenance
Asset Management - continued
Good asset management depends on accurate and up-to-date
inventory information
Key asset management issues:
• Accountability for the proper use and stewardship
• Well maintained assets give better service – and visa versa
• Growing links between asset management and financial
reporting – as accounting practices change
• Increasing emphasis on asset management by other levels
of government
• Changes in regulation that require knowledge about assets
to determine compliance.
Asset management and Risks
• A risk assessment of a municipality may reveal
significant risks which concern moveable assets.
Good risk management practices can put
measures and controls in place to eliminate or
minimise the risks identified.
• The MFMA requires that a municipality must
prepare a Risk Management control plan which
includes a strategy through which to eliminate or
minimise the impact of identified risks.
A Risk Control Plan
• Risk mitigation. Identifying the necessary actions that can
be carried out in advance to reduce (or eliminate) the
impact of the risk
• Risk planning. Develop an emergency plan for dealing with
significant risks
• Risk monitoring. Monitor and track all the risks identified
and manage them o successful resolutions.
• Risk communication. Formally document and
communicate the project risks to the project team and
project decision makers.
Asset Management Policy
Every municipality must have an asset management policy –
to guide its asset management. This is very important if costly
mistakes are to be avoided.
Policy considerations to mitigate common risks associated
with moveable assets.
Pg. 129-130
The policy should contain the essential roles, practices and
procedures
pto
Asset Management Policy - content
•
•
•
•
Definition of a fixed asset
Role of municipal officials
Format of fixed asset register and classification
Investment property and fixed assets treated as
inventory
• Registration of heritage assets and donated in the
fixed asset register
• Safekeeping of assets
• Identification of fixed assets
Asset Management Policy - content
• Procedure in case of loss, theft, destruction or
impairment of fixed assets
• Capitalisation criteria: material value and
intangible items
• Capitalisation criteria: reinstatement, maintenance
and other expenses
• Maintenance plans and deferred maintenance
• General maintenance of fixed assets
• Depreciation of fixed assets
• Amendment of asset lives and diminution in the
value of fixed assets
Legislative Requirements
Acquisition of assets
Municipality shall advertise its intention to acquire/hire
assets.
If an asset exceeds the market value or is hired at a rental,
Council approval is required.
Disposal of Assets
Many assets are ultimately transferred and disposed of.
Municipal transfer regulations prescribe certain principles to
be followed.
• Valuation principle
• Continuity of service principle
• Risk transfer principle
• Asset preservation principle
• Certain other regulations must also be applied
pg.. 132
The exam ……
Karel van der Molen
SCHOOL OF PUBLIC LEADERSHIP
Thank you ……