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.

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.

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.

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.

• 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.

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.

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.

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.

• 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.

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.

RFID has been making waves for over a decade as corporate organizations sought to leverage unprecedented ease and accuracy of goods tracking to drive down costs and improve product availability.  The technology is still advancing in this arena, especially with the continued decrease in pricing for the individual RFID tags.  The technology has been strongly embraced by other entities, as well, including libraries, museums, and higher education institutions to track assets ranging from computers to vehicles and infrastructure.

With increased focus on organizations across both public and private sectors to improve asset accountability and traceability, the time is optimal for school districts and other public entities to also consider the benefits of RFID.  Through the implementation of unified fixed asset management programs and accompanying asset tracking technologies, such as RFID, school districts and other public entities have found a proven method of managing their assets, while also reducing staff requirements, increasing accountability to school boards and government oversight, and saving money on insurance premiums by not insuring ghost assets.

1. Asset acquisitions – to capitalize new assets in the register
2. Asset transfers – to move assets into, out of, and within the register
3. Asset relifes – to restate an asset’s expected useful life
4. Asset revaluations – to restate an asset’s book values
5. Asset disposals – to remove the value of an asset from the register before the end of its stated useful life

Having these events available on your fixed asset register will enable your organization to effectively deal with expected and unexpected changes to your fixed assets.  Whether an asset has to be removed from the register because it is sold, scrapped or stolen or the asset is simply transferred to a different area of responsibility, the five events above will help maintain the accuracy of your asset register.

• A multiple user system is required, but unavailable with spreadsheets
• Audit history is inaccessible
• Data is insecure and open to unknown, inadvertent corruption
• Data is too complex to configure with such large quantities
• Your asset base has grown and is now too large to manage
• No external/technical support
• You spend valuable time verifying the accuracy of your system

Do these problems sound familiar?  If so, its time to consider selecting a fixed asset management solution that better fits your needs.  Fixed asset software provides accurate tracking, depreciation and audit history of your assets among other things, helping avoid the many pitfalls of spreadsheets.

1. Date placed in service – If a new asset is placed in service immediately upon acquisition, its date placed in service is simple to establish.  If an asset is added to a register that was already placed in service but originally excluded from the fixed asset register, determining the date placed in service will be more of a challenge, but important for your calculations.

2. Acquisition value – This is referring to an asset’s value at the end of its useful life. 

3. Salvage value – Fixed assets are typically recorded at historical cost.  If an asset, such as a building, is of significant value, a more formal appraisal may be required to determine its value.  For assets that have been excluded from the fixed asset register, you may first want to try researching the item’s historical cost.  If that information is unavailable, it is permissible to estimate the amount based on a similar asset’s value.

4. Estimated useful life – The estimated useful life of an asset refers to the number of years that an asset can be used for its original intent. 

5. Depreciation method – Using the straight-line method to calculate depreciation of fixed assets would consist of the following: Depreciation = Acquisition Value – Salvage Value/Estimated Useful Life.  The asset is written off evenly over the course of its useful life, resulting in equal depreciation from year to year.

For help with accurate depreciation calculations, fixed asset software can efficiently manage depreciation budgeting and forecasting and offer tracking functionality.

A specialized IT asset management/inventory tracking system will allow school officials to scan each item’s barcode and store detailed information such as:

• Location (school, floor, room number)
• Department
• Description
• Condition
• Purchase cost
• Purchase date
• Serial number
• Barcode number
• Make/model/manufacturer
• Estimated useful life

RAMI’s Track4000 and Inventory4000 modules are used by school districts nationwide to effortlessly address the issue of IT asset management.  Within the system, school officials can also maintain accurate audit trails by recording transfer and disposal events.  Having accurate inventory records provides school districts with several obvious 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 their district.

GASB 34 requires that fixed asset records be maintained by school districts in a complete, accurate and detailed manner and that districts report on all capital assets and depreciation (including infrastructure assets) and any items categorized as “historical treasures.”

Fixed asset accounting software can assist school districts in complying with all fixed asset-related GASB 34 requirements.  Real Asset Management’s Asset4000 records vital data such as acquisition dates and costs, asset lives and depreciation policies for all capital asset classifications.  It then calculates depreciation and produces detailed fixed asset reports needed to complete Statement of Activities required by GASB.  If your school district doesn’t currently have fixed asset accounting software, you may be rolling the dice with GASB compliance.

Reliable fixed asset records enable business officials to protect the district’s investments.  From providing values for insurance coverage to reporting requirements and financial statements, proper fixed asset managementis a key factor in formulating policies and strategies for acquisitions, maintenance, replacement and retirement of a district’s fixed asset base.  Furthermore, proper fixed asset management procedures enable school districts to effortlessly address GASB 34 reporting requirements.

Check back later this week and next as we address more aspects of fixed asset accounting for school districts.

Some of the key benefits of BAM software include:

• Never forget a critical action date again
• Reduce redundant manual tasks
• Reduce wasted time and money correcting avoidable errors
• Reduce labor by automating common tasks

Real Asset Management recently unveiled a new product, Workflow4000, that provides enhanced BAM support to its Series4000 range of fixed asset management solutions.  Workflow4000 immediately issues email and report alerts or takes action when user-specified data relationship situations occur, such as when an asset’s insurance renewal is due, when a warranty is about to expire, or when a key asset has been flagged for disposal. Workflow4000 can be used to act on any situation or condition to pre-set time-cycles, ensuring that both critical and non-critical triggers get the attention that business managers want.

Proposed new example: ABC Company’s new fixed asset and inventory tracking software provides a built-in link to its e-Procurement system, eliminating data entry time for Accountant I. The new system’s built-in report writer generates reports quickly and easily. Transfers and disposals are also completed with the click of a mouse, generating a full audit trail. Time spent on these tasks is dramatically reduced by 60 percent. Accountant I costs lowered to = $3,840 ($9,600 – 60% or $5,760)

Accountant II also realizes significant time savings since assets splits and other complex accounting events are also now completed quickly and easily. Calculating and posting depreciation and closing books can now be accomplished with a few clicks of a mouse. Senior management reports that previously required research and pivot tables are now just the push of a button away. Time spent on these tasks is dramatically reduced by 60 percent.

Accountant II costs lowered to = $5,616 ($14,040 – 60% or $8,424) With Track4000, accurate physical audits are completed in no time at all, typically in about 65 percent less time than it takes with pen and paper.

Total Audit Cost = $700 ($2,000 – 65% or $1,300)

Proposed Total Costs = $10,156 ($3,840 + $5,616 + $700)

Total Benefits: $15,484 ($25,640 – $10,156)

Furthermore, after completing its latest physical audit, ABC Company was unable to locate 10 percent of its assets; refer to the company facts above.

Cost of ghost assets = $250,000 (250 X $1,000)

Writing off the NBV associated with the ghost assets on the register, assuming a 39 percent corporate tax rate, results in a significant tax overpayment. Income tax overpayment = $48,750 (39% of $125,000)

At a five percent property tax rate, the property tax overpayment is significant as well. Property tax overpayment = $6,250 (5% of $125,000)

Lastly, at $.01 for every $1.00 of assets, there is a hefty insurance premium overpayment. Insurance premium overpayment = $1,250 ($.01 X $125,000)

Total Overpayment (Tax + Insurance) = $56,250 ($48,750 + $6,250 + $1,250)

Total Benefits + Tax and Insurance Savings when using an asset tracking system: $71,734 ($56,250 + $15,484)

Example ROI Calculation for ABC Company:

Facts:
2,500 Assets
GBV = $2,500,000 (average asset cost = $1,000)
NBV = $1,250,000

Calculation of Benefits:
Current Scenario
Accountant I spends 25 hours per month manually entering data into an Access® database, generating basic reports, and processing transfers and disposals on a monthly basis. Based on a total, yearly salary of $65,000 (includes benefits and overhead costs), divided by 2080 total working hours per year, the hourly cost works out to around $32.00.

Annual cost for Accountant I = $9,600 ($32.00 X 25 hours X 12 months)

Accountant II spends 30 hours per month performing asset splits and more complex accounting events, producing depreciation calculations, posting to the G/L, closing books and generating senior management reports on a monthly basis. Based on a total, yearly salary of $80,000 (includes benefits and overhead costs), divided by 2080 total working hours per year, the hourly cost works out to around $39.00.

Annual cost for Accountant II = $14,040 ($39.00 X 30 hours X 12 months)

ABC Company has not conducted a complete physical audit  in four years. Two members of the maintenance department and two members of the IT department performed the last physical audit. The inventory audit was completed with pencil and paper over a two-day period; total costs came to $2,000. During that two-day period, the IT helpdesk and maintenance work order support fell behind schedule.

Current Total Costs = $25,640 ($9,600 + $14,040 + $2,000)

Stay tuned: next week see the cost benefits of a fixed asset management system.

A specialist fixed asset management system will eliminate costly depreciation errors. Depreciation formulas and asset lives can be defaulted for each book based on any defined asset category. Processing depreciation this way is both quick and easy, completed with just a click of a button.

Lack of an audit trail and overall security
A specialist fixed asset management system will track and record every detail of every action ever made by any user, which is unattainable with spreadsheets. Dates, times and explanations are recorded as well as Calculating Return on Investment (ROI) for your Fixed Asset Management Software Purchase making it very simple to ensure the security and integrity of your data. A specialist system will require a valid username and password combination to enter the system and will enable department heads to define security at an individual level to ensure that confidential information can be viewed only by those that need to see it and safely hidden from those who don’t. In other words, limited access can be set by user in order to restrict read only and editing rights.

Some of the main benefits of a specialist fixed asset management software include compliancy with corporate governance regulations, accurately calculated depreciation, and a maintained audit trail to name a few.

To further demonstrate the benefits of a specialist system, consider the following item as an example:

Corporate Governance Requirements (SOX, CSOX, US Tax, GAAP, SAS 70, IFRS, etc.)

Today, companies of all sizes are subject to increased scrutiny by government agencies and regulatory boards reacting to recent business reports and investor’s requests for higher standards of accountability, transparency and overall corporate behavior. The main goal here is to improve financial management, reporting and corporate governance. With such a high degree of attention focused on your organization, why would you risk the integrity of your financial data by relying solely on spreadsheets? Accurate and effective implementation, management, monitoring and updating can easily be accomplished with a specialist fixed asset management system system in place; it’s the only real way to ensure compliance.

From a purely operational standpoint, having an accurate asset register that shows location, condition and the responsible contact can help ensure that assets are available and usable when needed. But how a business manages its assets also has multiple effects on the entity’s finances, through the very tangible costs of heightened insurance premiums, property taxes and neglected depreciation. These areas cannot be effectively addressed without a specialist fixed asset management solution.

Organizations that are using cumbersome spreadsheets to manage an ever-growing asset register constantly struggle to address a variety of issues surrounding the accountability and traceability of their asset base.

Up next: Benefits of a fixed asset system

For those cash rich organizations looking to exploit the growing numbers of distressed businesses, the opportunities in the current market are significant. But any business looking to sell needs to ensure its asset information is up to date and trusted. Without accurate records about asset life, usage and refurbishment history, potential acquirers will struggle to put a correct figure on asset value.

And without access to a consolidated asset register that also records asset maintenance, it will be impossible to determine an asset’s longer term value to the business. The result will undoubtedly be a significant reduction in any potential offer – or a significant business risk incurred by the acquiring organization.

In contrast, an accurate asset register provides a platform for improved cost control and the ability to demonstrate sound business practice. It will also offer additional value to a potential acquirer by providing a platform for rapid post merger/acquisition consolidation – a key issue in achieving business success and reducing costs.

Non-organic business expansion may look strongly appealing in 2010 but with cost control under focus and a sustained reluctance to embark upon unscheduled capital expenditure, should any merger and acquisition activity really take place without a trusted, accurate audit trail of company assets?

In this economy it is also essential for every business to demonstrate strong cost control to improve corporate value, and good asset management is key to that process. As the recession has taken a strong hold and capital expenditure capped there has been a growing move to recycle assets and maximize the asset lifespan, from office equipment and IT kit to major pieces of manufacturing equipment.

Indeed, as organizations have relocated manufacturing activity from the US to Eastern Europe and Asia, growing numbers are now actively considering relocating core equipment rather than purchasing new. Those companies that have put in place a strong asset register and management processes are now in a position to create an internal market for buying and selling assets within the group to improve cost control and maximize asset value.

While that may not affect their value to a finance team concerned primarily with depreciation, should a company opt to divest a number of locations, inaccurately recorded assets could severely compromise the value of the agreement to either party.

With such a lack of robust information, how can any acquiring organization undertake due diligence on behalf of shareholders? And for those organizations looking to maximize company value prior to a sale, poor asset information can only result in significant undervaluation.

However, 40% of those surveyed also believe that a quarter to half of these deals will be distressed deals. For any organization facing up to the need to sell or go out of business, it is therefore essential to maximize business value in any way possible.

And an important component of this valuation, especially in the manufacturing sector, is asset value. Yet while many US organizations appear highly confident of the value of their corporate assets, claiming 95% accuracy of the asset register, in reality around 50% of assets on the books are actually no longer in use. As a result, a proportion of items on the asset register are still being depreciated after disposal, reducing profitability without just cause.

Merger and acquisition activity may be on the up but for many organizations now looking for a buyer, maximizing value is a major challenge. And while cash rich companies are keen to expand where possible, no organization wants to acquire a business that is likely to need unexpected investment in the current climate.

Yet with the majority of organizations still reliant upon false fixed asset data held in spreadsheets, achieving an accurate picture of the balance sheet and true profitability is proving a major challenge and a potential deal breaker.

Failure to put in place an accurate, up to date asset register could result in the company assets being significantly undervalued. It could also undermine the organization’s ability to demonstrate strong cost control through asset reallocation and, with no asset maintenance history, a potential purchaser has no insight into asset health and the potential investment required, which could further reduce the price offered.

In the next few blog posts we’ll outline the importance of an accurate audit trail of fixed asset information to maximizing both the value of a business for sale and the post merger consolidated organization.

Total control over your fixed asset management data simply cannot be achieved through the use of a spreadsheet. Whether a user input error or unintentional miscalculation, inaccuracies within your fixed asset register are inevitable. With that said, how can you be 100% confident in the integrity of this vital data? A specialist system will have strict security features in place to effortlessly address the issue.

Furthermore, entering and maintaining asset data becomes an endless task when working within the parameters of a spreadsheet. A specialist system will automate the entire fixed asset management process. From data import capabilities to automated reports and forecasts, a significant amount of valuable time can be shaved off the entire process.

RECOMMENDATIONS AND ADDED BENEFITS
While the spreadsheet is an integral part of business operations, it cannot perform all the tasks businesses face. And while the importance of tracking and monitoring fixed assets is often overlooked, the return on investment that can be attained by maintaining a current inventory and properly accounting for fixed assets in a “best of breed” solution can be substantial. By implementing a dedicated asset inventory and asset accounting solution, companies can achieve many benefits.

As a part of a broader fiscal strategy, the move to more accurate and effective asset management can be invigorating to a business, providing essential short-term cash flow benefits as well as positive longer term advantages with regards to workflow processes, security and disaster management preparation.

One of the most tangible ROI realizations for businesses that implement such a system can be a dramatic lowering of insurance premiums and more successful insurance claims, as well as decreased property taxes. These result from having a more accurate knowledge of assets that may no longer be on the books.

Automated fixed asset management systems are integral to responsible financial management, providing more accurate financial statements, streamlining workflow processes and helping businesses take full advantage of available tax benefits.

Fixed asset management is critical to the fiscal health of all operations. Frequent and effective fixed asset management processes could potentially save your organization hundreds of thousands of dollars a year. Why risk this by using spreadsheets? Here we’ll look at two more aspects of fixed asset management that spreadsheets fail to address.

Access to multi-currency, multi-lingual or multi-book capabilities
If your organization operates in many different countries then multi-currency, multi-lingual and multi-book capabilities are most likely imperative in your fixed asset management procedures. A specialist fixed asset management system will have multi-book capabilities to allow core asset information to be shared across any number of books with different sets of figures, enabling compliance with both local and group depreciation policies. Vital information (such as analysis codes, descriptions, purchase costs, acquisition and capitalization dates, etc.) can remain constant across all books, while details like asset life, depreciation rules and residual values can be book dependent. As far as multi-currency capabilities go, a specialist system will allow each accounting book to be independently configured to meet international accounting standards. Within the asset register, each office location should be able to record and report on its own assets in local currency. User-defined exchange rates will allow the parent company to easily view and report on the same values in USD.

Unable to meet historical reporting and forecasting requirements
Composing reports and forecasts can be a complicated and daunting process, especially if attempted in a spreadsheet. The data produced is far too important to chance inaccuracies. A specialist fixed asset management system will incorporate standard and customized reporting and forecasting templates to ensure an intuitive method of extracting and analyzing asset data.

Lack of an audit trail and overall security
A specialist fixed asset management system will track and record every detail of every action made by any user, which is unattainable with spreadsheets. Dates, times and explanations are recorded as well, making it very simple to ensure the security and integrity of your fixed asset data. A specialist system will require a valid username and password combination to enter the system and will enable department heads to define security at an individual level to ensure that confidential information can be viewed only by those that need to see it and safely hidden from those who don’t. In other words, limited access can be set by user, in order to restrict both read only and editing rights.

Inability to link ‘parent/child’ assets or conduct asset splits, batch disposals, etc.
The ability to link ‘parent/child’ assets is essential to establish hierarchical relationships and dependencies. A specialist fixed asset system will display such links pictorially in collapsible branches. A typical example of this might be the association between a PC and software license, where the PC is the ‘parent’ and the license assumes the role of the ‘child’.

The option to transfer or dispose of the ‘child’ asset will subsequently follow the transfer or disposal of the ‘parent’ asset, keeping the relationship intact. Spreadsheets are unable to accommodate ‘parent/child’ asset relationships in such a way, making it difficult to accurately track and manage these important hierarchical dependencies. Their ability to conduct automated asset splits and batch disposals will cause similar problems.

Establishing the highest standards of depreciation accuracy and best practices in fixed asset management will pay off in savings. There are many reasons why spreadsheets are not the solution for all business needs. With so many potential causes of and opportunities for errors, companies must look to software solutions that are designed for specific, specialized tasks to eliminate them and ensure sound financial tracking and reporting.

Let’s identify the top 7 issues which businesses using spreadsheets to manage their fixed asset data are failing to address.

Corporate governance requirements
Today, companies of all sizes are subject to increased scrutiny by government agencies and regulatory boards reacting to recent business reports and investors’ requests for higher standards of accountability, transparency and overall corporate behavior. The main goal here is to improve financial management, reporting and corporate governance. With such a high degree of attention focused on your organization, why would you risk the integrity of your financial data by relying solely on spreadsheets? Accurate and effective implementation, management, monitoring and updating can easily be accomplished with a specialist fixed asset management system in place; it’s the only real way to ensure compliance.

Inaccurate depreciation calculations
Nearly all spreadsheets contain errors, which is to be expected with information entered without good controls. Whether it be the background asset data or the formula itself, there’s little doubt that the depreciation calculations are likely to be inaccurate. Several people within one accounting department will often access, manage and edit the same spreadsheet, making errors even more likely. A specialist fixed asset management system will eliminate costly depreciation errors. Depreciation formulas and asset lives can be defaulted for each book, based on any defined asset category. Processing depreciation this way is both quick and easy, completed with just a click of a button.

Manual fixed asset management methods can be labor intensive and add considerably to the total cost of asset ownership. A good fixed asset management system that also incorporates barcode technologies will speed up your physical audits, making them both fast and efficient leaving your finance team with more time to focus on other tasks at hand. It will also establish asset values and produce accurate depreciation and amortization calculations in accordance with relevant tax and accounting rules.

But why should an organization trade in its spreadsheets for a dedicated fixed asset management system?

The accurate management of fixed assets can lead to significant tax savings in depreciation deductions, while poor fixed asset management can negatively affect the accuracy of financial reports, causing re-reporting and ultimately impacting the bottom line.

Fixed asset management in relation to internal control is critical to the fiscal health of all operations. Frequent and effective fixed asset management processes could potentially save your organization hundreds of thousands of dollars a year.

The PCAOB, and independent auditors, have already started the process of reviewing internal controls on fixed assets. The best property record system in the world does not represent true internal control. The only way to assure that the property record is correct, and that the record truly reflects actual conditions, is to take a physical inventory of PP&E and then reconcile the results.

If you are looking to justify the implementation of a fixed asset management system, take some time to detail the deficiencies in your current processes. Then set up a working schedule, a timeline, with specific tasks assigned to individuals. This will involve all the participants discussed above, plus IT management to assure that all new software is fully compatible with existing company systems.

The best practices we recommend can be handled as follows:

Determine the current condition of you property record system, including both the capabilities of existing software and the underlying accuracy of the information contained in today’s system.

Make sure your existing software has full flexibility and capability to handle the wide variety of uses to which a good property record system can be put.

Review capitalization policy to avoid putting small dollar items into the system.

Start entering new acquisitions into the updated property record system using a barcode tag on each asset.

To the extent resources are available start to clean up the existing file representing past acquisitions by identifying ghost assets, and reconciling what we refer to as zombie assets.

Review insurable values, which can be input into a new system.

Review property tax assessments against current financial information.

Optimize tax depreciation by taking maximum advantage of Federal Tax requirements.

To ensure accurate internal control, a detailed assessment of an organization’s current policies and procedures should be made, including review of current software adequacy.

Sample reconciliation should be reviewed to determine the nature of the problem. Just how accurate or inaccurate is the present fixed asset management system? A sample physical inventory will indicate the degree of accuracy.

Set minimum capitalization level as a policy decision. This should be set high enough so that inexpensive items are not set up in the system, thus reducing costs.

Start a new system with new acquisitions from today forward. Going back and fixing everything may appear unrealistic, but at a minimum an organization should start a new control system and use it from here forward.

Get current records in line with reality. This involves making sure current accounting records reflect actual assets on hand. Three approaches are possible:

1. Take existing printout and try and find the items.

2. Take a physical inventory and identify corresponding items on existing property ledger.

3. Use a professionally developed and supported asset tracking tool such as Track4000.

Review Property Tax issues. Eliminate ghost assets from records to reduce taxes. It is not always necessary to have the same value for property taxes as is used elsewhere in the system. For example, so-called ‘soft construction costs’ probably should be removed from asset values reported to local assessors.

Review Insurable values. Assets should be neither over-insured nor under-insured. A good property record system can be updated to current replacement cost using indexes.

The owner of an asset is the individual or department that has physical custody of the asset and should have overall responsibility for the asset. In many organizations, however, this sense of responsibility is missing. Thus there appears to be no incentive for asset sales, retirements or transfers to be recorded in a timely basis. What the property accountant does not know simply cannot be recorded.

Therefore it is the responsibility of the asset owner to communicate properly. The Internal Auditors should treat property records, and the internal control of fixed assets, as a high priority. Most internal audit departments have very limited resources, and the audit committee and top management will usually indicate areas of concern. With other aspects of internal control pretty much taken care of, one of the largest areas still needing scrutiny deals with PP&E.

Finally, the External Auditor allocations of resources are governed by a number of factors, including perceptions of SEC and PCAOB areas of interest. It would not be surprising to see these regulatory organizations start to scrutinize internal controls on fixed assets; in turn this will force independent auditors to increase their focus on this specific area in future annual audits.

Fixed asset management is often a group effort in an organization, as many different positions share responsibilities. From the CFO to the Internal Auditor, each position plays a role in maintaining and reporting on the asset register and assuring the record system is accurate.

The CFO and Controller have primary overall responsibility for internal control and fixed asset acquisition, management and disposition. Usually, one or more individuals are given direct responsibility for maintaining the software system and input from others in the organization is imperative. This can sometime cause a breach in communication, as in many organizations, the property accountant has difficulty obtaining cooperation from higher level managers in other departments.

The Property Accountant is at the heart of every successful fixed asset system and the related internal controls. This is an important job. The individual(s) have far-reaching responsibilities in virtually every aspect of the organization’s operations, including tax, insurance, IT, strategic planning and budgeting.

The Tax Manager has perhaps the single biggest role in utilizing the property record to optimize the organization’s cash flow. Federal and state taxes on income are directly affected by depreciation and amortization charges. Property tax assessments are usually based on information supplied by the tax manger from the property record. The choice of lives, depreciation methods and individual asset basis for tax purposes can significantly affect cash and reported income. We do not recommend, however, that tax departments have the primary responsibility for the property record system.

Up next:  More roles and responsibilities.

Assign responsibility for maintaining both the assets and the system. In many organizations, responsibility for assets and internal control over those assets is dispersed. Specific responsibilities, with adequate controls, should be a priority in every company.

Procedure to track changes and retirements. Perhaps the main reason that fixed asset systems fail to reflect actual physical assets is that changes (including transfers) and retirements of assets (including trade-ins) are never reported and therefore never captured.

Physical inventory taken periodically and books adjusted. This is going to be the single hardest thing to do, because it is labor-intensive, and may result in accounting write-downs. By the same token, without such periodic inventories, which are aided by barcodes, it is impossible to certify for SOX compliance that fixed asset controls are working.

Fully depreciated assets are a fact of life. Many companies have assigned accounting lives that are less than the real economic utility of the assets. Consequently, many assets that have zero book value (fully depreciated) are still in use. Memo entries into a fixed asset system should be prepared both for internal control purposes and for proper insurance values.

Disposals are recorded promptly and accurately. The one true generalization about fixed assets is that they seldom are ‘fixed’. Disposals should be recorded, but if they have not, the only way to determine what should be taken off the record is to take the physical inventory mentioned above.

A comprehensive system of internal control of fixed assets encompasses a number of steps. Here are the critical stages: Capital expenditure approval controls are assumed to be in place. In most organizations, amounts above a structured threshold must be approved at senior management or executive level officials in an organization.

Set up property record (software) and barcode. Today’s fixed asset software systems have substantial capacity and features. Conversion to a professionally developed and supported system, such as Asset4000, is quick and efficient. Barcode identification is recommended to be used on most assets controlled by the fixed asset software system.

Determine life and depreciation method. While many companies use the same lives for corporate book and tax book, there is no requirement that this be done. Many companies would gain from ‘uncoupling’ the two systems. Similarly, different depreciation methods can be used for corporate book and not tax.

Typically, when performing an initial inventory it is common to find that up to 15% of assets on the books may not be there. These assets are sometimes referred to as ghost assets. Additionally, it is possible to offset discrepancies, assets present but not on the books. These assets are referred to as zombie assets. The existence of ghost and zombie assets is the first evidence of poor internal control.

Based on recent events in the global marketplace, it appears that in the future, internal control of fixed assets is going to receive a lot of attention from auditors, the SEC and the PCAOB. With tighter restrictions coming down the pipeline, stringent control over fixed assets and their physical locations will remain a necessary business practice.

However, many organizations are still relying on spreadsheets or other antiquated systems that are time-consuming and require the active involvement of management personnel. Acquiring and utilizing a good fixed asset management system that incorporates barcode technologies will speed up physical audits, making them both fast and efficient.

Up next:  Life-cycle of best practices

Fixed Assets are sometimes referred to as Property, Plant and Equipment (PP&E) and the terms are used interchangeably. There are three crucial aspects of internal control in relation to fixed assets that top-level management should focus on. The next few blog posts will discuss the three key elements to accurate fixed asset management and offer solutions and recommendations to maintaining accuracy on the asset register.

The first imperative of internal control is Sarbanes-Oxley, which requires all publicly traded firms and firms that may go public or be acquired by a public company to have a system of internal controls. Emphasis to date has been on revenue recognition and valuation of financial instruments. It appears that accounting firms, the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) are starting to focus on evaluating company controls over PP&E.

Second, a good system of controls over fixed assets, real estate, IT assets and machinery and equipment will help companies reduce both property taxes, and avoid unnecessary insurance expense.

Finally, a good property record, with periodic inventories of assets, assists companies in optimizing the acquisition of new assets by being able to transfer unused or infrequently used assets to areas of greater need. Maintenance records associated with the property record can aid in determining when it is cost effective to replace an asset.

The PCAOB, and independent auditors, have already started the process of reviewing Internal Controls on Fixed Assets. The best property record system in the world does not represent true Internal Control. The only way to assure that the property record is correct, and that the record truly reflects actual conditions, is to take a physical inventory of PP&E and then reconcile the results.

It is highly likely that there will be some significant discrepancies, due to a multitude of causes. Correcting these discrepancies, in turn, may involve material accounting entries. Whether it is possible to offset discrepancies, assets present but not on the books (zombie assets), with assets on the books that cannot be found (ghost assets) is a matter for each company and its auditors.

In many cases these can be considered corrections of prior accounting errors. In other cases, a charge to expense may be required. Once such an inventory is taken and reconciled, then management can sign the Section 404 assertions with confidence. Right now, it is safe to say, many such 404 assertions are made but without underlying support, at least in the case of fixed asset management.

The only way of assuring that the property record system is correct and accurate is to reconcile the records with the actual fixed assets physically present. In short, one has to take and reconcile a fixed asset inventory, just as is done annually with finished goods inventory.

Using spreadsheets and antiquated systems is time-consuming and requires the active involvement of management personnel. A good fixed asset management system that utilizes barcode technologies will speed up physical audits, making them both fast and efficient.

The procedure is a simple one that involves downloading information from the asset register onto an inexpensive, handheld device. The operator then scans the barcode labels for all assets, automatically recording where they are located and, by exception, noting assets that are not found. The data is then uploaded into the fixed asset system and management is presented with a change report for final authorization before the data is processed against the asset register.

There is one unique aspect of property accounting that may be the cause of inattention to verifying or validating the records. The very nature of depreciation expense, calculated periodically for financial statements, is that sooner or later the net book value of every asset will be written down to salvage value or to zero.

Assume for a minute that a particular fixed asset is missing, perhaps it was traded in for a piece of new equipment and that information was never entered into the property record. As soon as this is discovered, the company should write the asset down to zero and take a charge to earnings, to correct the inaccuracy of the records.

But what if no entry is made? Then each year a depreciation charge will be taken to expense for the missing asset. After a certain number of years, the book value will automatically have been written down to zero. While this has little impact for a single, low value asset, it can seriously affect profit statements when a larger number of more costly items are involved. In the past, management as well as some auditors, were guilty of looking at one year’s expense total and comparing it to the previous year’s. Under the scenario where an asset should be written off, but isn’t, the reported operating expenses year to year will be comparable (assuming the company is using straight-line depreciation).

This thought process, analyzing the Internal Control of Fixed Assets by comparing one year’s depreciation expense to the next, provides a false sense of assurance. As long as the PCAOB is not reviewing audit firm work on PP&E and audit firms are not reviewing PP&E reconciliations of their clients, then the simplistic analysis that the two years depreciation totals are the same obviates challenge.

Independent audit firms have driven the SOX implementation in most organizations. For many companies, compliance with SOX began with their auditors or consultants initially suggesting what had to be done. Outside consultants were probably brought in to help establish and test the controls. Then the company’s independent auditors tested the controls that were put in place so the audit firm could affirm management’s assertions as stated in Section 404. The missing link was that the audit firm overlooked the physical inventory and reconciliation function for fixed assets. In effect, they told management that as long as they had a functioning fixed asset software system, had controls on the acquisition and capitalization of assets and properly calculated depreciation, they were OK.

Further, the Public Company Accounting Oversight Board (PCAOB), while stating that controls over PP&E were necessary, actually did not put emphasis on fixed assets in their reviews of auditor work papers. However, it has been reported that the PCAOB is planning to start a crackdown on what is effectively malpractice.

In the past, where the PCAOB did not follow this up, then the independent auditors, with limited time budgets, did not check that the assets shown on their clients’ property records were actually there. This lack of emphasis on the physical reconciliation of company property records is about to change as the PCAOB puts PP&E higher on its priority list. The PCAOB inspectors will find that some independent audit firms have done little work on asset reconciliation and, if firms are written up for this ‘deficiency’, they will very quickly start scrutinizing their clients’ practices in physical reconciliation of PP&E. When gaps are identified they will have to be plugged, inevitably delaying publication of the final accounts and adding considerable internal and external cost to the audit process.

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 fixed asset management.

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.

Very few companies systematically reconcile the assets shown on their property records with actual physical assets being utilized by the organization. Progressive and responsible companies undertake regular physical audits, reconciling what is there with what is supposed to be there (per the property record system).

It is a high risk strategy for company management to sign a Section 404 certification if such an inventory of Fixed Assets has not been taken. Yet many companies are implying each year their Internal Control systems are working without such checks. How is this possible?

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:

Fixed Assets

-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 the 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.

Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of external financial statements in accordance with generally accepted accounting principles. Internal controls over financial reporting, no matter how well designed, have inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on the Company’s processes and assessment, as described above, management has concluded that, as of ________ , the Company’s internal control over financial reporting was effective. The effectiveness of the Company’s internal control over financial reporting as of __________ has been audited by an independent registered public accounting firm, as stated in their report, which appears herein.

This SOX mandate incorporates all financial aspects of a company’s business, including revenue recognition, valuation of securities, provision of adequate reserves, and so on. Many companies have spent literally millions of dollars to be in compliance with SOX. Further, the annual testing of these Internal Controls is a major responsibility of top management, which must personally sign a compliance statement with serious potential consequences if the report is in error.

There is, however, for many businesses one operating area that may not be in ‘Control’, at least as far as the word is defined in SOX. By definition, the directive requires that control totals (the property record detail and totals) accurately reflect the underlying fixed assets. Many companies have significant discrepancies between what is shown in their property record system and actual assets physically present. In the next series of blog posts, we’ll discuss Internal Control required by SOX with specific reference to Fixed Asset Management.

Why Small Biz Isn’t Ready For IFRS
IFRS conversion is a large task and some small companies may not be able to adjust.

IFRS Returns to the Front Burner
Are the problems that opponents of IFRS point out being resolved?

IFRS: Jekyll or Hyde?
Benefits of IFRS will differ from company to company while creating a level playing field for global organizations.

Balance Sheet Blues
How will the changes impact lessee accounting?

Want to learn more about IFRS in relation to fixed assets? Request RAMI’s IFRS white paper here.

It is important for organizations to understand the deficiencies in spreadsheets and implement solutions that are intended specifically for fixed asset management.   Those businesses that recognize the need for a tailored asset management solution rather than a massive spreadsheet will not only enable maximum asset utilization and achieve a decrease in administrative cost but will be in a very strong position as the economy starts to stabilize.

In times of economic uncertainty, a degree of caution and operational control are essential. Businesses that take care of the pennies on the asset register will soon start to see the dollars appearing on the balance sheet.

With a good asset register in place, organizations can employ excellent control over the management of assets and also streamline processes to reduce the administrative overhead – hence saving costs. Rather than relying on sometimes complex spreadsheets  to manage new depreciation calculations, and changes to the treatment of leased assets and impairments, organizations can leverage an automated solution to dramatically reduce the month and year-end processes.

This not only drives down administrative time but also reduces the reliance upon one or two experts responsible for the creation of highly complex spreadsheets that are impenetrable to anyone else in the finance team. By leveraging simplicity and automation, organizations can deskill the asset management role to gain further cost benefits. This strategy also supports the growing trend towards centralizing the finance role for organizations with multiple locations or operating companies. A centralized asset register supports the move to a shared service center across the entire organization, delivering significant financial savings.

In addition, automated generation of reporting combined with a full audit trail significantly reduces the time taken to undertake the year end audit and confirm the asset value – resulting in a reduction in auditor fees.

What happened to the fixed assets that were replaced by the shiny, new equipment? Are they being used across the business – or simply left unused in a cupboard or warehouse? With no budget forthcoming for new purchases, now is the time to get an accurate handle on corporate assets to ensure maximum utilization and value.

The difficulty for most organizations is that despite going through the process of moving to IFRS and adapting to the new requirements for asset accounting and revaluations, the majority of organizations are still using spreadsheets to manage the asset register.

The process can be cumbersome, prone to errors and provides the finance team with little insight into an asset’s location or its current operational role within the business. Those organizations that have moved to component accounting as part of the shift to IFRS may have achieved a greater insight into the overall asset register but still have no proactive way of imposing control over this base. The result is a valuable corporate investment that is only visible on the balance sheet.

Yet organizations that can impose control and rigor over the asset register will be in a far better position to maximize the existing, deceptively valuable, asset base. They will have a complete picture of asset location and current use; they will be able to keep track of assets – a key issue with the growth in portable IT equipment. And they will be able to ensure that new employees are not automatically purchasing brand new equipment but that existing, serviceable assets are reused where appropriate.

Many organizations have made the transition to IFRS, with its associated implications for asset valuation, but have yet to fully recognize the administrative overhead and inaccuracy created by reliance upon spreadsheets.

The adoption of a fixed asset register will not only streamline year-end audits and reduce reliance on specific, skilled personnel but will also provide the detailed insight into corporate assets required to attain maximum asset utilization across the business.

Organizations across the country are imposing far tighter financial controls – and capital expenditure is being reduced to the bare minimum.  Coming so close on the heels of the significant expenditure and resource required to manage the transition from US GAAP to IFRS, it is tempting for the finance department to maintain increasing control.

However, over the past decade of prosperity, organizations have invested heavily in new assets and equipment.  Manufacturing lines have been replaced, state of the art IT equipment purchased and property portfolios extended.  Yet very few organizations have any real idea of where much of this asset base resides, whether it is being effectively utilized or whether it has been disposed of, despite still being depreciated on the balance sheet.

Up next: Spreadsheet Debacles

A recent article on CFO.com, IFRS Returns to the Front Burner, shows once again the difference of opinions among finance officials on the true impact that IFRS conversion will have on organizations.

CFO.com quotes C. Bradford Richmond of Darden Restaurants as writing:  “[T]he large majority of U.S. public companies, like Darden, serve primarily domestic customer bases and are adequately capitalized without tapping overseas capital markets.  Rather than mandating IFRS for all companies, we believe it would be more appropriate to allow large multinational organizations to adopt IFRS on a voluntary basis.”

Conversely, Martyn Webster of XenoPort Inc. writes:  “If the U.S. remains outside of the IFRS framework, then we will somewhat compromise our ability to participate in, and influence, important matters related to the overall operations of global capital markets.”

These quotes taken from the above mentioned CFO.com article are examples of the varying degree of opinions that IFRS has sparked.  Although we may never come to a strict agreement of the benefits or setbacks of IFRS adoption, one thing is for certain, the debate over whether U.S. companies should be forced to use international accountaing standards continues.

Up next: How IFRS adoption and its associated implications for asset valuations may effect your organization

Legacy System:  Is it high risk?

• Capability, customization, and technical support are limited.
• Slow and clumsy to operate/process information.
• Poor reporting facility/difficult to extract accurate data.
• Auditors insist that a more reliable system is required.
• Unable to run on company specific platforms or servers.
• Integration with other e-business solutions is required.
• Vendor is no longer in business or no longer provides support for old systems.

General ledger or ERP – Need something more robust?

• Does not meet group requirements.
• New workload requires changes to current e-business solutions.
• There is no centralized system.
• You must reconcile individual systems throughout your group.
• Lacks a cost of effective fixed asset solution.
• Built-in, basic asset register lacks the necessary functionality.

Summary

With a good asset register in place, organizations can not only impose excellent control over the management of assets but also streamline processes to reduce the administrative overhead.  The fixed asset register is key to business value in many ways.  Disaster recovery strategies, business continuity plans, insurance claims and due diligence during a merger or acquisition all begin with the information recorded in the asset register.

Those businesses that recognize the need for a tailored asset management solution rather than a massive spreadsheet will enable maximum utilization and achieve a reduction in administrative cost.

There are multiple stages involved in researching and implementing a fixed asset management system. Before an organization begins to research a fixed asset management solution, it should identify current practices.

What type of system do you currently have in place?
A. No system
B. Spreadsheets
C. Legacy system
D. General ledger or ERP

No system: Why consider a system at all?

• Your organization requires on but the project has never been properly resourced.
• Auditors have recommended that you improve the way you manage your fixed assets.
• Your organization’s fixed asset function has been brought in-house.
• You are a fast-growing organization now of sufficient size to warrant one.
• Your asset base has significantly increased.

Spreadsheets:  Have you outgrown them?

• Multiple user system is required
• Audit history is inaccessible.
• Data is insecure and open to unknown, inadvertent corruption.
• Data is too complex to configure with such large quantities.
• Your asset base has grown and is now too large to manage
• No external/technical support.
• You spend valuable time verifying the accuracy of your system.

Up next:  Legacy system and General Ledger

In the previous posts we have reviewed four reasons why having an accurate asset register that shows location, condition and the responsible contact can help ensure that assets are available and usable when needed. Other areas where organizations require a dedicated asset register also include: access to multi-currency, multi-lingual or multi-book capabilities, unable to meet historical reporting and forecasting requirements, wasted time on data entry and lack of confidence in data integrity.

Access to multi-currency, multi-lingual or multi-book capabilities
If your organization operates in many different countries then multi-currency, multi-lingual and multi-book capabilities are most likely imperative in your fixed asset management procedures. A specialist fixed asset management system will have multi-book capabilities to allow core asset information to be shared across any number of books with different sets of figures, enabling compliance with both local and group depreciation policies. Vital information (such as analysis codes, descriptions, acquisition and capitalization dates, etc.) can remain constant across all books while details like asset life, depreciation rules and residual values can be book dependent. As far as multi-currency capabilities go, a specialist system will allow each accounting book to be independently configured to meet international accounting standards. Within the asset register, each office location should be able to record and report on its own assets in local currency. User-defined exchange rates will allow the parent company to easily view and report on the same values in USD.

Unable to meet historical reporting and forecasting requirements
Composing reports and forecasts can be a complicated and daunting process, especially if attempted in a spreadsheet. The data produced is far too important to chance inaccuracies. A specialist fixed asset management system will incorporate standard and customized reporting and forecasting templates to ensure an intuitive method of extracting and analyzing asset data.

Wasted time on tedious tasks such as data entry
Entering and maintaining asset data becomes an endless task when working within the parameters of a spreadsheet. A specialist system will automate the entire fixed asset management process. From data import capabilities to automated reports and forecasts, a significant amount of valuable time can be shaved off the entire process.

Lack of confidence in data integrity
Total control over your fixed asset management data simply cannot be achieved through the use of a spreadsheet. Whether a user input error or unintentional miscalculation, inaccuracies within your fixed asset register are inevitable. With that said how can you be 100% confident in the integrity of this vital data? A specialist fixed asset management system will have security features in place to effortlessly address the issue.

Now let’s visit two more examples relating to the importance of a dedicated fixed asset register.

Lack of an audit trail and overall security
A specialist fixed asset management system will track and record every detail of every action ever made by any user, which is unattainable with spreadsheets. Dates, times and explanations are recorded as well, making it very simple to ensure the security and integrity of your fixed asset data. A specialist system will require a valid username and password combination to enter the system and will enable department heads to define security at an individual level to ensure that confidential information can be viewed only by those that need to see it and safely hidden from those who don’t. In other words, limited access can be set by user in order to restrict read only and editing rights.

Inability to link ‘parent/child’ assets or conduct asset splits, batch disposals, etc.
The ability to link ‘parent/child’ assets is key in order to establish hierarchical relationships and dependencies. A specialist fixed asset management system will display such links pictorially in collapsible branches. A typical example of this might be the association between a PC and software license, where the PC is the ‘parent’ and the license assumes the role of the ‘child’. The option to transfer or dispose of the ‘child’ asset will subsequently follow the transfer or disposal of the ‘parent’ asset, keeping the relationship in tact

For obvious reasons, spreadsheets are unable to accommodate ‘parent/child’ asset relationships in such a way, making it difficult to accurately track and manage these important hierarchical dependencies. The ability to conduct automated asset splits and batch disposals will provide similar benefits.

In our next post we’ll look at the remaining reasons why organizations should implement a dedicated fixed asset register to manage and address a variety of issues surrounding the traceability and accountability of assets.

Let’s take a look at just two of the many issues in which businesses, without a comprehensive fixed asset management system, are failing to address.

Corporate governance requirements
(SOX, CSOX, US Tax, GAAP, SAS 70, IFRS, etc.)
Today, companies of all sizes are subject to increased scrutiny by government agencies and regulatory boards reacting to recent business reports and investor’s requests for higher standards of accountability, transparency and overall corporate behavior. The main goal here is to improve financial management, reporting and corporate governance. With such a high degree of attention focused on your organization, why would you risk the integrity of your financial data by relying solely on spreadsheets? Accurate and effective implementation, management, monitoring and updating can easily be accomplished with a specialist fixed asset management system in place; it’s the only real way to ensure compliance.

Inaccurate depreciation calculations
It is a proven fact that nearly all spreadsheets contain errors, which is to be expected with information entered by hand. Whether it be the background asset data or the formula itself, there’s little doubt that depreciation calculations, when based on a spreadsheet, are likely to be inaccurate. Several people within one accounting department will often access, manage and edit the same spreadsheet, making errors even more likely. A specialist fixed asset management system will eliminate costly depreciation errors. Depreciation formulas and asset lives can be defaulted for each book based on any defined asset category. Processing depreciation this way is both quick and easy, completed with just a click of a button.

But there’s more…In the next post we’ll take a look at two more critical issues that organization’s often do not address without a dedicated fixed asset register in place.

There are many reasons to use spreadsheets, but organizations that use spreadsheets to manage an ever-growing asset register constantly struggle to address a variety of issues surrounding the accountability and traceability of their asset base.

From a purely operational standpoint, having an accurate asset register that shows location, condition and the responsible contact can help ensure that assets are available and usable when needed. But how a business manages its assets also has multiple effects on the entity’s finances, through the very tangible costs of heightened insurance premiums, property taxes and neglected depreciation. These areas cannot be effectively addressed without a specialist fixed asset management solution.

Manual fixed asset management methods can be labor intensive and add considerably to the total cost of asset ownership. A good fixed asset management system that also incorporates barcode technologies will speed up your physical audits, making them both fast and efficient, leaving your finance team with more time to focus on other tasks at hand. It will also establish asset values and produce accurate depreciation and amortization calculations in accordance with relevant tax and accounting rules.

But why does an organization need a dedicated fixed asset register? In the next few posts, we will take a look at just a few of the issues in which businesses, without a comprehensive fixed asset management system, are failing to address.

And the impact only appears when a claim is made and then challenged by the insurance assessor due to the inaccuracy of the register. In the worst case scenarios where the assets have been moved in mass from one location to another – and the move not recorded in the system – the insurance company will simply refuse to pay out. While companies can perhaps cover the cost of replacing office furniture, losing payment on a network server or two would be far from ideal.

Yet, in reality, the ease with which holes can be punched in the majority of asset registers should be a major concern not just to Financial Directors currently paying over the odds on insurance but also internal auditors. The asset register has a significant effect on company value, especially in industries such as manufacturing. By failing to ensure the asset register is up to date, internal auditors are not undertaking the required corporate due diligence.

It costs less than $60,000 to undertake a full physical audit on assets that could be worth up to $200 million. Combine the one-off event with sound processes for keeping the register up to date and an organization can reduce its insurance premiums and ensure any claims are rapidly processed. Can organizations really afford not to take asset value seriously?

The problems caused by poor asset information extend beyond the initial insurance premium. What happens if a company has to make a claim? As soon as a good insurance assessor sees a ten-year old PC on the asset register, alarm bells start to ring. With minimal likelihood of such an item still being in use, the assessor will be extremely unlikely to pay out.

More critically, the assessor will then be in a position to challenge every item on the register. Suddenly the fire/flood/theft that caused the initial claim becomes ever more serious as the challenge in confirming assets’ existence and location results in long term delays in receiving a payment. This can only cause further problems to an organization desperate to get back to business as usual.

The only way organizations can speed up the claim process is to provide a highly accurate, highly verifiable asset register. Tracking assets during a physical audit and storing the information in an integrated asset register alongside a detailed description and location information is the first step.

With this single record in place, it is a simple process to ensure any changes, such as scrapping or selling an asset or its relocation, are updated within the system. At any time, therefore, the organization has an up-to-date record of complete asset value and critically, location – key for the smooth progress of any insurance claim.

Despite admitting poor processes and a reliance on personal knowledge to determine asset location, most organizations’ awareness of the quality and accuracy of asset information is woefully inadequate. The majority believe that the asset register to be, at worst, 5% inaccurate. They are shocked when a physical audit reveals just how badly the asset register has been maintained.

On average, physical assessment reveals only 40% of assets are well described on the register and can be easily found; a further 40-50% probably exist but are so poorly described it is impossible to prove and the remaining 10-20% are well described but cannot be found, indicating they no longer exist.

This means that, on average, by basing insuring requests on the asset register, organizations are over insuring by upwards of 20% – a significant cost that any Financial Director would be keen to reclaim.

Having a dedicated asset tracking system and/or inventory management system will help with recording the whereabouts and other details for all fixed assets, stock and inventory items. Additionally, with a dedicated asset accounting and tracking system an organization can easily calculate depreciation as well as record functionality of each asset. Better control of the asset register can decrease the chances of insuring assets that no longer exist.

Insurance is a standard business overhead; it increases annually and organizations work hard to negotiate better deals where possible. The cost of insurance is, of course, based on the assets held. For asset-heavy organizations in areas such as manufacturing and distribution, insurance is a significant annual overhead.

Yet most companies openly admit the asset register, upon which the insurance premium is based, is not up to date. Information on new purchases is, of course, recorded. However, most organizations record little detail about the fixed asset.

Indeed, in instances such as an office refurbishment, it is not unusual for an entire $500,000 investment – which incorporates furniture, telephone systems as well as decorating costs – to be bundled under one ‘office refurbishment’ entry in the asset register.

Little or no effort is then made to keep track of assets as they move around the company, either with specific individuals or as a result of reorganization. Nor do many companies update the register when an asset is scrapped or sold. The result, of course, is an organization insuring an asset that is no longer in use and adds considerably to the total cost of asset ownership.

A great benefit to a centralized asset register is that an organization will then have the ability to conduct full and partial asset disposals, transfers, relifes, revaluations and splits, thereby making sure that the insurance is covering only the assets that are in use.

Accurate asset management could help organization’s reduce insurance premiums.

US companies are increasingly aware of the escalating insurance premiums, but, in reality, the majority of organizations are actually over insured. The savings potential of accurate fixed asset management is often overlooked and many companies are 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 hardly getting value for money from expensive insurance premiums. Furthermore, poor asset description typically results in claims being challenged by insurance assessors. Without detailed information, such as a serial number or barcode, and proof of location, why should an insurance company pay out?

Most organizations are aware that the asset register is inaccurate. But just how many realize the potential business cost?

Up next: What is the Business Value of Fixed Asset Management?

It is highly likely that there will be some significant discrepancies, due to a multitude of causes. Correcting these discrepancies, in turn, may involve material accounting entries. Whether it is possible to offset discrepancies, assets present but not on the books (zombie assets), with assets on the books that cannot be found (ghost assets) is a matter for each company and its auditors. In many cases these can be considered corrections of prior accounting errors. In other cases, a charge to expense may be required.

Once such an inventory is taken and reconciled, then management can sign the Section 404 assertions with confidence. Right now, it is safe to say, many such 404 assertions are made but without underlying support, at least in the case of fixed assets.

The procedure is a simple one that involves downloading information from the asset register onto an inexpensive, handheld device. The operator then scans the barcode labels for all assets, automatically recording where they are located and, by exception, noting assets that are not found. The data is then uploaded into the fixed asset system and management is presented with a change report for final authorization before the data is processed against the asset register.

In many companies the following elements of Internal Control over fixed assets are considered and performed according to standard guidelines:

• Approval process for Capital Expenditures
• 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 the 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.

A recent article on CFO.com titled “Since Sarbox, Non-audit Fees Dove from 51% to 21%,” states:

“Remember the Sarbanes-Oxley Act? In the furor over the current financial meltdown and its attendant cries for stiffer regulations, good old Sarbox has largely faded from the news. But according to a new study, one of its most prominent provisions — the one that seeks to insure auditors’ independence by forcing them to focus less on raking in fees for services unrelated to audits — seems to have succeeded smashingly well.”

In accordance with SOX, companies must evaluate their system of internal control at least once a year and a report must then be provided to shareholders. An additional requirement is for the independent auditor to report on its evaluations of those Internal Controls.

This SOX mandate incorporates all financial aspects of a company’s business, including revenue recognition, valuation of securities, provision of adequate reserves, and so on. Many companies have spent literally millions of dollars to be in compliance with SOX. Further, the annual testing of these Internal Controls is a major responsibility of top management, which must personally sign a compliance statement with serious potential consequences if the report is in error.

There is, however, for many businesses one operating area that may not be in ‘Control’, at least as far as the word is defined in SOX. By definition, the directive requires that control totals (the property record detail and totals) accurately reflect the underlying fixed assets. Many companies have significant discrepancies between what is shown in their property record system and actual assets physically present.

Up Next: Elements of Internal Control Over Fixed Assets

Critically, by creating a single source of all asset data, organizations can streamline many of the processes associated with improved accuracy and financial control. Detailed information about fixed assets can be consolidated at the finance level, if required, while the process of asset cross-referencing is also greatly improved.

Leveraging this single data source to impose good processes, asset disposal and replacement can be input into the system locally and new depreciation values automatically calculated for the finance team, ensuring a far more truthful business value. Furthermore, with good processes for recording asset disposal as well as purchase, organizations should retain high levels of asset accuracy. Critically, the information required for both insurance and DR planning is available, consistent and trusted, significantly reducing business risk and underpinning the growing business continuity investment.

The issue is even more complex in manufacturing environments where the highly complex production line is typically under continuous refurbishment. Even if finance is informed of changes, there is not enough information on the asset register to identify which items should be removed.

And, of course, most finance teams regard the issue as self-resolving: the majority of the assets no longer actually in use have already been depreciated down to zero, so there is no impact on corporate value. But this approach may actually increase business risk.

With poor, inconsistent asset information how can any company feel confident in its business continuity planning and investment – from insurance to disaster recovery? Any inconsistency in the asset register or inability to reconcile the asset value in finance with multiple inventory records will raise significant doubt for insurance companies, delaying payment at best. At worst an organization could lose any chance of insurance payment, even face charges of claiming for items that do not exist.

And while very, very few organizations opt to duplicate their entire operation in the event of a disaster, many have set up relationships with suppliers to re-supply previously purchased equipment to the hot site within a specific timescale. Yet with poor record keeping, how can any organization feel confident that the suppliers will provide the right equipment? They only know what they have sold; not which of the assets are still in use, and which have been replaced.

Failing to record actual assets in use can only result in organizations paying a premium for equipment that is simply not required in the event of a disaster.

Within finance, the primary objective is to record the fixed asset value for depreciation purposes. As a result, assets tend to be consolidated into a single figure irrespective of the number or complexity of the component parts. Indeed, it is not unusual to discover a $100,000 ‘computer equipment’ record in the asset management system, with no asset breakdown.

While this may appear adequate for depreciation purposes, it provides no opportunity for asset tracking throughout its lifetime. This same asset may well be recorded in far more detail within the IT department – typically on a spreadsheet. And, to be fair, given the drop in the cost of technology, many components – such as PCs and laptops – fall below the capital value threshold set by companies. Thus there is no requirement for finance to record each item in detail.

Up next: Maintaining information in the asset register

Additionally, the majority of companies believe the fixed asset register is, at worst, 5% inaccurate – and are therefore shocked by the results of a complete physical asset audit. In fact, on average, physical audits reveal 40% of assets are well described on the register and can be easily found; a further 40-50% probably exist but are so poorly described it is impossible to prove, and the remaining 10-20% are well described but cannot be found, indicating they no longer exist.

When taken as a proactive move to improve accuracy, the shock can be addressed with proactive strategies to create more robust processes and information sources. Discovering the true level of asset inaccuracy in the result of a refused insurance claim or unsuccessful DR invocation can create significant business problems.

So why is there such a disconnect between the real and perceived levels of fixed asset accuracy? Are assets impossible to locate due to poor recording within the asset register, because they have changed location, or actually removed from the organization?

Up next: Lack of coordination between the fixed asset register recorded within finance

Growing risk awareness and an increasingly dangerous business environment may have prompted an increasing number of companies to invest in disaster recovery (DR) as part of the business continuity program – but how safe is that investment?

Just what, indeed, is being recovered? Few organizations have real insight into the true extent of their corporate assets. In fact, on average, upwards of 50% of assets on the register cannot be located.

Not only does this challenge the validity of the DR solution but it also raises huge questions in the event of an insurance claim. Without excellent, up-to-date information about asset type, value and location, an organization may feel unsure in its business continuity investment.

Given the growing acceptance that business continuity is an essential component of 21st century business, many companies are willing to compromise that investment from day one by failing to retain control over essential fixed asset information.

Up next: Fixed asset management is a fundamental business process

This latter point is particularly important for the management of complex equipment comprised of multiple components and for environments requiring the highest level of health and safety check and audit. With this technology, each assembly line manager can be tasked with maintaining a specific list of assets. Using a hand held PDA, scans can be undertaken regularly: information is directly input into the integrated asset register and maintenance system and exception reports highlight any missing assets.

This implementation of RFID within Unilever demonstrates the technology’s potential for asset management across every industry sector. By creating a single source of asset purchase, location, maintenance and disposal information, organizations can reduce errors and attain an immediate view of maintenance status at any time. In critical environments such as the emergency services, this up-to-date information on equipment status not only saves time but also minimizes the risk of an ambulance or fire engine attending an incident without fully compliant equipment.

Furthermore, the process is simple and straightforward, requiring minimal resources, which drives down costs. And this is an essential point: Despite growing pressure to deliver asset accountability and traceability, organizations simply cannot afford to undertake repeated manual audits, each of which can take months.

By adopting RFID asset tracking, not only can scanning be undertaken by line managers on a regular basis in a matter of minutes, without impacting the organization’s core operations in any way, but also the tight integration with the full asset history ensures unprecedented accuracy and auditability of the entire asset inventory.

The first decision organizations need to make is whether to opt for Active or Passive RFID tags. Passive tags are significantly cheaper – around $.50 as opposed to $40 – $60 per Active tag. However, they have a limited read range and do not hold much information, constraining the development of a single source of all fixed asset history.

The Active tags by comparison have their own internal power source, which broadcasts the response signal to the reader. As a result, these tags have a far longer read range, typically more than 300 feet. In addition, Active tags hold far more information about the asset, enabling organizations to transform the depth and accuracy of fixed asset history.

The additional functionality offered by Active tags convinced leading fast moving consumer goods manufacturer, Unilever, to deploy this form of RFID technology to track 20,000 fixed assets across several production lines at its manufacturing site in Gloucestershire, England.

With each piece of machinery comprising many distinct components, the ability to scan hundreds of fixed assets simultaneously from a distance is a major benefit; many of these components are extremely hard to reach and would require the production line to be turned off to undertake a physical audit.

Furthermore, compliance to International Financial Reporting Standards (IFRS) demands fixed asset management accountability and the provision of a full audit trail. With IFRS becoming increasingly prevalent within the public sector, the spotlight is now on the widespread poor asset management processes that have resulted in these highly inaccurate asset registers.

From highly mobile items such as laptops that cannot be accurately located, to heavy machinery composed of multiple component parts that are frequently changed by maintenance without being recorded, organizations simply have no idea what happens to assets once in use.

But how many businesses can afford to periodically interrupt production to undertake a manual audit? Taking manufacturing processes offline or disrupting operations is just not a viable option for most businesses. Furthermore, manual audits can be notoriously inaccurate; horror stories abound of organizations that have embarked upon manual audits only to discover that many months into the exercise only 60% of assets have been checked.

Indeed, even those organizations that have adopted barcodes in a bid to impose greater control and visibility over their asset base still struggle to gain access to certain parts of the infrastructure – from production lines to clean environments, such as hospital operating theatres.

The ability to use RFID technology to scan hundreds of assets at once, from a single point, while ensuring business continuity has the potential to transform the entire asset management process.

The WSJ article states: “Getting less attention are a host of businesses that are finding innovative ways to use RFID internally, to keep track of high-value items like computer equipment, for instance, or of things that get used over and over, like legal files—or sushi plates.”

RFID asset tracking may just now be picking up speed in the commercial environment, but with growing pressure in the corporate world for improved asset management and accountability, RFID has an important role to play. As its popularity increases, it’s easy to see that RFID’s possibilities are limitless.

Making Waves
RFID has been making waves for over a decade as organizations throughout the supply chain look to leverage unprecedented ease and accuracy of goods tracking to drive down costs and improve product availability. But, as yet, the technology has not achieved optimal results. This is particularly relevant within the retail environment where RFID tag costs make it impractical to take the technology beyond pallet level, undermining the vision of individual product tracking from the manufacturer to the store shelf.

However, the technology has gained significant traction in other areas here in the U.S. and abroad; most notably, new passports now include RFID tags and other transportation payment systems are utilizing the tags as well. Indeed, the technology has also been embraced by libraries, museums and higher ed institutions to track valuable assets. The result of this diversification of RFID application is a significant reduction in unit cost over the last few years.

With increased focus on organizations across both public and private sectors to improve asset accountability and traceability, isn’t it time more organizations considered the benefits of RFID?

Real Asset Management International (RAMI) has announced that on May 25 it will open an office in San Francisco to support current customers and future business development. This will be the first office on the West Coast and the third U.S. location for the global company, which also maintains offices in Boston, Des Moines, Iowa, and London, England. RAMI develops commercial and public sector software for managing assets, including tracking, inventory, depreciation, transport and logistics.

The company has experienced considerable growth in the West, according to Marcus Scholes, Vice President of U.S. Operations for RAMI. “With a growing number of important customers in the region, the new office will strengthen our ability to provide local support for existing clients, as well as to respond to an increase in interest from companies along the West Coast.”

To accommodate the international nature of many West Coast organizations, the San Francisco office will provide extended helpdesk and service hours to support the Pacific Rim market. The new office is located on California Street in San Francisco’s financial district, which Scholes says is ideally suited to serving the company’s diverse client base.

“In this period of economic challenge, the move to more accurate and effective asset management can be invigorating to a business,” according to Scholes. “RAMI’s solutions can help strengthen an organization’s finances by providing essential short-term cashflow benefits, as well as positive longer term advantages with regards to workflow processes, security and disaster management preparation.”

But the most significant issue is that the process will create far more individual asset records and far more complex registers. This will create audit challenges and constrain the desire to improve operational performance through effective utilization of assets and budget. It takes visibility of the bigger picture to really appreciate the long-term benefits that specialized asset accounting and IFRS will bring.

The fixed asset register is key to business value in many ways. Disaster recovery strategies, business continuity plans, insurance claims and due diligence during a merger or acquisition all begin with the information recorded in the asset register. Those businesses that recognize the need for a tailored asset management solution rather than a massive spreadsheet will not only enable maximum asset utilization and achieve a reduction in administrative cost but will be in a very strong position when the economy swings around again.

This not only drives down administrative time but also reduces the reliance upon one or two experts responsible for the creation of highly complex spreadsheets that are impenetrable to anyone else in the finance team. By leveraging simplicity and automation, organizations can deskill the asset management role to gain further cost benefits. This strategy also supports the growing trend towards centralizing the finance role for organizations with multiple locations or operating companies. A centralized asset register supports the move to a shared service center across the entire organization, delivering significant financial savings.

In addition, automated generation of reporting combined with a full audit trail significantly reduces the time taken to undertake the year end audit and confirm the asset value – resulting in a reduction in auditor fees.

The problem for most organizations is that despite going through the process of moving to IFRS and adapting to the new requirements for asset accounting and revaluations, the majority of organizations are still reliant upon spreadsheets to manage the asset register.

The process is cumbersome, prone to errors and provides the finance team with no insight into an asset’s location or its current operational role within the business. Those organizations that have moved to component accounting as part of the shift to IFRS may have achieved a greater insight into the overall asset register but still have no proactive way of imposing control over this base. The result is a massive, highly valuable corporate investment that is, to all extents and purposes, visible only on the balance sheet.

Yet organizations that can impose control and rigor over the asset register will be in a far better position to maximize the existing, deceptively valuable, asset base. They will have a complete picture of asset location and current use; they will be able to keep track of assets – a key issue with the growth in portable IT equipment. And they will be able to ensure that new employees are not automatically purchasing brand new equipment but that existing, serviceable assets are reused where appropriate.

In a recession, this degree of prudence and operational control are essential. Businesses that take care of the pennies on the asset register will soon start to see the dollars appearing on the balance sheet.

Many organizations are currently still debating the merits and costs associated with switching to IFRS requirements. While the expense of switching to IFRS seems to outweigh the benefits associated with the migration, there are some keen qualities to take note, for example the management of fixed assets in relation to IFRS requirements. The change to IFRS could be an opportunity for asset utilization.

Good Housekeeping
With many companies now reporting a capital expenditure freeze, the ability to reuse and reinvigorate existing asset value will become increasingly important as the recession bites. Organizations across the country are imposing far tighter financial controls – and capital expenditure is being reduced to the bare minimum. Coming so close on the heels of the significant expenditure and resource required to manage the transition from to US GAAP to to IFRS, it is tempting for the finance department to batten down the hatches and dig in for the long haul.

What happened to the assets that were replaced by the shiny, new equipment? Are they being used across the business – or simply left unused in a cupboard or warehouse? With no budget forthcoming for new purchases, now is the time to get an accurate handle on corporate assets to ensure maximum utilization and value.

Up next:  The Spreadhseet Quandary

As a part of a broader fiscal strategy, the move to more accurate and effective asset management can be invigorating to a business, providing essential short-term cashflow benefits as well as positive longer term advantages with regards to workflow processes, security and disaster management preparation.

One of the most tangible ROI realizations for businesses that implement such a system can be a dramatic lowering of insurance premiums and more successful insurance claims, as well as decreased property taxes. These result from having a more accurate knowledge of assets that are no longer on the books.

Automated fixed asset management systems are integral to responsible financial management, providing more accurate financial statements, streamlining workflow processes and helping businesses take full advantage of available tax benefits.

Highlights of the Business Tax Cuts:
* 50% Bonus Depreciation
* No cap on total amount of assets
* Applies to all capital assets with IRS life of 20 years or less
* Assets must be purchased in calendar year 2009
* Discretionary, can opt out

Section 179 Expense Deduction:
* Can expense up to $250,000
* Total asset purchases must be capped at $800,000 or lose dollar for dollar benefit up to $1,050,000
* Assets must be purchased in fiscal year beginning in 2009

An organization’s fixed assets are often one of the largest line items on their financial statements, but because of the complexities of depreciation and the logistics of keeping up with potentially thousands of items, large investments are often managed poorly.

For businesses that still rely on antiquated methods for tracking their fixed assets and managing depreciation, frequent changes to tax law, such as the 2008 and 2009 stimulus acts, can be a time-consuming burden.

The aim of the 2009 Stimulus Act, in regards to fixed assets, is to encourage companies to increase spending on major pieces of equipment by allowing them to quicken the depreciation of long-lived or capital assets. Companies currently taking advantage of the bonus depreciation are experiencing an increase in cash flow.

The American Recovery and Reinvestment Act of 2009, an extension and improvement, on the Economic Stimulus Act of 2008, includes; federal tax cuts, increases in unemployment and welfare benefits, subsidized healthcare insurance for the unemployed, and investments in infrastructure, education, energy efficient programs, and homeland security.

With about 35% of the 2009 bill dedicated to tax cuts, it contains measures specifically designed to help businesses retain and reinvest their capital through infrastructure improvements and expanded deductions for other business expenses. Most notably, the stimulus package includes a 50% Bonus Depreciation that allows companies to take more depreciation sooner on their fixed assets.

The additional depreciation that is taken effectively reduces the taxable profit that a company makes. Because its taxable profit is lower, the amount of tax a company has to pay on its profit is lower. The stimulus act doesn’t change the total amount of depreciation that is taken over the life of the asset depreciation.

If you are looking to justify the implementation of a fixed asset management system, take some time to detail the deficiencies in your current processes and utilize the template below to calculate ROI for the project. This is a beneficial exercise for organizations in any stage of the fixed asset management software review process.

Fixed asset management is critical to the fiscal health of all operations; frequent and effective fixed asset management processes could potentially save your organization hundreds of thousands of dollars a year.

In addition to the hard facts there are several other, intangible benefits involved in running a comprehensive fixed asset management system. To learn more, please contact Real Asset Management International (RAMI) today at 617 342 7291 or solution@realassetmgt.com.

Facts: 2,500 Assets
GBV = $2,500,000 (average asset cost = $1,000)
NBV = $1,250,000

Calculation of Benefits:
Current Scenario
Accountant I spends 25 hours per month manually entering data into an Access® database, generating basic reports, and processing transfers and disposals on a monthly basis. Based on a total, yearly salary of $65,000 (includes benefits and overhead costs), divided by 2080 total working hours per year, the hourly cost works out to around $32.00.

Annual cost for Accountant I = $9,600 ($32.00 X 25 hours X 12 months)

Accountant II spends 30 hours per month performing asset splits and more complex accounting events, producing depreciation calculations, posting to the G/L, closing books and generating senior management reports on a monthly basis. Based on a total, yearly salary of $80,000 (includes benefits and overhead costs), divided by 2080 total working hours per year, the hourly cost works out to around $39.00.

Annual cost for Accountant II = $14,040 ($39.00 X 30 hours X 12 months)

ABC Company has not conducted a complete physical audit in four years. Two members of the maintenance department and two members of the IT department performed the last physical audit. The inventory audit was completed with pencil and paper over a two-day period; total costs came to $2,000. During that two-day period, the IT helpdesk and maintenance work order support fell behind schedule.

Current Total Costs = $25,640 ($9,600 + $14,040 + $2,000)

Proposed Scenario
ABC Company’s new fixed asset and inventory tracking software provides a built-in link to its e-Procurement system, eliminating data entry time for Accountant I. The new system’s built-in report writer generates reports quickly and easily. Transfers and disposals are also completed with the click of a mouse, generating a full audit trail. Time spent on these tasks is dramatically reduced by 60 percent.

Accountant I costs lowered to = $3,840 ($9,600 – 60% or $5,760)

Accountant II also realizes significant time savings since assets splits and other complex accounting events are also now completed quickly and easily. Calculating and posting depreciation and closing books can now be accomplished with a few clicks of a mouse. Senior management reports that previously required research and pivot tables are now just the push of a button away. Time spent on these tasks is dramatically reduced by 60 percent.

Accountant II costs lowered to = $5,616 ($14,040 – 60% or $8,424)

With RAMI’s Track4000, accurate physical audits are completed in no time at all, typically in about 65 percent less time than it takes with pen and paper.

Total Audit Cost = $700 ($2,000 – 65% or $1,300)

Proposed Total Costs = $10,156 ($3,840 + $5,616 + $700)

Total Benefits: $15,484 ($25,640 – $10,156)

Furthermore, after completing its latest physical audit, ABC Company was unable to locate 10 percent of its assets; refer to the company facts above.

Cost of ghost assets = $250,000 (250 X $1,000)

Writing off the NBV associated with the ghost assets on the register, assuming a 39 percent corporate tax rate, results in a significant tax overpayment.

Income tax overpayment = $48,750 (39% of $125,000)

At a five percent property tax rate, the property tax overpayment is significant as well.

Property tax overpayment = $6,250 (5% of $125,000)

Lastly, at $.01 for every $1.00 of assets, there is a hefty insurance premium overpayment.

Insurance premium overpayment = $1,250 ($.01 X $125,000)

Total Overpayment (Tax + Insurance) = $56,250 ($48,750 + $6,250 + $1,250)

Total Benefits + Tax and Insurance Savings: $71,734 ($56,250 + $15,484)

A specialist fixed asset management system will eliminate costly depreciation errors. Depreciation formulas and asset lives can be defaulted for each book based on any defined asset category. Processing depreciation this way is both quick and easy, completed with just a click of a button.

Lack of an audit trail and overall security

A specialist fixed asset management system will track and record every detail of every action ever made by any user, which is unattainable with spreadsheets. Dates, times and explanations are recorded as well as Calculating Return on Investment (ROI) for your Fixed Asset Management Software Purchase making it very simple to ensure the security and integrity of your fixed asset data. A specialist system will require a valid username and password combination to enter the system and will enable department heads to define security at an individual level to ensure that confidential information can be viewed only by those that need to see it and safely hidden from those who don’t. In other words, limited access can be set by user in order to restrict read only and editing rights.

Up next: An Example ROI Calculation

Some of the main benefits of a specialist fixed asset management software include compliancy with corporate governance regulations, accurately calculated depreciation, and a maintained audit trail to name a few.

To further demonstrate the benefits of a specialist system, consider the following items as example:

Corporate Governance Requirements (SOX, CSOX, US Tax, GAAP, IFRS, etc.)
Today, companies of all sizes are subject to increased scrutiny by government agencies and regulatory boards reacting to recent business reports and investor’s requests for higher standards of accountability, transparency and overall corporate behavior. The main goal here is to improve financial management, reporting and corporate governance.

With such a high degree of attention focused on your organization, why would you risk the integrity of your financial data by relying solely on spreadsheets? Accurate and effective implementation, management, monitoring and updating can easily be accomplished with a specialist fixed asset management system. system in place; it’s the only real way to ensure compliance.

Up next: Examples of inaccurate depreciation calculations

From a purely operational standpoint, having an accurate asset register that shows location, condition and the responsible contact can help ensure that assets are available and usable when needed. But how a business manages its assets also has multiple effects on the entity’s finances, through the very tangible costs of heightened insurance premiums, property taxes and neglected depreciation. These areas cannot be effectively addressed without a specialist fixed asset management solution.

Organizations that are using cumbersome spreadsheets to manage an ever-growing asset register constantly struggle to address a variety of issues surrounding the accountability and traceability of their asset base.

A recent article in The CPA Technology Advisor, Asset Management Means Much More Than Just Depreciation, emphasizes the importance of accurate asset depreciation, since assets are often one of the largest line items on a financial statement. With effective strategic management of depreciation a business can gain a more exact knowledge of its overall fiscal strength. Poor depreciation management can lead to missed tax benefits and return on investments.

Economic stimulus refers to government spending or tax measures to support or revive an economy in recession. In February 2008, Congress passed a $168 billion package of tax cuts and rebates. Later in the year, when signs emerged that the economy was still falling, Democrats called for a larger stimulus, and a 2009 “recovery” package worth nearly $800 billion dollars was passed.

Through the 2009 Stimulus Act, billions of dollars will be allocated to State and Local governments. The allocated funds are earmarked for construction and repair of federal buildings as well as water and transportation projects.

In a recent New York Times article, A Race to Be the First to Use Stimulus Money, cities and towns across America are

GASB 34 requires state and local governments to report the value of their infrastructure assets, (roads, bridges, water and sewer facilities, etc.) in their annual financial reports on an accrual accounting basis.

With Real Asset Management International

These organizations can also leverage the additional memory on active RFID tags to create a complete history of each asset, from initial purchase order number, location unique serial number, to maintenance history and child/parent asset relationships.

With this technology, one person at each school or campus can be tasked with maintaining a specific list of the assets at their location. Using a handheld PDA, the person can simply walk through a building facility on a scheduled basis, while the scan of assets is automatically performed and information is directly input into the district

The first decision a district needs to make is whether to opt for Active or Passive RFID. Passive tags are significantly cheaper

The next generation of accounting principles for entities in the U.S. is the International Financial Reporting Standards (IFRS). These standards will soon replace the existing GAAP and other traditional rules at commercial institutions, and similar requirements for public entities such as school districts will undoubtedly follow. IFRS requires greater fixed asset management accountability and the provision of a full audit trail. Unfortunately, many school districts currently use antiquated and inefficient methods, like spreadsheets, resulting in poor fixed asset management processes that result in highly inaccurate asset registers.

From highly mobile items such as laptops that cannot be accurately located, to district buses and vehicles, and even IT infrastructure that may contain multiple component parts that are frequently changed by staff without being recorded, some school districts simply have no idea what happens to many assets once they are in use.

But how can a district afford to periodically devote valuable staff time to undertake a manual audit? With staffing shortages and continuing IT and accounting needs across the organization, most simply cannot afford to spend an inordinate amount of time performing laborious asset audits. Furthermore, manual audits can be notoriously inaccurate.

The ability to use RFID technology to scan hundreds of assets at once from a single point, while ensuring the continuity of the educational mission, has the potential to transform the entire asset management process.

The Asset4000 module, from RAMI, has built-in features that automatically implements the 2008 and 2009, 50% Bonus Depreciation and Section 179 expensing rules.

Companies currently using Asset4000 can be confident that they will automatically maximize the Stimulus Act benefits.

Compliancy with the Economic Stimulus Act of 2008 and 2009:

• Asset4000 is fully compliant with the Economic Stimulus Act of 2008 and 2009.
• Property can be expensed by Section 179 deductions based on the 2008 act.
• Additional 50% Bonus Depreciation can be expensed to take further tax benefits.
• Helps significantly reduce the 2008 corporate tax burden.

Many companies, large and small, still rely on inefficient techniques like spreadsheets to manage their assets. Automated asset management systems like RAMI

Approximately 35% of the bill is dedicated to tax cuts. The tax cuts are split 50/50 between personal tax cuts and business tax cuts.

Highlights of the Business Tax Cuts:

• 50% Bonus Depreciation
• No cap on total amount of assets
• Applies to all capital assets with IRS life of 20 years or less
• Assets must be purchased in calendar year 2009
• Discretionary, can opt out

Section 179 Expense Deduction:

• Can expense up to $250,000
• Total asset purchases must be capped at $800,000 or lose dollar for dollar benefit up to $1,050,000
• Assets must be purchased in fiscal year beginning in 2009

Example:
Because of the economic downturn resulting in an operating loss in 2008, Company ABC originally decided to postpone purchasing a new, more efficient label making machine. The cost of the purchasing machine is $780,000. Upon hearing of the 2009 ESA, Company ABC reevaluated their decision to postpone the purchase.

• Purchase Price $780,000
• 5 Year Life using Half Year Convention

Under Section 179 Company ABC expenses $250,000 right away to leave a new depreciable basis of $530,000. Applying the ESA 2009 bonus depreciation, Company ABC can additionally deduct $265,000 (50%), leaving a new basis of $265,000 which they can then apply the normal depreciation of $53,000 to for the first year.

After further analysis, Company ABC decides to take advantage of the tax savings and purchase the equipment in 2009, rather than take the chance that the stimulus package will be extended to 2010. They will reap tax advantages as well as the benefit of the new machine’s efficiencies in 2009. Because Company ABC is a small business with revenue under $5 million, they have an additional safety net of being able to use current losses to reduce taxes paid over the past 5 years, should they need to.

NOTE: While this reduces the taxable obligation in 2009, later years will be comparatively higher due to less depreciation expense. Also, states are not required to follow suit with Federal guidelines, therefore, depending on which states the assets are located, bonus depreciation may be required to be added back in to calculate your state taxable income.

Summary: Reducing tax obligations in the near future allows companies to invest in capital assets today, ideally allowing companies to save jobs, make money, and ultimately stimulate the economy as a whole.