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Streamlining your assets

With increased pressure on organizations of all types to ‘do more with less’, communication and transparency between departments is an important part of streamlining business processes.  A central asset register can not only help streamline your asset maintenance, but it also provides that desired increased transparency and easier communication between departments.  The register can be accessed and viewed across multiple departments including asset management, finance, IT, estates and maintenance, providing all the information required in a consistent and easily-accessible format.

Sharing asset information in this way can deliver increased efficiencies and direct financial savings.  For instance, the lifecycle of equipment and its maintenance can be effectively tracked and managed using a central system so that optimum value is obtained from investment in the asset.  This can include deployment, service and disposal of the asset at the appropriate time.

How accurate asset registers may help lower insurance

One of the most tangible ROI realizations for businesses that implement a specialist asset management system can be a dramatic lowering of insurance premiums and more successful insurance claims.  Many companies deal with escalating insurance premiums.  However, in reality, the majority are actually over insured.  Endemic failure to maintain accurate asset registers results in the majority of companies insuring assets they no longer own.

With less than 40% of assets on the register easily identified during a physical audit and an estimated 20% no longer in existence, organizations are not getting value for money from expensive insurance premiums.  Furthermore, poor asset description typically results in claims being challenged by insurance assessors.  Without detailed information from a specialist system, such as a serial number or bar code, and proof of location, an insurance company will be less likely to pay out, a risk that businesses cannot afford to take.

The second step for conducting a physical audit

The second step an organization should take when planning a physical audit is to review and consolidate the data.  Utilizing a specialist asset management system makes this simple.  It should be easy to generate a report from your asset register to include the asset reference, description and location of the items that need to be audited.  If such a system is not in place, this can be a daunting task.  The first stage is to request a list (lists) of the items an organization thinks it has.  Many will ask their Finance, IT and Operations or Facilities departments to provide a spreadsheet.  Where larger corporations have subsidiaries, each may offer its own individual version of the spreadsheet.

Multiple spreadsheets should be consolidated and reconciled to eliminate potential duplicates.  Spreadsheets should be revised to include the data points determined in the first step for conducting a physical audit.

The first step when planning a physical audit

Organizations need to determine what assets will be included in the audit.  Is it going to be solely based on the capital asset policy or will it also include expensed items which fall below the capitalization threshold?

Some expensed items are categorized as ‘portable and attractive’ and are therefore sometimes included in an audit.  Identifying and controlling these items is an integral part of a risk management and internal control strategy.  An organization needs to find the balance between the benefits associated with greater control versus the inevitable administrative costs.

After agreeing on the items to be audited, the next thing to decide is what details will be collected.  Some organizations are solely interested in finding and verifying the items, while others will take the opportunity to gather additional data.  While conducting the audit, it is also a good time to note the condition of assets.  If other details haven’t been previously recorded, such as serial numbers, make, model, meter readings, color, room location, last serviced ate, etc., then this is a good opportunity to collect this type of information.  With this data, a standard asset register can be turned into a powerful enterprise asset management tool.  Audit managers should determine whether the company leases equipment and, if so, how they can be identified.  Accidentally disposing or transferring assets that belong to a leases company can lead to undesirable fines. 

Finally the audit location(s) need to be clearly defined.  If an organization is in one building then this process is relatively easy, but if it has multiple locations then either the physical audit will have to be rolled out in stages or it will have to be completed by teams.  If a suitable resource isn’t available to perform the work, a professional services company can assist.

The potential risks of not conducting regular physical audits

Whether assets are maintained on a spreadsheet or on a professional asset management system, the credibility of an organization’s data (the existence of assets and their Net Book Values) will be in question if it cannot verify them.  As a result, an organization can be over or under reporting the values and over or under paying income and property tax as well as insurance premiums.  Potential risks of not conducting a physical audit include:

• Inaccurate physical verification of assets can render the asset register unreliable
• Depreciation could be allocated to the wrong company/cost center/department/division
• Depreciation could be misstated resulting in over or under payment of taxes
• Missing assets (potential theft problem) could go undetected
• The audit trail of transferred assets can be lost
• Assets could be under or over covered by insurance
• Exposure to accounting audit write-up

Verifying what an organization owns and the whereabouts is essential for complying with US GAAP and SOX.  In addition to  compliance, effective asset management can also help to ensure assets are insured at the correct level, to budget for maintenance and help to avoid unexpected ‘write-offs’.  In order to properly manage assets, it is essential to perform thorough, routine physical audits.

How to simplify your ARRA asset reporting & tracking

 What is the ARRA?

The American Recovery and Reinvestment Act (ARRA), which is commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted in February 2009 and  was designed to create new jobs, save existing jobs, spur economic activity, and foster unprecedented levels of accountability and transparency in government spending.   This transparency requires detailed reporting from award recipients.

Recipients of recovery awards usually fall into one of four categories, which include state/local governments (including local school districts), universities and other research institutions, non-profit organizations, and private companies.  All recipients of ARRA funds are required to report on the status of their projects at the end of each quarter.  Reporting requires the inclusion of the status of the project(s), funds spent, and details of any subcontracts awarded by the recipient.

Simplifying asset reporting and tracking

Government and educational institutions that have received ARRA funds and need help with reporting can use an asset register and tracking system to help provide transparency and a centralized repository for information about fixed assets, making it simple to track how funds are spent and where assets currently reside.  Without a specialized system, organizations may have to rely on spreadsheets and manual audits, which do not provide an electronic trail and are subject to errors.  A specialized asset management system will allow institutions to easily and quickly generate the necessary reports for ARRA funds.

Fixed asset categories – land, buildings & improvements

Organizations typically categorize fixed assets into distinct groups, four of which include land, land improvements, buildings and building improvements.

Land that is purchased or donated is usually capitalized but not depreciated.  Land can be recorded at, and remain at, historical cost.  When land and a building are acquired as a package, most organizations will opt to determine separate values for each.  Costs involved in the formation of a structure can be capitalized and included with the land.

Land improvements include those that are permanent and add a significant value to the land, such as site improvements (examples include fencing and excavation) and infrastructure (examples include driveways, parking lots and roads).  Non-permanent improvements can be covered under machinery/equipment.

Buildings are typically valued at the time of acquisition or construction.  Broker and architect fees, permits, etc. can be covered within this category.  Building components, such as a roof, are normally recorded separately in an asset register since the value and useful lives of these components equal much less than the building itself. 

Building improvements that extend the useful life of a building will fall into the category of “building improvements” and should be capitalized.  Improvements are commonly recorded at acquisition cost.  Building improvement examples include roofing, remodeling, replacements, etc.

Get independence from pen and paper audits

If you’re still conducting pen and paper audits verifying the existence and location of individual assets and inventory items it can be both difficult and time-consuming.  As a result, audits are often regarded as tedious tasks and are carried out as infrequently as possible.  Without regular audits, register information can quickly become redundant and assets are not only under-maintained but also under-utilized. 

Asset maintenance and tracking software can help grant you independence from tedious pen and paper audits.  Bar code tracking allows each asset or inventory item to be cataloged individually.  Having eliminated the necessity for manual description checks, the use of bar codes allows auditors to access all the information required to perform a full and comprehensive audit in just a fraction of the usual time.  As an added benefit, the use of an automated system significantly decreases the probability of human error that is inherent in the auditing process.  Having accurate inventory records provides organizations with several benefits.  Most importantly though, business officials will become more confident in the asset data and can then rely on it to make key business decisions relating to the allocation of costs and resources across the organization.

Elements of Internal Control over fixed assets

Fixed Assets are sometimes referred to as Property, Plant and Equipment (PP&E) and the terms are used interchangeably.  In many companies the following elements of Internal Control over PP&E are considered and performed according to standard guidelines:

• Approval process for Capital Expenditures (Capex)
• Determination whether planned expenditure is capitalized or expensed
• Purchasing and Accounts Payable systems are correctly applied
• If capitalized, appropriate useful life and salvage value determined
• Correct depreciation expense is calculated and applied each period
• Property tax reports filed with tax jurisdictions
• Insurance coverage relates directly to asset exposure

However, there is one critical element of Internal Control that often is missed.  This involves periodically checking that the information shown in the property record system corresponds to the actual assets reported to be there.  To put this into perspective, a company may have a very good system of invoicing and accounts receivable, but it is still necessary to confirm that outstanding balances as part of the required annual audit.  One well known aspect of this is the verification of ageing debts in the A/R ledger to confirm their collectability.

Similarly, with inventory (raw material, work in process and finished goods), for the past 70 years companies have been required to perform a physical count and valuation at least once a year.  Further, auditors are required to monitor closely the inventory taking and pricing.  In the case of perpetual inventory systems, periodic sample testing is required, again with external auditor input. After the reconciliation of receivables and inventory, adjusting entries must be made to bring the accounting records into agreement with the underlying assets. It is equally necessary that the same kind of reconciliation of reported balances to actual physical assets is in place because for many companies, PP&E may represent 35% or more of total assets. Without a periodic reconciliation, the property record system will lose accuracy as items are scrapped or enhanced. If a reconciliation is performed and adjusting entries made, however, the resultant asset category totals have been verified. Management can then sign with confidence the Section 404 certification – its assertion that there is a system of Internal Controls and that the system is working properly.

RFID in School Administration

Since the adaptation of more stringent reporting requirements such as GASB 34, one of the more time-consuming tasks for school and district administrators has been maintaining accurate asset registers. Unfortunately, studies have shown that as much as 50 percent of an organization’s listed assets are no longer in use, are missing or are so poorly identified that they may not be locatable. These issues can lead to difficulties in planning asset maintenance, replacement and even with insurance coverage in the event of a fire or other disaster.  

Two important steps that districts can take to remedy these problems are:

1)    Institute a dedicated fixed asset management program

2)    Incorporate asset tracking technology, like RFID

The first step provides greater overall fiscal management and responsibility, with streamlined and consolidated control features, while the second ensures reliable asset location monitoring. The return on investment resulting from decreased staff time, reduced asset loss and lessened insurance premiums generally covers the implementation costs for both technologies within a year or two. The benefits also extend to enhanced fiscal reporting, which allows for greater accountability up the administrative chain of command.