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Are your assets working for you?

According to the International Financial Reporting Standards’ Conceptual Framework, an asset is a resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity. Essentially, an asset is the embodiment of future cash flows. Its existence pre-establishes an expectation that cash flows are expected to arise out of its deployment or sale.

An asset can be current or non-current, the former implying that the economic benefits are expected to flow within its normal operating cycle, or over the next twelve months; whereas the latter implies that cash flows arising out of its deployment will continue flowing beyond the fore-seeable future.

The current assets are more liquid in the day-to-day running of the business, in that they are either cash or are easily convertible to cash and these may include cash itself, inventories/stock, trade receivables, tax rebates, prepaid expenses, etc. The non-current assets, on the other hand, are not as liquid and may include tangible assets such as buildings, land, plant and equipment, furniture and fittings, leased properties, computers, and other ICT equipment, as well as intangible assets such as goodwill, software and other intellectual property. Assets could also take the form of cash-generating-units (CGUs) owned by an enterprise. The goal of any enterprise should be to optimize the use of its assets to generate maximum cash flows attainable from their deployment.

An enterprise can, however, be in a situation where it holds more assets than those incidental to its core operations effectively meaning that its asset base is underutilised. The holding and maintenance costs incurred on such assets do not necessarily help in harnessing them to generate more operational cash flows. Sometimes this may be a result of Capex overspend in view of the attainable market or continued obsolescence and the advancement of technology leading to the addition of newer assets while the older ones are not disposed of. Some CGUs might also be perennially loss-making. Holding unneeded or loss-making assets reduces operational space, may hinder relevant procurements because of cash trapped in unusable assets, and also proliferates cash leakage.

As such, it is vital for Management to critically assess the enterprise’s assets and monitor its register to ensure that they are keeping the right category and quantities of usable assets. They should consider their business model and establish their core functions and the particular assets that support these. Non-core functions can be outsourced and attendant assets hived off as well to the third-party provider by way of outright sale, hire-purchase or rental arrangements. Outsourcing improves core efficiencies and supports innovations as enterprises focus on what is core to their vision and business model.

Additionally, assets that have been shelved on account of not being enhance-able to match prevailing technological changes should be disposed of by selling them back to the supplier, to employees at a scrap value, to targeted emerging enterprises that might not have the funds to purchase more advanced technology or by way of public auction. It is ideal that these assets, although some might even be having zero scrap value, be sold in a usable state, therefore some funds may have to be set apart for cleaning, repair as well as marketing them. Assets that are broken beyond repair may either be completely destroyed or sold/given to recyclers. Loss-making CGUs can be carved out and divested or shut down altogether.

The proceeds arising from asset disposal can be ploughed back into the business to ramp up inventories of raw materials, settle liabilities, or for whatever other commercial or strategic purpose Management may find prudent. It is important to hold the right set and quantity of assets and to ensure that they are optimally utilised.

The writer is a corporate and project finance specialist at Frontier Advisory Partners.

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