MARCH/APRIL 2012 Article

Know How to Recognize and Protect Your Company Against Fixed Asset Risk Factors

Inaccurate fixed asset management can hurt a company in many ways. From overpaying for taxes and insurance to failing to prevent theft and loss to potentially costly penalties for accounting errors, a company's bottom line can suffer due to poor fixed asset management processes.

In order to successfully meet compliance mandates, companies should identify risks in their fixed asset management process, maintain detailed records and documentation, and undergo regular audits or reviews. All companies need to reduce the risk of financial misstatement by implementing controls throughout the fixed asset management and accounting process.

There are two inherent risk factors in every fixed asset management process that you should pay close attention to when implementing controls.

  1. Misstatement of cost basis.

    For obvious reasons, recording the correct cost basis for your assets is important. If a mistake is made in the cost basis, it can snowball and affect the accuracy of subsequent depreciation calculations. Make sure your company has capitalized all costs relating to the construction or purchase and continuing use of fixed assets.

    When reviewing assets, be sure to check the maintenance expense account to ensure that major repairs are not included as expenses. Instead, major repairs should be added to the cost of the asset if they increase the useful life of that asset.

  2. Working with complex accounting transactions.

    By their nature, complex accounting transactions are difficult to audit. For example, lease accounting can be tricky from the start if you do not properly categorize operating and capital leases. If capital leases are recorded as expenses, it causes inaccuracies on the company's balance sheet and income statement. It is important to go back and review each lease to ensure that each one is assigned to the proper category.

    Nonpurchased assets can also cause problems in accounting. Any asset that is self-constructed, donated, or nonmonetary is difficult to verify the fair market value or the cost involved in acquiring or building the asset.

    Another complex transaction is a fixed asset transfer. When auditing your fixed assets, be sure to set up an automated process so that you ensure timely transfer of assets from one location to another. It is important to correctly calculate property taxes based on the appropriate location and tax rate or risk assessment of penalties and interest.

Take steps now to protect your company from fixed asset risk factors. It is vital to both your bottom line and compliance that company financial reports are valid. With the right internal controls and systems in place, you can ensure the integrity of your fixed asset accounting reports and avoid costly mistakes.


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