Fixed asset management as a corporate financial strategy: the accountants’ perspective

Introduction

The role of fixed assets in business management has been underlined by most business executives and reduced to elements with a physical presence. According to Investopedia, it is long-term tangible property that a company owns and uses in the production of its income and is not expected to be consumed or converted into cash for at least a year.

The International Accounting Standard, IAS (ie IAS 16) also considers it to be an asset whose future economic benefit is likely to flow to the entity and whose cost can be measured reliably. It falls into one of 2 types: “Freehold Assets” – assets that are purchased with legal right of ownership and used, and “Leasing Assets” – assets used by the owner without legal right for a specified period of time. Typical examples include plant and equipment, buildings, fixtures and fittings, machinery, vehicles and heavy equipment, computers and IT equipment, etc.

Attempts to maintain, use and track these are called fixed asset management. It is basically an accounting process that seeks to track fixed assets for purposes of financial accounting, preventative maintenance, theft deterrence, and to track the location, quantity, condition, and depreciation status of assets. This management practice tends to look beyond its quantitative nature. to include qualitative attributes as well, and will typically consider processes such as asset planning, acquisition, tracking, depreciation, and disposal. The most common management system is the fixed asset register, which is basically a manual register used to keep track of the fixed assets of a company and shows information related to the value of the assets, date of acquisition, name of the supplier, code of reference and other necessary details. compute for depreciation and tax purposes.

Business Relevance

Companies do not often consider fixed asset management as a key priority, but effective fixed asset management provides numerous benefits that cannot be overemphasized. Some of the relevant ones include:

• Helps an organization keep track of all its assets and can tell where they are located, how they are used, and when changes were made to them.

• Helps ensure that depreciation rates are calculated accurately and periodically evaluating them ensures that your financial statement information is accurate.

• Creates more efficiency in operation because asset management enables an organization to understand the capabilities of its assets and how they can be operated most effectively to improve profitability.

• Helps to take advantage of tax relief via capital relief. With the application of the capital provision for depreciable assets, effective asset management will ensure the full enjoyment of the tax benefits available to all identifiable fixed assets.

• Helps avoid misrepresentations in financial statements. Effective asset management will ensure that fixed asset values ​​are accurately recorded in the financial statements to avoid any potential overstatement or understatement of asset values.

• Helps to assess and identify the risks related to the use and ownership of assets so that the corresponding mitigation factor can be considered.

• Probable incidents of theft are reduced as proper accounting of the asset recovery process will ensure that the business maximizes profits without items being lost during the process.

Adverse effects on business

The fact that fixed assets are illiquid in nature could probably explain some of the reasons business executives pay less attention to them, even though they can represent a significant portion of total assets on a company’s balance sheet. However, its adverse effects are not negotiable for any company. Possible side effects include

• May lead to inaccuracies in the value of fixed assets reported in financial statements, as adequate asset data may not be available, and ultimately reduce investor confidence in financial reporting.

• The fixed asset report could also take longer to produce, as the data may be incomplete or missing.

• Without fixed asset management, a company’s assets can be exposed to theft or misuse due to poor tracking

• Their absence could cause excessive capital expenditure without any accompanying productivity and therefore affect cash flow

• Has the potential to contribute to the undervaluation or overvaluation of the company’s operations

• It could also affect the overall performance of the company if inaccurate gains or losses are recorded on the disposal of assets with their associated tax implication, particularly in the case of profits.

• Could cause additional or higher audit cost, as auditors may have to spend more time auditing assets due to incomplete records or no records at all.

• Could result in poor capital budgeting, especially when the primary source data that forms the basis for the budget is littered with inaccurate or incomplete information.

How to Effectively Manage Fixed Assets in Business

Profitability is not only a function of income, but also of better management of resources, including fixed assets, hence the need to ensure their effective management. The possible practical ways of managing fixed assets are as follows:

Ensure accountability and safe custody of assets. – Safe custody of assets is a very important part of the process and is achieved by assigning a responsible officer as custodian. Only when this is done can asset accountability be established, which can result in a higher level of security and help reduce the incidence of theft or misuse, including serving as a risk management measure .

Asset Tracking Institute System– Companies that have a large number of assets, particularly mobile assets, need to implement fixed asset tracking systems to ensure safety and productivity. Keep asset details up to date by tracking their location, usage, custodian, maintenance, etc. it could help ensure safety, productivity, and efficiency.

Carry out labeling or labeling of fixed assets – labeling or marking of assets with unique identifiers goes a long way to ensuring effective and proper management and control of assets. For example, when a company has multiple fixed assets and some are even nearly identified, a mistake could be made by creating duplicate asset records, hence the need to properly tag and label assets. Such tagging or labeling could also speed up the audit of fixed assets as they can be easily identified.

Carry out asset verification – to ensure optimal asset management, a periodic physical verification of the assets should be carried out to ensure their existence and identification, in order to reconcile the results of the verification with the asset records in the company’s books, with all significant exceptions noted and investigated accordingly. It could also reveal inefficiencies in the asset acquisition and control process that may require the necessary attention and correction to safeguard them.

Establish SOP or Fixed Asset Policy and strong internal control – The existence of standard operating procedures (SOPs) or fixed asset policies or internal controls is considered a prudent means of managing them effectively in a business. Since they are typically large capital expenditures, implementing such mechanisms will ensure that their acquisition, maintenance, movement and disposal are properly managed with reduced risk of incidents such as theft, ghost assets, misuse and errors 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.

Get reliable fixed asset software – a reliable fixed asset software will not only have readily available data on components, location, quantity, etc. of assets, but it will also improve reporting. The application of manual means to calculate, for example, depreciation could have various errors that will affect the reliability of the value of fixed assets in the financial statements; however, the use of such software offers relatively improved reports that could be generated at any time or day. Practices such as collating, scanning and attaching invoices to asset records are recommended as it will provide management with an accurate assessment of fixed assets within the entire business and make it easier to audit them.

conclusion

It is evident that with effective management of fixed assets, companies have the potential to maximize the return on capital investments, reduce risks and increase the efficiency of asset management, save costs and administrative time, improve the accuracy of financial and tax reporting and compliance make effective decisions to improve the organization’s overall profitability and support growth.