Fixed asset registers – multi-million dollar benefits for oil & gas operators
18 May 2015: Australia’s emerging LNG industry could be missing out on millions of dollars in value as a result of procurement practices and the accounting treatment of large-scale engineering works.
According to Deloitte, large engineered assets, such as power plants, camps, LNG facilities, gas plants, built under contract by are often handed over to the customer on completion, accompanied by operating manuals and maintenance instructions, but then recorded as a single, lump sum accounting entry.
Deloitte Tax partner Jonathan Schneider said this basic and all-too-common approach for a big, complex and expensive asset actually hides a lot of value.
“The accounting really matters, and taking a more sophisticated and granular approach via a fixed asset register, can drive better decision making across a business.”
- Spares management – embedded assets that might require a far greater inventory of spare parts can mislead managers into miscalculating inventory needs
- Business management – without a detailed financial view of assets, managers get a distorted view of the business
- Depreciation – with so little detail, the finance team is limited to depreciating the big asset over its useful life. But some parts inside the asset might legitimately be depreciated faster or differently
- Revenue measurement – where a depreciation charge is incorporated into calculating revenue, if it is understated, revenues may be overstated, and vice versa
- Insurance –insurance premiums can be more targeted, and possibly reduced, improving the overall risk profile of the business
- Joint venture management – some shared services, product sales and tax calculations that apply to a joint venture will depend, in part, on granular asset information
- Tax risk mitigation – a position on the tax treatment of an asset that is not based on hard engineering evidence could be open to challenge by tax authorities, and even result in penalties
- Cost allocations – asset valuations based on cost allocations might matter when assets are purchased, transferred or sold off
- Research and development –lump sum financial records might block claims for legitimate R&D savings
- Financial reporting – detailed fixed asset information may be needed to meet some financial reporting obligations imposed by, for example, capital markets.
“The solution here is actually very simple,” Schneider said. “All the accountants need is a detailed fixed asset register that breaks an asset down into its component parts, along with a cost breakdown to match.
“A register is easy to build, on the go, as the asset is being built, but much harder after the asset has been delivered. It’s so difficult in fact, that most operators simply don’t bother.
“There are likely more subtle impacts also, as having access to more detailed financial data might trigger a need to improve or change financial reporting, performance metrics, or performance-based compensation schemes.
“We have recently developed a type of ‘hack’ around this problem for recently built assets. It does come with a cost, but the return on investment can be significant.
“One of our Australian LNG clients recently applied the hack, built a new asset register, and improved their first year depreciation position on just one large asset by a significant amount. Rather than just accounting for a single lump sum asset, it was converted it into dozens of different assets, as required for tax and accounting purposes.”
Deloitte National Oil and Gas Director Geoffrey Cann said the best approach – a permanent, and value-adding, fix – was to simply build the fixed asset register at the same time the assets are being built, and keep financial and operations asset registers aligned.
“Asset builders should ensure contracts included detailed financial records so they could claim credit for the eventual cash flow benefits, and position their bid as offering a lower total cost of ownership,” he said.
“Asset owners and contracting teams should insist that detailed fixed asset financial registers be part of contracts. They should resist the temptation to remove accounting and finance issues from the scope of work, and work with their contractor to capture fixed asset data to their standard, not the contractor’s.”
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