Fixed Asset Management Best Practices
Companies need to maintain accurate records regarding their fixed assets.
However, it is critical not only to maintain those records, but also to do it in a way that can be used throughout the organization,
is updated in a timely manner and can be customized to meet the specific needs of various departments.
As Peter Drucker said, "There is nothing worse than doing the wrong thing well."
Creating this comprehensive collection of information on the entire fixed asset inventory involves establishing and maintaining a comprehensive,
automated and customizable fixed asset management (FAM) solution. However, as with most
business practices knowing what processes are needed and putting them into practice are two different things.
Use these key best practices to optimize your FAM implementation and operation.
Establish Standardized Policies and Procedures
Policies and procedures should be created to ensure consistent and correct accounting and management of fixed assets including:
- Accounting treatments
- Approval process of acquisitions
- Transfers and disposals
- Useful/depreciation lives
- Asset configuration
- Debt cost capitalization
- Periodic fixed asset inventories
- Establish an inventory and eliminate unused or fully depreciated assets
- Asset aging, reuse, storage, spare parts inventory and ethical disposal
In addition, the policies and practices should define key performance indicators which measure the success of your FAM activities, prioritize the most important items and define key measures which indicate that your FAM activities have reached maturity.
Establish a Capitalization Threshold
A company needs to have a defined set of criteria of what constitutes a fixed asset and what is an expense item.
If a non-inventory asset is used for more than a year, it should be treated as an asset.
However, it is often beneficial to allow expensing assets under a defined capitalization threshold.
Such threshold should be carefully considered to avoid expensing assets which should be capitalized,
resulting in a misstatement of the company’s financial statements. The company’s external auditors may be consulted on this decision prior to establishing the policy.
Correct Depreciation Setup
An asset should be depreciated as soon as it is ready for intended use and it must be assigned to the correct books and the correct depreciation formulae.
In addition the type of the asset often determines the formula and life, so the asset has to be correctly classified.
It is critical to track this information accurately and record it in your fixed asset tracking system. Key information that needs to be captured include:
- Acquisition date
- Total cost
- Initial use date
- Depreciation period
Use Automated Solutions
Fixed Asset Management software packages for tracking and managing fixed assets will make the process more efficient.
Avoid practices that rely on manual entry into a spreadsheet or stand-alone database which can be prone to errors.
In addition, work to select an asset management tool that track what you have in a central database which integrates to other
systems containing asset information Fixed asset software solutions will automate key fixed asset processes including:
- Integration with Purchasing
- Physical Location / Owner
- Disposals / Transfers
- End of life/removal from asset records
Define Key Performance Indicators (KPIs)
Measurement of performance can be relatively effortless if it is well supported by your fixed asset management software, so consider a toolset which allows automated KPI reporting.
The reports should include, but not necessarily limited to:
- Inventory tool accuracy
- Monthly and annual expenditure
- Cost, TCO, ROI and Value
- Aging assets and storage/spares inventory re-utilisation
- Report on high risk assets and especially those which do not have a failover/backup option
- Exceptional conditions, e.g. theft, loss,
- Equipment failures, reliability and adherence to maintenance schedules
Clearly Label Fixed Assets
This is essential, especially if the organization has many fixed assets distributed across several in one or more locations.
Clear labels will help with recording asset movements, asset inventories and so on. Labeling methods include:
- Printed asset numbers
- RFID chips
Barcoding and RFID solutions may not fit every need. The company needs to consider the merits of deploying a barcoding solution and evaluate the benefits of various alternatives. In any case, the barcoding or RFID solution must integrate with the selected FAM solution.
Periodic Fixed Asset Inventories
Fixed assets should be periodically inventoried. This process will help identify:
- Missing fixed assets
- Fixed assets not recorded in accounting records
- Fixed assets moved from one location to another
- Fixed asset obsolescence, etc.
The selected FAM solution should generate these reports on a scheduled or on-demand basis.
Fixed Asset Reconciliations
Fixed asset subledger/detailed records should be reconciled to the general ledger on a periodic basis.
The fixed asset software solution should integrate with the firm’s accounting software.
Reconciliations should include:
- Original costs
- Remaining value
Such reconciliations should be reviewed and approved by a person independent of the reconciliation process.
Some assets require regular maintenance to retain their scheduled values or to ensure employee safety. The FAM solution should support requirements to report and provide scheduling notices for regular servicing activity for specified assets (automobiles, generators, HVAC, machinery, etc.)
The selected FAM solution should generate standard and user-defined reports on a scheduled or on-demand basis. The solution must be able to draw information from the purchasing and financial systems and generate reports utilizing information from those sources as well.
Use the Tool
The FAM practice and the information provided by the process needs to be integrated into the daily process of managing the firm’s fixed assets. The employees and the key decision makers in the company must all use the FAM solution, otherwise it will fall into disuse by not being updated properly.
Establishment of a formal fixed asset management process will result in improved financial reports and statements, make purchasing more efficient, improve planning for replacement equipment and streamline any internal audit processes. The time and budget required to implement the process will yield dividends for years to come.