IPSAS 17: GUIDANCE NOTE 1

IPSAS 17: GUIDANCE NOTE 1 PROPERTY PLANT AND EQUIPMENT CLASSIFICATION Executive Summary Tools such as the Federal Supply Classification system (also known as the NATO Codification System) and the United Nations Standard Products and Services Code contain the breadth of Property Plant and Equipment (PPE) assets that can be useful to United Nations System organizations in the grouping and classification of PPE assets for both internal use and for external reporting, including disclosures required for compliance with IPSAS. By using these tools, consistent categorization of PPE items can be practiced within an organization and comparability with other organizations is enhanced. The proper classification of PPE assets requires the planning, participation and interaction of the financial, procurement, logistical, asset/inventory management and ERP departments of an organization. For best results PPE asset classification should not be undertaken in isolation of all relevant organizational departments. The information required for PPE reporting whether it is for internal or external use must be captured through a thorough understanding of the reporting requirements themselves, a robust classification system, a carefully planned Chart of Accounts and a well integrated ERP system. 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 1 of 18

Table of Contents This guidance is subordinate to the Standard 3 Guidance Notes 3 Guidance Requested on PPE Classification 3 IPSAS Compliance and Asset Classifications 3 Recommended Accounting Practice: PPE Classes 4 Asset Classification Tools 4 Federal Supply Classification (FSC) & NATO Codification System (NCS) 5 NATO Asset Classification 7 Relevance of the NCS Classification System to the United Nations System 8 United Nations Standard Products & Services Code (UNSPSC) 8 Other Implementation Considerations 9 Number of Asset Classes 9 Finance, Procurement, Logistics & ER 9 Chart of Accounts 10 Summary 11 APPENDIX A: CHART OF ACCOUNTS EXAMPLE 12 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 2 of 18

DRAFT: IPSAS 17: GUIDANCE NOTE 1 PROPERTY PLANT AND EQUIPMENT CLASSIFICATION December 2007 This guidance is subordinate to the Standard 1 The final authority on IPSAS 17 Property, Plant and Equipment requirements is IPSAS 17. If a conflict between guidance and the Standard is identified, the requirements of the Standard apply. Guidance Notes 2 Guidance Notes aim to support organizations as they implement International Public Sector Accounting Standard (IPSAS) requirements. They may include explanations of what a particular standard means, how a standard should be understood when applied to United Nations System specific situations transactions or events, descriptions of the range of acceptable practices which may include identification of a best practice where one exists, and guidance on practical implementation tasks. Guidance Requested on PPE Classification 3 At its June 2007 meeting, the Task Force on Accounting Standards (the Task Force) requested guidance to specify in further detail the basis for grouping of assets within an asset class. 4 This Guidance Note addresses this request by: Introducing inventory/ppe classification systems such as the Federal Supply Classification (also known as the NATO Codification System) and the United Nations Standard Products and Services Code; Explaining the importance of asset classification throughout various departments of an organization; and Providing an example of asset classification in the design of an organization s Chart of Accounts and ERP system. IPSAS Compliance and Asset Classifications 5 The classification of assets is important for a number of reasons including internal reporting and decision making, asset tracking and custodianship, asset revaluation and external regulatory reporting and disclosures required for compliance with IPSAS 17. IPSAS 17 requires reporting entities to disclose Property, Plant and Equipment (PPE) classes, where classes are determined by either nature or function (paragraph 13, paragraphs 88 to 89). United Nations System organizations have varied operations and equally diverse assets. The task of consistently placing individual items of PPE into logical, meaningful categories, which can then be grouped upwards consistently into IPSAS required classes can be daunting - especially when considering smaller assets and sub-components. 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 3 of 18

Recommended Accounting Practice: PPE Classes 6 In June 2007, the Finance and Budget Network approved a recommended accounting practice 1, submitted to it by the Task Force with respect to organizations PPE asset classes. The approved recommended accounting practice for PPE classes is that organizations use the following six PPE classes, when preparing IPSAS compliant financial statements: Communication and IT Equipment Vehicles Furniture and Fixtures Leasehold Improvements Buildings Land 7 The recommended accounting practice also states that: Further classes should be added when further significant material groups of assets exist, for example, infrastructure assets, work-in-progress, specialized vehicles, machinery. An organization may need to amalgamate recommended classes, if a class is not material 2. 8 To implement this recommended practice each United Nations System organization will need to identify their PPE assets and group them into categories then further group them into higher level classes. Asset Classification Tools 9 Powerful asset classification tools that have been used in various forms by many national governments, international organizations, and other public sector organizations include the Federal Supply Classification (FSC) as it is called in the United States or as the NATO Codification System (NCS) as it is known internationally. Another more recently developed classification system is the United Nations Standard Products and Services Code (UNSPSC) which is also used internationally. 10 These classification systems are likely to prove useful to United Nations System organizations as they classify their assets to comply with IPSAS, while also meeting internal management needs. These classification systems help organizations to determine: which asset groupings would logically relate to the six asset classes above; specifically which types of assets would be included in asset groupings; and, whether particular asset groups are so significant that they should be broken out and disclosed as a 1 Recommended accounting practices guide organizations to a usually acceptable accounting practice and support both consistency and compliance. Any recommended accounting practice must be read in the context of the relevant accounting policy and guidance paper, which explains the background to and basis for a recommendation, as well as its relative authority. United Nations System organizations will be expected to apply recommended accounting practices that have been approved by the Finance and Budget Network. However, each organization remains responsible for deciding whether or not their specific operational reality allows them to adopt a recommended practice and still comply with IPSAS. 2 Refer FBNetwork papers CEB/2007/HLCM/FB/7 (the recommendations) and CEB/2007/HLCM/FB/10 (the decisions). 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 4 of 18

separate, additional asset class. These classification systems, in some form, may already be in use by various United Nations System organizations. They are described in the following sections. Federal Supply Classification (FSC) & NATO Codification System (NCS) 11 The FSC was developed by the United States military as a means of providing a uniform and common classification of items of the same physical or performance characteristics or of the same general application. In IPSAS terminology, this would be comparable to the nature or function where physical corresponds to the nature of the asset and application to the asset s function. 12 The FSC classification system is hierarchical. It provides a comprehensive listing of asset groups with detailed descriptions of the range of asset items that would comprise each group. The full set of FSC Groups and Classes is provided with this paper, as a separate file: Appendix B FSC-H2_Groups_and_Classes.pdf 13 The following chart (Fig 1.0) shows an example of assets and their associated asset groupings and how these could be grouped even further to form an asset class. Fig 1.0: Sample Asset Groups & Asset Class 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 5 of 18

14 International organizations making up the North Atlantic Treaty Organization (NATO) have incorporated the FSC as their own asset classification system, which is called the NATO Codification System or NCS. The NCS is effectively the world standard for classifying, describing and numbering items of supply 3. The NCS has been used in practice since the 1950s. 15 Beginning in the United States as the FSC and then expanding to NATO and NATO member governments, the use of NCS worldwide is still growing. NCS is now used by national governments throughout the world - whether or not they are members of NATO. The following figure (Fig 2.0) shows the worldwide use of the NCS: 4 Worldwide use of the NATO Codification System (NCS):Situation as of May 2006 NATO countries using NCS NCS sponsored countries Countries using the NCS Belgium Albania Papua New Guinea Bulgaria Argentina Solomon Islands Canada Czech Republic Denmark Estonia France Germany Greece Hungary Iceland Italy Latvia Lithuania Luxembourg Netherlands Norway Portugal Poland Romania Slovakia Slovenia Spain Turkey United Kingdom United States Australia Austria Brazil Chile Croatia Egypt Fiji Finland Indonesia Israel Korea, Republic of Kuwait Macedonia, Former Yugoslav Rep. of Malaysia New Zealand Oman Philippines Russian Federation Saudi Arabia Singapore South Africa Sweden Thailand Tonga Fig 2.0: Worldwide use of NCS 3 Defense Logistics Information Service Jan 27, 2003 System Offers Unity of Effort to Logisticians. 4 Defense Logistics Information Service NATO Codification Benefits; List of Countries using the NCS. http://www.nato.int/structur/ac/135/why_catalog/chapters/6_ncs_users.htm 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 6 of 18

NATO Asset Classification 16 Recently, the NCS has been used in a joint effort by the procurement, logistics, asset management, ERP, and financial communities within NATO organizations to support IPSAS adoption by taking the detailed listing of asset groups found in the NCS and aggregating the relevant ones to Asset Classes (also commonly referred to as Asset Chapters ). This is called the NATO Asset Classification. The Asset Classes in this classification are ultimately reflected on the financial statements and related disclosures. 17 A sample version of the NATO Asset Classification (based on NCS) as used to support IPSAS compliance is provided with this paper, as a separate file: Appendix C NCS_Group_Class Assets and Depreciation.pdf. 18 A sub-set of Appendix C is provided below in Fig 3.0. It shows how specific types of assets are grouped into an Asset Group called Ground Effect Vehicles, Motor Vehicles, Trailers and Cycles. That Asset Group is a component of a PPE Asset Class used by NATO called Transport Equipment. Fig 3.0: Asset Group as part of Asset Class 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 7 of 18

Relevance of the NCS Classification System to the United Nations System 19 Although certain asset groups in the FSC (NCS) classification system are specific to military operations, there are many others which apply to United Nations System organizations. In fact, many national governments of the NATO member countries use adaptations of this classification as part of their inventory and asset classification systems. In doing so, for PPE they ensure that they speak the same language internally within their government, externally with other nations and also with other stakeholders such as suppliers and manufacturers. This system has proven useful in understanding the inventories and PPE assets held and available for deployment, in the streamlining of procurement and in the classification required for financial reporting. United Nations Standard Products & Services Code (UNSPSC) 20 The United Nations Standard Products and Services Code (UNSPSC) is a hierarchical convention used to classify products and services specifically for commercial procurement purposes. The UNSPSC was co-developed by the United Nations Development Programme (UNDP) and a private corporation in 1998. The classification system has over four thousand members in over eighty countries and is used by global corporations, small firms, several government entities as well as universities and other educational institutions. 5 21 The advantages of the UNSPSC are that it is an open source standard meaning it is in the public domain and since the United Nations owns the copyright to the code, it can be used without any restrictions. UNSPSC members are also able to vote on changes to the classification code. 22 The UNSPSC hierarchy is based on five levels as follows: 6 Segment logical aggregation of families for analytical purposes Family A commonly recognized group of inter-related commodity categories Class A group of commodities sharing common characteristics Commodity A group of substitutable products or services Business Function A function performed by the organization in support of the commodity 23 The UNSPSC could also be used as a tool to classify PPE assets for compliance with IPSAS. An example of the UNSPSC is provided with this paper, as a separate file: Appendix D UNSPSC_English_v10.0501_pdf_20070817.zip 5 UNSPSC - Frequently Asked Questions: What is the UNSPSC? http://www.unspsc.org 6 UNSPSC - Frequently Asked Questions: How does UNSPSC Work? http://www.unspsc.org 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 8 of 18

Other Implementation Considerations 24 In addition to IPSAS requirements concerning the classification of PPE, other important implementation considerations are: Number of asset classes; Interrelationship between finance, procurement, logistics and ERP; and Chart of Accounts. 25 These are discussed further below. Number of Asset Classes 26 The optimal number of asset classes must be carefully considered. Too few and the value of the information provided in the financial statements is diminished. Too many classes and considerations such as the number and detail of disclosures required for IPSAS compliance must be taken into account. IPSAS requires specific and detailed disclosure for each asset class (refer paragraphs 88 to 89). The burden of complying with this requirement will quickly become onerous as the number of classes increases. 27 Although at the outset it would seem useful to report on as many asset classes as possible, this is not the preferred course of action. The recommended accounting practice is for United Nations System organizations to disclose six classes with scope to add further classes. This recommendation was made to meet the requirements of IPSAS, to support consistency and comparability, and from a practical ease of preparation perspective. The materiality of additional asset classes must be analyzed in the context of their relevance to general purpose financial reporting. 28 It is important to note that when large groups of assets are grouped into a single asset class for financial reporting purposes, the detail of the asset groups and of the individual assets that comprise the groups can still be available through the combined use of a sound classification system, the thorough design of a Chart of Accounts and a well configured ERP system. Finance, Procurement, Logistics & ERP 29 The classification of PPE is not just an issue for an accounting department. It must be discussed, planned and implemented with the finance, procurement, logistics and ERP departments of an organization. At a design and operational level, each unit plays an integral role in correctly capturing the PPE information required for asset classification. For example, the finance department approves and codifies the expenditure against the budget, the procurement department orders the PPE, the logistics department records the transport and receipt of the PPE, and the assets/inventory management department records custodianship of the PPE asset throughout its useful life. Each department must properly code and classify the order to ensure that it is correctly recorded as PPE in the ERP system. Since this information will ultimately be reported in the financial statements it is critical that each unit understands their role in providing PPE information and its importance for IPSAS compliance and a clean audit opinion. 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 9 of 18

30 The following diagram (Fig 4.0) depicts the interaction between various organizational departments in keeping track of PPE: Fig 4.0: Interaction between Organizational Departments Chart of Accounts 31 The correct design of an organization s Chart of Accounts (COA) and subsequent implementation into its Enterprise Resource Planning system (ERP) is critical. The importance of the COA and the planning needed to ensure that it works well for an organization must not be underestimated. 32 PPE can be designed into the COA with sufficient detail to capture the information required, while maintaining the flexibility to incorporate future information should it ever be required. Information needs must be balanced so that the COA does not become unnecessarily large or time consuming to populate. PPE information should support both internal management (e.g. What is the value of portable sheds held by the organization?) and IPSAS compliance (What is the value of the PPE class Communications and IT Equipment?). 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 10 of 18

33 In Appendix A below, an illustrative example is provided to show how a well designed COA can support both the information required for compliance to IPSAS and also the detail required for internal management and reporting for PPE. It is important to note that, depending on an organization s circumstances, required information may also be obtainable in whole or in part from the Assets module of an organization s ERP instead of directly from a COA. Summary 34 Tools such as the Federal Supply Classification system (also known as the NATO Codification System) and the United Nations Standard Products and Services Code contain the breadth of PPE assets that can be useful to United Nations System organizations as they group and classify their PPE assets for both internal management use and to comply with IPSAS by providing IPSAS 17 required note disclosures on PPE classes. By using these tools, consistent categorization of PPE items can be practiced within an organization and comparability with other organizations is enhanced. 35 The proper classification of PPE assets requires the planning, participation and interaction of the financial, procurement, logistical, asset/inventory management and ERP departments of an organization. For best results PPE asset classification should not be undertaken in isolation of all relevant organizational departments. 36 The information required for PPE reporting whether it is for internal or external use must be captured through a thorough understanding of the reporting requirements themselves, a robust classification system, a carefully planned Chart of Accounts and a well integrated ERP system. 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 11 of 18

APPENDIX A: CHART OF ACCOUNTS EXAMPLE A1 The following is an illustrative example only. It is designed to show how information required for both internal management and external (IPSAS) reporting requirements can be captured within an Asset specific segment of an organization s Chart of Accounts (COA) structure. A2 Please note that depending on the capabilities and design of an organization s ERP system including its sub-systems and sub-ledgers, certain data elements could be captured directly from other data fields in the ERP system (e.g. specific fields within an Asset module) and thus may not be required directly in a COA. A3 An ideal COA should support the capture and reporting of all required information while at the same time be easy to use, understandable, have sufficient flexibility and allow for future information needs. A4 The example presented shows how detailed asset information can be captured directly in an Asset segment. This approach, depending on organizational circumstances, could be deemed cumbersome and inflexible. The section Additional Considerations (see A10) discusses how the same information could be obtained by using hierarchical Parent accounts to reduce the number of data elements captured directly in the Asset Segment. This would result in the need for less data entry/capture and increased reporting flexibility. A5 For example an organization may have a COA structure consisting of five (5) segments where the 5 th segment is specific to Assets: Fig 5.0: Sample COA Structure 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 12 of 18

A6 Furthering the example, the COA could be designed such that the Asset segment (Segment 5) consists of seven (7) alpha-numeric fields as follows: Fig 6.0: Sample Asset Segment Structure A7 Each field within the Asset segment could provide information as follows: Field 1: Is the asset PPE or an Intangible? The delineation between tangible Property Plant and Equipment and Intangible assets is required for IPSAS compliance and can be captured as follows: Where: Value P I E Description Property, Plant and Equipment Intangible Assets Expensed attractive low dollars assets tracked for custodial purposes Fig 7.0: Sample 1 st Field of Asset Segment 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 13 of 18

Field 2: To what Asset Category does this asset belong? The classification of assets into Asset Categories Where: Value Description 1 Communication & IT Equipment 2 Vehicles 3 Furniture and Fixtures 4 Leasehold Improvements 5 Buildings 6 Land 7 Future Use 8 Future Use 9 Future Use 10 Future Use Fig 8.0: Sample 2 nd Field of Asset Segment Fields 3 and 4: To what Asset Group does this asset belong? Using a portion of the FSC classification system for illustrative purposes: Value Description 23 Ground Effect Vehicles, Motor Vehicles, Trailers & Cycles 24 Tractors 34 Metal Working Machinery 54 Prefabricated Structures 58 Communication, Detection & Coherent Radiation Equipment Fig 9.0: Sample 3 rd and 4 th Fields of Asset Segment Fields 5 and 6: What specifically is this asset? Assuming Asset Group 23 was chosen above for fields 3 & 4, the choices then available for fields 5 & 6 would be (using only a portion of the FSC classification system): Value Description 05 Ground Effect Motor Vehicles 10 Passenger Motor Vehicles 20 Trucks and Truck Tractors, (Wheeled) 40 Motor Cycles, Motor Scooters, Bicycles Fig 10.0: Sample 5 th and 6 th Fields of Asset Segment 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 14 of 18

Field 7: Reserved for Future Use Additional information can be captured depending on present or future needs. Examples of additional information which might be useful and easily captured include: Is the asset internally constructed? Is the asset leased? Value Z Description Field is for future use. Result: Fig 11.0: Sample 7 th Field of Asset Segment A8 Continuing the example, many organizations commonly use trucks for distribution of aid and or movement of displaced persons in their field missions. Using the example Asset segment structure provided above the result to recognize a truck in the COA would be: P22320Z Fig 12.0: Result of Asset Codification Example A9 This codification would provide IPSAS information required for consolidation on the financial statements by informing the financial community that a Property Plant and Equipment asset within the Machinery and Vehicles asset class exists. A10 For internal reporting and management the fact that the asset is a truck would be evident. Should it have been required, the determination if the asset was constructed internally or leased could also have been obtained. Additional Considerations A11 It is important to note that the level of information captured depends on the design of the fields within the Asset segment. A12 The Asset segment can be designed so that either all required information is captured directly in the segment or instead captured through a combination of segment information and planned groupings in the form of hierarchical Parent accounts. A13 Parent accounts constitute rolled up ranges of the Child accounts to which actual amounts are posted. The advantages of Parent accounts are the Asset segment will be shorter and simpler to codify and have increased flexibility because Parent ranges can be modified (expanded/contracted) at anytime without any impact on the Asset Segment. Conversely when an Asset Segment is in use it is difficult if not impossible to change. The ability to effectively use Parent accounts depends on the level of flexibility required (generally the more flexible the better), capabilities of the ERP and reporting 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 15 of 18

tools and the cost/benefit associated with the effort required to capture and use the information required. A14 For example, the Asset Segment example provided above (see A5) could be simplified by eliminating Field 1 (PPE, Intangibles etc) and Field 2 (Asset Category) through the use of Parent accounts. The resulting Asset segment structure would then be: Fig 13.0: # of fields in Asset Segment reduced A15 Field 2 (Asset Category) of the Asset Segment could be eliminated by implementing a Parent account called Vehicles. This parent account would be added to the COA and mapped in the ERP so that it would capture the range of Asset Groups (fields 3 & 4 of the Asset segment) associated with the Asset Category Vehicles as follows: 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 16 of 18

A16 Fig 14.0: Rollup Group Vehicles replaces Field 2 (Asset Category) of the Asset Segment The process presented in A14 would be repeated for each Asset Category. A17 Each PPE Asset Category Parent account would then be rolled up to a Parent account for PPE. This in effect would remove the need for field 1 (PPE or Intangible) of the Asset Segment. (Note: the process would be repeated for Intangibles) Fig 15.0: Rollup Group PPE replaces Field 1 of the Asset Segment 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 17 of 18

A18 The level of data entry required to populate the Asset segment could be further reduced by recognizing the hierarchical nature of classification systems. Since levels are often dependent on each other, only specific options should be available depending on a previous choice. Rules can be built into an ERP system to restrict the options available in a field, automatically populate fields with default values, and to extract information from other fields/modules within the ERP system or even from external systems. A19 Additional information specific to IPSAS disclosures are required including depreciation by asset class, impairment losses by asset class, revaluations of asset classes etc. COA planning in the context of disclosure requirements and the capabilities of the Assets module within the ERP should be undertaken to decide how best the disclosure requirements can be satisfied. 34. IPSAS 17 Property Plant & Equipment Classification.doc 04/04/2008 Page 18 of 18