Fixed asset best practices

Fixed assets may represent a significant area in many organizations. This article provides a list of fixed best practices.

1. A list of fixed asset best practices

Policies and Procedures.  Policies and procedures should be established to ensure consistent and correct accounting for and management of fixed assets.  Such policies need to cover all possible aspects of fixed assets.  Consider areas such as: capitalization threshold; accounting treatments; approval process of acquisitions, transfers, and disposals; useful/depreciation lives; asset construction; debt cost capitalization (US GAAP); periodic fixed asset inventories; and so on.

Establish Capitalization Threshold. A company needs to have a clear set of criteria of what represents a fixed asset and what is an expense item.  Typically, if an asset is used for more than a year (and is not inventory), it should be treated as an asset.  However, from a practical standpoint, it will be beneficial to allow expensing assets under a capitalization threshold.  Such threshold should be carefully considered from materiality standpoint: you don’t want to expense assets which may result in a material misstatement of your company’s financial statements.  Your external auditors may weigh in on this decision if you reach out to them with your proposed policy.

Correct Depreciation Start Dates.  This may seem insignificant, but it is an area for errors related to depreciation.  An asset should be depreciated as soon as it’s ready for intended use.  Therefore, it is important to track this information accurately and record it in your fixed asset tracking system.  For example, if an asset is being constructed instead of being acquired, it may be difficult to know when exactly it is ready for intended use.  In such cases, consultations with engineers or discussions with managers involved in the construction project will be helpful.

Use Automated Solutions.  Use software packages for tracking and managing fixed assets unless you feel comfortable doing this on paper or in Excel.  Paper or Excel may be fine if you don’t have a significant fixed asset balance or if fixed asset turnover is low, but paper or Excel are prone to errors.  On the other hand, there are a lot of fixed asset software solutions in the market which will help you automate a lot of fixed asset processes (e.g., approvals, acquisitions, disposals, depreciation, different basis tracking – tax vs. financial accounting).

Clearly Label Fixed Assets.  This is essential if your organization has a lot of fixed asset items in one or more locations.  You can use asset numbers (barcodes) or more advanced tracking mechanics (chips placed on assets which help track their location, etc.).  Clear labels will help with recording asset movements, asset inventories and so on.

Fixed Asset Reconciliations.  Fixed asset subledger/detailed records should be reconciled to the general ledger on a periodic basis especially if you utilize a stand-alone fixed asset software solution.  Reconciliations should cover both original costs and depreciation.  Such reconciliations should be reviewed and approved by a person independent of the reconciliation process.

Reviews and Approvals.  Fixed assets may cost a lot, and thus, having appropriate approvals in place is important.  Consider establishing approval levels for acquisitions, disposals, etc.  If an asset is going to be constructed, then a committee may be established to oversee the process and perform periodic reviews.

Periodic Fixed Asset Inventories.  This may not sound significant, but in reality it is an important procedure.  Fixed assets should be periodically inventoried.  This process will help identify any fixed assets missing, fixed assets not recorded in accounting records, fixed assets moved from one location to another, fixed asset obsolescence, etc.  Company personnel can do this or a specialized service provider can be engaged to assist with the process.

Insurance.  Having appropriate insurance coverage for fixed assets (and other assets and risks) may be a good idea.  Fixed assets may be significant in value and having their value diminished or destroyed (e.g., flood or fire) may put a company in a bad financial position.  Thus, it is important to consider buying insurance coverage and reviewing it periodically with your insurance agent(s).

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