Elements of Internal Control over fixed assets

Sep 24 2019

Fixed Assets are often referred to as Property, Plant and Equipment (PP&E) and the terms are used interchangeably. Section 404 of Sarbanes-Oxley states that companies must have adequate and effective internal controls for financial reporting and that these procedures must be regularly evaluated. Therefore organizations with fixed assets should always follow strict procedures and processes when it comes to fixed asset management. Companies are advised to perform a physical count and valuation at least once a year of their asset register as auditors will monitor asset management closely. 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 asset 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 that Section 404 certification is working properly.

Controls fall into two categories:

Physical Controls

1. There must be a register or ledger of fixed assets to identify a particular asset, the date of purchase, model number, serial number, acquisition cost, expected life and assignment to any debt instrument.

2. At a minimum, assets must be accounted for annually.

3. A physical inspection should be carried out for those assets that have a high exposure to damage like vehicles, site development equipment and tools to identify any possible valuation adjustments.

4. Good management teams should periodically review their insurance policies related to the particular assets that have exposure to damage and loss.

Financial Controls

1. A policy should be in place that sets the requirements for capitalization of an asset, i.e. minimum dollar amount, useful life expectancy and salvage value.

2. A policy with a corresponding set of procedures should determine the depreciation formula and the frequency of journal entries related to depreciation.

3. An inventory of all fixed assets (see physical controls above) should be conducted on an annual basis to ensure that ghost assets are not being accounted for when they are either missing or unusable.

4. Acquisitions and disposals of assets must be approved by management and then properly recorded to the books of record.

5. Fixed asset ledgers need to be reviewed regularly to confirm segregation of non-fixed asset purchases to the fixed assets account. The most common error is construction in process expenses being recorded to the fixed assets account.

6. It is a challenge for companies to keep up with ever changing tax rules that affect asset depreciation methods based on the classification of property but this is crucial to the effective control of fixed assets and property tax reports need to be filed with tax jurisdictions.

7. Segregation of Duties is the requirement for more than one person to complete a task so that the risk of fraud or theft is eliminated. This is essential when carrying out the internal control of fixed assets. For example, the person who sells a fixed asset cannot take payment for the asset.

If you would like to discuss how to improve your fixed asset management processes, why not call one of our consultants today?  +1 800 321 8770