The role of fixed asset in business management has been underscored by most business executives and lowered to just being items with physical presence. According to Investopedia, a fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year’s time.The role of fixed asset in business management has been underscored by most business executives and lowered to just being items with physical presence. According to Investopedia, a fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year’s time.
The International Accounting Standard, IAS (i.e. IAS 16) also considers fixed assets as assets whose future economic benefit is probable to flow into the entity and whose cost can be measured reliably. It belongs to one of 2 types: “Freehold Assets” – assets which are purchased with legal right of ownership and used, and “Leasehold Assets” – assets used by owner without legal right for a particular period of time. The most commonly used fixed assets are plant and equipment, buildings, fixtures and fittings, machinery, vehicles and heavy equipments, computers and IT equipments etc. Attempts to keep, use and track these fixed assets are termed as fixed asset management.
Fixed assets management is basically an accounting process that seeks to track fixed assets for the purposes of financial accounting, preventive maintenance, theft deterrence and to track the location, quantity, condition and depreciation status of asset. A fixed asset management practice tends to look beyond just the quantitative nature of fixed assets to include the qualitative attributes as well and will usually consider processes such as asset planning, procurement, tracking, depreciation and disposal. The most common fixed asset management system is the fixed asset register which is basically a manual register used to keep track the fixed assets of a company and shows information relating to the value of assets, date of acquisition and other details necessary to compute for depreciation and tax purposes.
Fixed asset management is usually not considered a key priority by companies but an effective fixed asset management provides numerous benefits that cannot be underscored. Among some of the relevance are:• It helps an organisation to keep track of all their assets and can tell where the assets are located, how they are used, and when changes were made to them.• It helps to ensure that depreciation rates are accurately calculated and regular assessment of such ensure that its reporting in financial statements are accurate.• It creates more efficiency in operation because an asset management allows an organization to understand the capabilities of its assets, and how they can be operated in the most effective manner to enhance profitability.• It helps to take advantage of tax reliefs via capital allowance. With the application of capital allowance for depreciable assets, an effective asset management will guarantee full enjoyment of tax benefits available to all identifiable fixed assets.• It helps to avoid misrepresentation in financial statements. An effective asset management will ensure that fixed asset values are accurately recorded in financial statements to avoid any potential overstatement or understatement of asset values. • Asset management could also help to assess and identify risks connected with the use and ownership of the assets for the relevant mitigation factor to be considered.• With proper asset management system, incidents of thefts are lowered as proper accounting of the asset recovery process will ensure that the company maximizes the returns with no items lost during the process.Adverse Effects of Poor Fixed Asset Management in BusinessProbably the fact that fixed asset is not liquid in nature could account for some of the reasons why business executives pay less attention to it even though it may comprise a significant portion of the total asset on a company’s balance sheet. However, the adverse effects of poor fixed asset management is non-negotiable for any business. The possible adverse effects include• Poor fixed asset management may result in inaccuracies in fixed asset value reported in financial statements as proper data on asset may not be in place and eventually reduce investors’ confidence in financial reports• Fixed asset reports could also take longer time to be produced as data may be incomplete or non-existent • Without fixed asset management, a business asset may be exposed to theft or misuse due to poor tracking• Absence of fixed asset management could cause excessive capital expenditure without any accompanying productivity hence affecting cashflow• Improper fixed asset management has the potential to contribute to the undervaluing or overvaluing of company’s operations• It could also affect overall company performance if inaccurate gains or losses on disposal of assets are recorded with its associated tax implication particularly in the case of gains• Poor fixed asset management could cause additional or increased audit cost as auditors may have to spend more time on the audit of assets due to incomplete records or non-existence of records• It could result in poor capital budgeting especially where the primary source data forming the basis for the budgeting is full of inaccurate or incomplete information
How to Effectively Manage Fixed Assets in Business
Profitability is not just a function of revenue, but also the better management of resources including fixed assets, hence the need to ensure effective management of fixed asset. Possible practical ways to manage fixed assets are as follows:
Ensure accountability and safe custody of assets – safe custody of assets is a critical aspect of fixed asset management and is accomplished by assigning a responsible officer as a custodian. It is only when such is done that accountability of assets could be established, which can result in increased level of security and help reduce incidence of theft or misuse including serving as a risk management measure.
Institute Fixed Asset Tracking – companies that have large number of assets particularly movable assets needs to put in place fixed asset tracking processes to ensure safety and productivity. Maintaining up to date details of asset by keeping track of their location, usage, custodian, maintenance etc. could help to ensure safety, productivity and efficiency.
Carry out fixed asset labelling or tagging – labelling or tagging of assets with unique identifiers goes a long way to ensure effective and appropriate management and control of assets. For instance, where a company has multiple fixed assets with some even being nearly identified, one could make an error by creating duplicate asset records hence the need to properly label and tag such assets. Fixed asset tagging or labelling could also speed up fixed asset audit as they can easily be identified.Conduct asset verification – to ensure optimal asset management, a periodic physical asset verification should be conducted to ensure existence and identification of asset, to result in reconciliation of verification results with asset records in the books of the business with all significant exceptions noted and investigated accordingly. It could also reveal inefficiencies in the asset acquisition and control process that may require necessary attention and correction for safeguarding assets.
Establish SOPs or Fixed Asset Policy and strong internal control – existence of standard operating procedures (SOPs) or fixed asset policy or internal controls is considered a prudent means to effectively manage fixed assets in a business. as fixed assets are usually huge capital expenditures, putting in place such mechanisms will ensure their acquisition, maintenance, movement and disposals are properly managed with lesser risk of incidences like theft, existence of ghost assets, misuse and mistakes that have the potential to affect profitability. Duly accepted and documented depreciation and disposal policies with proper implementation will reduce the risk of misstatements or errors in financial reporting.
Acquire a reliable fixed asset software – a reliable fixed asset software will not only have readily available data on assets components, location, quantity, etc but will also enhance reporting. The application of manual means to calculate say depreciation could be flawed by several errors which could affect the reliability of fixed asset value in financial statements, however, the use of a reliable fixed asset software offers relatively enhanced reports which could be generated at any time or day. Practices like matching, scanning and attaching of invoices to asset records is encouraged as it will provide management with accurate assessment of fixed asset within the entire business and facilitate audit of fixed assets.
It is evidenced that with an effective fixed asset management, businesses have the potential to maximize the return on capital investments, reduce risks and increase efficient of asset management, save costs and administrative time, improve the accuracy of both financial and tax reporting compliances and to make effective decisions to improve overall organizational profitability and support growth.
Author: Desmond AidooThe author is Financial Reporting/Analysis, Audit and Tax professional, a Consultant at Danisa Consult (Accounting, Audit & Tax) and a Facilitator for accounting, tax and audit at Global Institute of Resource Development (GiRD), a capacity development and training institution. A member of the Institute of Chartered Accountant, Ghana; Chartered Institute of Taxation, Ghana; Association of International Accountants, UK; International Association of Accounting Professionals, UK; Association of Certified Fraud Examiners, US; Southern African Institute of Business Accountants, SA.All comments and suggestions to firstname.lastname@example.org /0242844114