Are you paying enough attention to fixed assets?

Let’s be honest—fixed asset management is not often at the top of management’s priority list. In a business environment focused on rapidly changing compliance requirements, just-in-time production, and new technology trends, fixed asset management seems relatively low risk.

That’s probably why many accounting executives, operations managers, and even outside auditors downplay the importance of a physical fixed asset inventory; however, fixed assets are not as low risk as managers might believe. In many industries, including manufacturing and healthcare, fixed assets represent the largest item on the balance sheet.

Most organizations have an internal policy requiring employees to take a physical inventory of fixed assets every five or more years, yet a surprising number of organizations have never performed a single wall-to-wall inventory. No matter if your organization is large or small, fixed asset management is important. This guide will explain:

• Why your organization might want to consider a physical asset inventory and reconciliation.

• What performing an inventory and reconciliation involves and some best practices.

• What’s at stake across various areas of your business if you continue to manage fixed assets without fortifying critical information in the records.

• How to share asset inventory and reconciliation information across the organization for a holistic approach to fixed asset management that can improve your return on investment.

Why most organizations need a physical inventory of fixed assets

To determine whether your organization needs to conduct fixed asset inventory and reconciliation, consider how easily you can answer these five not-so-simple questions:

• What fixed assets do you own?

• By whom are they being used?

• Where is each fixed asset physically located today?

• Is each asset in working order? Active or idle?

• How much are your assets worth today?

Fixed assets play a big role in the success of your business. Unfortunately, most organizations don’t have complete, accurate, or timely information about fixed assets. Here are just a few examples of how easily made mistakes can diminish your ability to manage fixed assets:

• The same asset is described different ways in the system, so you can’t properly query the quantity of that item to analyze that asset group to benefit the organization.

• The status of an asset is not captured, so you don’t know if equipment is idle or active.

• A quantity of an asset is purchased but shows as a single line item in the accounting system, for example a “bulk” asset.

• Assets are lost, broken, or disposed, but the event wasn’t captured in your fixed asset system. These assets are known as “ghost assets.”

• New assets are purchased, but information is not collected in the fixed asset record.

Every company deals with some of these problems. In fact the average fixed assets register is off by 15-30% because of items that are lost, stolen, or no longer useable. That’s why it’s so important to conduct regular fixed asset inventories and reconciliations to shore up existing data and capture additional information. With an accurate record of fixed assets and a good system for tracking each asset event that occurs during the fixed asset lifecycle, you can better manage overall cost of ownership.

What is involved with fixed asset inventory and reconciliation?

Whether you hire independent consultants or work internally, every fixed asset inventory and reconciliation project should consist of four stages:

Planning

Planning of the project is critical to the success of the whole project. Planning should account for logistics and communication among employees, project leaders, and the people taking the actual inventory. Document key contacts at each site and for the overall project, obtain the necessary floor plans, note the access hours for each location, and understand how inventory will be conducted in secure areas. Ensure that employees know what is going on and are ready for the inventory in order to minimize disruption to ongoing operations. Plan what types of barcode tags you will utilize, the types of assets to include in the inventory, and what types of information you plan to capture about each asset.

Asset tagging

It is a best practice to affix property tags to all fixed assets so that you have a unique identifier specific to each fixed asset record. Some assets will have more than one tag affixed—perhaps an additional barcode tag exists for preventative maintenance or IT asset management. In these cases, the best practice is to capture not only the fixed asset tag, but the other tags as well. That way, you will end up with all of the relevant identification information that will help you share fixed asset information across your organization in a more holistic way.

There are many types of barcode tags ranging from relatively inexpensive paper tags to weather resistant, heat-resistant, tamper-evident, and/or corrosion-resistant materials. Determining the best fit for different types of assets in your business should be part of your planning process. Sometimes it’s fine to place a tag directly on the equipment; sometimes it’s not. For example, in the food and chemical manufacturing industries, many issues arise that would preclude the affixing of tags directly on the equipment. Some kinds of plant machinery have a greater possibility of corrosion, and some surface types present adherence challenges.

Wall-to-wall physical inventory

As the name implies, a wall-to-wall physical inventory collects information about every fixed asset in every business location, forming a complete and accurate inventory. Great care should be taken to standardize the way you record asset descriptions, manufacturers, model numbers, and model descriptions to bring uniformity and consistency to the data. For example, if the description for a desktop computer is at various times listed as “PC,” “computer,” and “desktop,” it is difficult to perform meaningful data queries and analysis.

The types of information to collect should be mapped out in the planning phase and filled in with as much detail as possible during the wall-to-wall inventory. The data collected may vary somewhat by the specific needs of each organization, but should always include at least the following:

• Asset description

• Existing tag numbers (a single asset may have multiple tags or none)

• Manufacturer

• Model number

• Model description

• Serial number (inherently inconsistent across manufacturers)

• Location

• Current status (active, idle and surplus, or idle and ready to redeploy)

• Cost center

• Asset class

Reconciliation

During the reconciliation process, you will attempt to match the fixed assets in your register with the fixed assets that are physically inventoried in your business locations. It’s essential to do the reconciliation as quickly as possible after completing the inventory; delaying reconciliation creates a strong likelihood of losing the audit trail integrity.

The first step of the reconciliation should be an automated match by unique identifiers—tag and/or serial numbers—if the assets inventoried and/or records contain this information. In many cases, automated matching ties out less than 50% of the asset records.

After exhausting automated matches, best practice is to continue matching the asset manually through a line-by-line approach until each asset is validated. This overall approach is designed to ensure that each asset is coded—both on the inventory and book side—to designate a match, an unrecorded addition, or unrecorded retirement. Once all asset records are resolved, the data can be consolidated back into the fixed asset system. The net result is a new baseline inventory that has cleaned up the ghost assets and fortified the existing assets with better data.

Fixed asset management across the organization

Improving the accuracy and completeness of your fixed asset records through inventory and reconciliation is a great first step to benefitting many different areas of an organization. In operations, if the fixed asset data can be cross-referenced to existing maintenance management databases, then your plant and equipment managers can use the asset information to ensure operational performance and return on investment. On the financial side of the business, inventories can help your tax, capital budgeting, financial reporting, and fixed asset management teams. Similarly in IT, knowing the technology that is deployed in each location makes it easier to support employees and plan for upgrades.

Operational asset management

Equipment status: A physical inventory of your fixed assets can help you to identify active versus idle or broken equipment so your organization enjoys better plant and equipment utilization. This information allows you to cascade equipment within the organization for more usage and help to avoid unnecessary capital equipment expenditures.

Preventative maintenance: With strong asset inventory data, you have an accurate baseline to import and augment with additional information about warranties. Consistent names and descriptions make it easier to query like items at the same location and plan efficient maintenance schedules.

Reactive maintenance: Some of your fixed assets may be idle because they are in need of repair. Having an updated status will enable your maintenance professionals to schedule work on these assets. Accurate model numbers and descriptions as well as warranty information will help to determine what parts are needed and how much a repair might cost.

Financial asset management

Personal property tax: If 15-30% of your fixed assets are no longer in service, what would that cost your organization in personal property taxes each year? Getting ghost assets off your books is an excellent way to ensure you’re not paying more than you have to in property taxes. Additionally, property tax rules and rates vary greatly by jurisdiction, so if you move a fixed asset between business locations, it’s important to record the transfer in your fixed asset system. A physical inventory and reconciliation provides the location and status of every asset.

Tax depreciation: Fortifying your fixed asset information will help you ensure that the correct asset type and class is recorded for each fixed asset. Vague descriptions of the asset or its class can result in the wrong depreciation method or useful life being used in your fixed asset accounting. Identifying ghost assets and making sure you are not overstating depreciation will increase the accuracy of your tax filings.

Financial reporting and compliance: Fixed asset records directly impact the validity and accuracy of financial reports. Compliance with a variety of reporting regulations, including International Financial Reporting Standards (IFRS), GASB 34/35 (schools and state/local government entities), and the Sarbanes-Oxley Act (SOX) demand that organizations know the location, condition, and current value of their fixed assets.

Audits: Prior to the passage of SOX, auditors had minimal concern that fixed assets internal controls were lacking and assessed them as low risk. SOX places more emphasis on internal controls and their testing, forcing corporate controllers and auditors to reevaluate the risk assessment of fixed asset accuracy. To bolster your internal controls over fixed asset management, bring in an independent inventory team with no vested interest in your results to conduct a physical inventory at cyclical periods that makes sense based on your industry.

Insurance: Fixed asset records are used partly as a basis to set property insurance premiums and determine replacement value. Inaccuracies in the fixed asset accounting system could result in your organization’s being over insured and paying premiums for ghost assets. A more subtle hit to premiums can occur when the insurer finds your data too vague and raises the premium to cover the risk of the unknown. Incomplete fixed asset information can also result in too little insurance due to low values that would not cover replacement costs in the event of a loss. If you work with an independent fixed asset consultant, ask for an insurance valuation at the same time that your inventory and reconciliation is performed.

Business sales and acquisitions: Organizations often use the existing fixed asset accounting records to assist in negotiations when acquiring other businesses. Under- or overstating the value of your fixed assets could negatively affect the purchase price. Knowing the current condition and value of all of your fixed assets will help you calculate the correct net book value at any time.

Information technology

Asset management: Using the same best practices for tagging and asset descriptions, your IT asset management system will have much more useful information to plan for upgrades, maintenance, and new purchases.

Help desk: If you have an internal help desk, the information from your fixed asset records can provide help desk professionals with details about models, age, and description of IT assets.

Bringing it all together: Holistic asset management

For the best return on capital investments, fixed assets should be managed with a holistic approach throughout their life cycle. Plant and equipment managers, as well as IT and financial managers, should be able to easily share information about fixed assets for better decision making about repairs, disposals, and capital budgeting.

The inventory and reconciliation information in your fixed asset management software can be integrated into other systems in order to realize added efficiency and better ROI for your fixed assets and your business management software systems. Once a thorough inventory and reconciliation are completed, the fixed asset management system will contain fortified, timely data that can be exchanged with the accounting system, maintenance system, budgeting system, and IT management system.

A holistic approach to fixed asset management provides a more thoughtful, well-reasoned approach to fixed asset end-of-life decisions, where there is potential impact to both finance and operations. If an asset is disposed of that hasn’t been fully depreciated, its disposal will impact earnings. The costs associated with different disposal methods must also be considered. Having high-quality information about the status, condition, and type of assets being disposed of will enable management to decide whether the most cost-effective approach is to sell, scrap, discard in a way friendly to the environment, or cannibalize the asset for parts.

Best practices for asset inventory and reconciliation

• Conduct physical inventories to true up the data in your system every 3-5 years, depending on the volume of asset events (acquisitions, moves, disposals) in your environment.

• Plan your first baseline inventory very carefully, considering the best way to describe assets, tag assets, and collect consistent data across all locations.

• Affix property tags to all untagged assets. Complete your reconciliation immediately after your inventory. If you wait, the integrity of the audit trail will be lost.

• Use an independent inventory team with no vested interest in the results.

• Get an insurance valuation when you get a physical inventory.

Conclusion

Physical fixed asset inventory and reconciliation is a best practice for initiatives on improving fixed asset management. It provides an important check to ensure you know the who, what, where, status, and value of every fixed asset in your organization. When performed by independent outside professionals, inventory and reconciliation is an excellent way to begin to understand the internal controls and compliance required for accurate fixed asset reporting.

Across the enterprise, a timely, accurate inventory provides managers in accounting, tax, operations, and IT with information that can help them reduce costs and achieve a better return on fixed assets. When this information is shared appropriately between departments and business management systems, companies are enabled for better business decision making.

Sage Inventory Services

A trusted market leader for more than 30 years, Sage offers customizable tools and services for better asset inventory management. We conduct physical inventories, offer innovative software, and provide consulting, training, and assessments—everything you need for accurate financial reporting, tax incentives, and regulatory compliance. Get a complimentary quote.

For more information visit www.SageFixedAssets.com or call 866-550-8156. We'd like to show you how we can help improve your fixed asset management for better productivity and profitability.