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"Asset Systems, Inc. is a privately held corporation specializing in barcode software and services for tracking fixed
assets and maintaining warehouse inventories."
Source : Asset Systems
Fixed Asset Inventory Best Practices
Fixed Asset Inventory is also known as:
Asset Systems,
Inventory Counting Services,
Asset Management Software,
Asset Inventory,
Fixed Asset Management,
Asset Management Scope,
Inventory Systems and Services,
Inventory management,
Best-practice asset,
Best-practice asset accounting,
rfid best practices,
operational best practices.
Successfully implementing asset tracking into an
organization, by necessity, requires a considerable change in policies,
processes and responsibilities. The stark difference between asset tracking
(or management) and fixed asset accounting is often under-appreciated despite
today's regulatory environment which mandates significantly enhanced
controls. Systems operating based simply on momentum often breed weaknesses.
Prior to the shift to a service oriented economy, most organizations formally
accounted for the financial presence of the assets, but only casually for
their physical presence. The accounting department maintained asset
information, both non-financial and financial. Eventually, weighed down by
paper based systems and exploding asset volumes, accountants began to employ
expedients like high and ever-increasing capitalization limits and basket
purchases to achieve a minimum balance in their workload. However, these
practices had the effect of creating unauditable records, driving up property
taxes and assuring that fixed asset ledgers were usually out
of date.
The
nature of assets has changed. Traditional approaches to asset control were
designed to address a relatively few, high value assets that were often
physically large and immobile, such as are found in a manufacturing
environment. As the economy has shifted towards services where assets are
more numerous, have lower individual cost, are often physically smaller and may
be reused in a variety of configurations, these approaches have become
strained, if not completely obsolete.
Correcting this weakness requires a
fresh look at the contemporary fixed asset environment coupled with an
organization-wide mandate. Simply put, asset management cannot be
successfully implemented by the accounting department alone (or any other single
department). What follows is a dispassionate look at today's asset management
climate and the tools available to improve controls. We will examine
approaches and techniques that are achieving the desired results in the
field. And, we will review what does not work and why. Lastly, we will identify
those best practices which have proven effective and durable.
What is an
asset?
An irreducible requirement for successful asset management is the
proper definition of an asset. This definition must be consistently applied,
easily and widely understood and meaningful both in the field and in the
accounting department. Ideally, an asset is the lowest level item that is
commonly managed. It will, generally, have a useful life greater than a year and
will be used, directly or indirectly, in the production of income. In
practice, it is best to track and manage assets within categories ' all
computers and monitors, for example ' rather than adding arbitrary parameters
such as cost or make/model.
Once defined, each asset must be physically
labeled with a unique number that is entered into the asset database as its
identifier. This unique asset identity allows robust descriptions and the
means to update asset records electronically. The current accepted standard is
to label assets with bar coded numbered tags except in extremely harsh
environments where materials and adhesives will not withstand the abuse. It
is likely that radio frequency identification (RFID) will become more
established and many users will take advantage of its benefits. However, it is
presently a large increase in cost.
Notice that this definition of an asset
gives scant consideration to cost because cost has little influence on which
items are managed and those which are not. In fact, asset solutions relying on
a capitalization limit to define an asset will compromise rather than enhance
internal controls. When assets are defined based on an arbitrary dollar
amount, line management has only a vague idea which are assets and which are
not. Compound the problem by distinguishing assets based on the purchase
event (invoice total) and it quickly leads to the confusing situation where two
identical items may be classified differently. Defining individual assets
categorically based on the manner in which they are used will create a
detailed, meaningful database used by line management. Capitalization limits
may then be applied to transactions relating to assets based on historical
cost to address the accountant's desire to avoid the cost of accounting for
small value assets where expensing the asset is not material. However,
automating asset management transactions achieves much the same goal while
providing greater granularity of data, reliable audit trails and lower
operating costs.
Best Practice: Asset Definition
- Asset is defined as the
lowest level of individual item commonly managed.
- All assets are identified
with a machine-readable asset label.
- All items within a category are
identified regardless of cost.
- Capitalization limits are applied to
transaction flow rather than asset recording.
- Assets are identified
individually, not by groups
Asset Management Responsibilities
Once
agreement has been reached on the organization's definition of an asset, daily
activities needed to maintain the currency of asset data need to be modified.
Best practices require a segregation of responsibilities between line
management and the accounting department. Managing and safeguarding assets is
performed by those who use or are assigned the custodial responsibility for
assets rather than the accounting department. Therefore, responsibility for
identifying and entering additions, updates and retirements must be assigned to
those individuals. Obviously, they must be held accountable for the accuracy of
the data. Once this data is recorded, the fixed asset accountant enters and
maintains financial information about each asset.
While integration with
the fixed asset depreciation system will be discussed later in greater depth,
it is important to segregate duties related to capital assets and the larger
pool of managed assets. A useful exercise is to identify the activities and
data capture requirements which are to be assigned to the asset inventory
system and those assigned to the fixed asset accounting system.
Typical Asset
Management Duties
Asset Inventory System
- Receive and label new assets
capturing asset number, description, location, serial number, and PO
number.
- Relocate assets as movements occur.
- Update non-financial data
regarding asset use and condition.
- Provide data to line management for
life cycle asset management.
- Retire assets capturing the type of
retirement.
- Audit accuracy of asset database.
- Maintain supplemental
information, such as maintenance, photos and non financial activities.
Fixed Asset Accounting System
- Harvest transaction activity for capital
asset additions, changes and retirement.
- Create entries for non-moveable
fixed assets.
- Augment or update asset value based on actual purchase
information.
- Reconcile supporting entries from other accounting systems
(general ledger, accounts payable).
- Apply harvested transactions with
each accounting cycle.
- Calculate depreciation for book and tax.
- Augment or update asset value based on actual retirement information.
The underlying concept is to assign to line management the responsibility for
managing the physical receipt, movement, reuse, maintenance and disposal of all
assets. Accounting responsibility is focused specifically on capital assets and
their financial impact on the organization. The approach mirrors how assets are
actually handled in practice. Each area targets the information needed to
perform their respective duties and is uniquely qualified to perform the duties
timely and accurately.
However, caution is indicted in designing adequate security into the system.
Line management should not be able to access depreciation information or change
any data related to the financial aspect of the asset. Concurrently, it is
futile to expect the accounting department to accurately initiate receiving,
updating and retirement transactions about assets for which they have no
visibility. As an added safeguard, many organizations will create databases for
each application and transfer transactions rather update a single database.
Others will create well-defined profiles for all users so that adequate security
is provided. Either can work if properly implemented.
An underlying assumption is that transactions will be recorded in the
database when they occur in the field. For example, when an item is received,
the core information (asset number, serial number, location, condition, serial
number, etc) is recorded. Subsequent movements are recorded so that the asset's
location is continuously visible and accurate. Often, accounting information
will not be available upon the item's physical receipt requiring the transaction
be placed in a pending status until proper data can be applied.
Once the day-to-day duties have been assigned, it is important to examine
auditing requirements. Asset labeling provides a foundation for rapid, accurate
inventories either complete or of selected areas. Because the bar code label is
simply scanned, the person conducting the inventory does not need extensive
product knowledge to create reliable results. With this in mind, the frequency
and scope of the audit requirements may be easily established.
Best Practice: Asset Management Responsibilities
- Responsibility for non-financial transaction activity is assigned to
line management; financial data remains in the accounting department.
- Segregate data between finance and non-finance protected by adequate
security.
- Define and document process, duties and segregation for both systems.
- Record transactions upon their occurrence in the field.
- Create audit program to assure that systems operate properly.
System Interfacing
An important benefit of establishing an asset management system is
interfacing transaction data into the fixed asset accounting system. The goal is
to eliminate a dependency on maintenance forms, documents and aggregated entries
from other systems. These traditional approaches are not only obsolete but can
cause significant inaccuracies and weaknesses in internal controls.
How the interface actually occurs varies based on system architecture. If
both asset management and fixed asset accounting share a common database there
is no need to perform physical export of the transaction data. Similarly, if the
two systems are linked at the database level, a portion of the transaction flow
will occur automatically. Only if the two systems are separate will a physical
export be required.
Recalling that the asset database will contain entries for all assets that
are managed regardless of cost, a necessary first step for interfacing is to
identify those assets which are considered capital assets. This is best
accomplished by capitalizing assets based on a common description or similar
identifier so that the assignment can be automatic as new assets are added.
Doing so will assure consistency across all data and can be controlled by the
accounting department with a minimum of effort. Most contemporary databases that
are relational in design will perform this task with ease. Non-relational
databases will require each line item to be properly classified.
As assets are classified, cost becomes a factor rather than an absolute
determinate in segregating capital and expensed assets. For integrated systems,
asset cost is invariably assigned at the individual asset level. Because the
asset database is developed based on an asset's category, capitalization policy
becomes a blend of type of asset and the underlying cost.
Once capital assets are defined, the steps below occur during each
closing cycle.
- Identify transactions to be interfaced based on common type of activity.
Any transaction having financial impact requires specific review by the
accounting department to assure accuracy.
- Augment information to complete the transaction for entry into the fixed
asset accounting system. Timing differences may dictate that the physical
receipt and determination of the cost basis occur in different accounting
periods.
- Apply completed transactions to fixed asset accounting ledgers as
information becomes available.
Each implementation and organization will define the detailed steps necessary
to complete the integration based on the system design and their unique
processes.
Best Practice: System Integration
- Define asset capitalization policy based on category and unit cost
considerations.
- Define data capture requirements based on timing and availability of
data.
- Create closing procedure to identify transactions of common type and
augment each with appropriate financial data.
- Design process to resolve timing differences between actual transaction
dates and availability of complete data.
Conclusion
Best practices for asset inventory require those implementing to rethink past
practices and understand the tools presently available. Implicit is an
organization-wide approach that assigns responsibility and accountability to
those individuals best equipped to perform a given task. As systems are brought
live, allowances must be made for the clean up of existing records in terms of
staff hours and potential financial adjustments. Budgets must provide sufficient
resources to support the cost of software, hardware, asset tagging and training.
Clearly, the implementation of an asset inventory system is a serious
undertaking however, present regulatory environment provides little choice.
By Alden Snyder