By: Miles Workman, Controller, Outsourced Services
Managing fixed assets is a critical function for every organization, but is often overlooked or not focused on because other areas require more attention. Let’s face it, you can see bigger benefits by focusing your time and energy in those other areas. However, what if I were to tell you that with just a few small changes or a little time you could start to see the savings add up as well as changes to the bottom line? In addition, fixed assets can be an area for potential fraud risk if not monitored correctly. By simply having an up to date capitalization policy, a fixed assets tracking system, and a process of monitoring and reviewing fixed assets, you should be able to see benefits within a short time frame.
It all starts with a capitalization policy, does your organization have one? Is it current and relevant with today’s technology needs? Do the employees within your organization know about this policy and do they adhere to it? These are just a few questions you must ask yourself, and if you’re unsure of the answers, then it’s probably time to focus on your organization’s fixed asset management practices and policies.
Writing a policy can be fairly easy and doesn’t have to be a cumbersome task. To start, you’ll need to know what your categories are for fixed assets. After you have the general categories simply asking yourself if you have any of those or do you plan to have any of them. If you do then then these categories become the basis of your policy. Once you have your categories you need to determine how long you plan to keep these assets in service before you dispose of them or replace them. There is guidance on this as well and another internet search will yield you lots of results.
The next step is to choose your method of depreciation and set a threshold for capitalization. Items purchased over a certain amount are capitalized and those under that limit are expensed in the current year. There are different depreciation methods and each has its pros and cons. Be sure to select a method that best fits your business and if you need help you can find very helpful guides by doing an internet search. When selecting the useful life be sure to select a life that is reasonable. You would not assign a useful life of 10 years for a laptop because we know with advances in modern technology it will not be used that long.
The useful life and depreciation method are also two elements that can have an impact on the bottom line. Certain methods of depreciation with the appropriate useful life will result in lower depreciation expenses for that period, thus reducing your total expenses and increasing your bottom line. Keep in mind, if that asset were to be disposed of too early, before it is fully depreciated, it would cause a major loss that year. So you could have been seeing lower expenses in previous years but if disposed of too early you will now see that loss. Be sure to include a section in your policy that specifies the procedure for disposals.
Now that your policy is in place and everyone one is following the policy, the next step is to establish a tracking process. Depending on your business structure, this can get very complex, but it doesn’t have to be. There are multiple software companies like PRO-WARE, BNA, Red Moon Solutions, Thomson Reuters, Intuit, CCH, and Sage, to name a few, that offer applications to help track your fixed assets and even help calculate the depreciation expense. Your accounting system may also have a module already built in to help you manage this process. However, if the fixed asset application isn’t the way for you, any spreadsheet software can be adapted to track your assets. Both options can work just fine and they both have their pros and cons and similarities and differences. It will be up to you to determine what is best for your organization. Regardless of which route you take, you are still going to have to collect the same type of information and record a journal entry.
As part of your tracking process, you want to make sure you note the location of each fixed asset you have recorded. This will make it easier come disposal time, as well as during audit when the auditors do the walkthrough. You can also incorporate an item number or tagging system which can make this process easier. This task can be time consuming and possibly difficult for older assets that have been in service for a long time. If you have a current fixed asset list, you will just need to identify the asset location and or tag the asset.
Also keep in mind that fixed assets can be an area for potential fraud risk. For this reason, there are a few extra steps that should be performed as part of your tagging and tracking process. This can be done by simply making sure that your employees are following the policy you have created. Accidents can happen, but a small extra step such as reviewing accounts payable transactions and expense reports more closely can help make sure that everything that should be recorded as a fixed asset, is in fact recorded as a fixed asset. By doing this, you will also have the location of that fixed asset. So it’s like doing two steps at the same time. Plus, there is nothing like finding out that an employee has furnished their house with new electronics because someone didn’t review the expenses closely enough or ask for the location of the new purchase.
Now your policy is in place, fixed assets are being tracked correctly and everything is going smoothly, now what? Where are these benefits I mentioned earlier? I have touched on a few of them already with fraud prevention as well as changes to the bottom line. In addition, you can also achieve tax savings by having a proper fixed asset system. Most likely the county your business is located in requires you to file a personal property tax return every year. As part of this return, you are required to list your assets and disposals and pay a tax on what you still have.
This return is of course is based on various year and depreciation percentages and every county will have different guidelines but it is very possible to see immediate tax savings here. For example if you have $100,000 worth of computer equipment still on your books that is fully depreciated and you have disposed of $25,000 of that equipment. For whatever reason that disposal wasn’t documented correctly or perhaps since it was fully depreciated it was just given away, you could still be paying taxes on the full $100,000 amount. This could be overlooked in your normal course of business since it is fully depreciated. This means you are no longer recording a depreciation expense so there will be no change in your bottom line and your Net Fixed Assets would be the same. But every year you will have to pay taxes on that asset you no longer have. This is another reason why it is so important that employees are aware of the policy and know the procedure for disposals. Because in this example you are paying more in taxes for something you don’t even own anymore and depending on your organization this could amount to some nice savings every year.
By having an organized process you can make sure you are only paying taxes on what needs to be paid. For example, if your county doesn’t require you to pay taxes on software this could be a huge savings. Let’s say you purchased some expensive new software and recorded it as computer equipment so it is reported on your property tax return as computer equipment when in fact it is software and your county doesn’t require you to report software. This means you are paying taxes on something that you shouldn’t because it was recorded and tracked incorrectly. Again, this something that can be prevented with proper tracking and monitoring of the fixed assets.
In conclusion, fixed assets isn’t exactly a glamorous topic, but it still deserves attention because it can help you in the long run not only with tax savings but with fraud prevention and maximizing your bottom line. It doesn’t have to be a cumbersome task to create a policy and have your employees stick to it and with a little bit of work you can have a well-organized machine and who knows, maybe save a little money at the same time.