18 Jan 2021 Ankit Chadha

Fixed Asset Accounting: Overview and Best Practices

Fixed Asset Management | TRC Corporate Consulting

Fixed assets are tangible long-term assets. In their regular business activities, businesses use these assets to produce revenue. Usually referred to as the ‘Capital’ of the company, products such as machinery and plant equipment provide fixed assets – here, their distinguishing characteristic is that they are not transformed into cash in the first year of purchase. Organizations tend to invest in fixed assets for the following purposes:

  • Function as third party rentals
  • Usage in routine organizational workflows
  • Allow the production or supply of commercial goods and services

What Is The Difference Between Fixed Assets and Inventory?

People also wonder how fixed assets differ from inventories. Business inventory is characterized as any current asset in your company’s financial database. Goods that come under inventory are worth to the company. Besides, the company can conveniently cash them out to cover any current debts. For convenience, the inventory can be divided into four categories:

  • Raw materials
  • Goods and services in progress
  • Finished goods
  • Maintenance, repair, and operational supplies

All of this is somewhat different from what a fixed asset is. Fixed assets are, more often than not, a finite, long-term investment. Another argument that needs to be explained here is that fixed assets do not have to be ‘fixed.’ This implies that a fixed asset does not always have to be stationary or immobile. They can be promptly moved from one place to another. Good examples include the use of cars and electronic equipment.

What Is Fixed Asset Management?

Fixed asset management or accounting concerns the correct logging of financial reports on fixed assets. For this reason, businesses need information on the acquisition, depreciation, audits, disposal of fixed assets, and more.

Since fixed assets are a significant part of the company’s expenditure, its requirements must be accurately registered. As per financial practices, fixed assets are listed in cash flow statements. That’s why the purchased fixed asset is a cash inflow, while the one sold is a cash outflow.

Next comes the question of how fixed assets are priced. Owing to their continuous use, fixed assets are subject to persistent devaluation. As a result, these assets fall in value each year. As a consequence, a capital asset exists in accounting books at its net worth. The net worth is the initial expense depreciated by a specific amount over the years. To find the appropriate fixed asset value, it is recommended that you hire an expert to handle your company’s fixed asset management.

When you first add a fixed asset to your financial statements after the fixed assets management process of valuation. Some of the most important transactions are:

  • Periodic depreciation, which applies to tangible assets
  • Amortization, which applies to intangible assets
  • Disposal of fixed assets

Remember that it is always better to measure precise depreciation rates on all of your fixed assets for an accurate fixed assets management process and systems to be put in place. This is called foxed asset tracking under the fixed assets management process. Once the asset’s value is completely depreciated and its useful life has ended, the last step is its disposal. Recording disposal is as critical as entering new purchase data. This makes for a crucial step in the fixed assets management process of an organization.

Now that we know what fixed assets tracking and management is, let’s look at how you can ensure the smooth running of your fixed asset accounts.

International Financial Reporting Standards

For fixed assets management and accounting, the International Financial Reporting Standards (IFRS) is a structure that provides consistent guidance for the preparation and arrangement of financial data. Actively supported by more than 120 nations, IFRS was taken from the London-based International Accounting Standards Commission. Why does all this matter to the company’s fixed assets management process?

Companies around the world are likely to have various asset management systems. This means that they would also have multiple ways to track the use of properties and include parameters for fixed asset management systems or management of fixed capital. In order to introduce some continuity between these differences, the IRFS has defined rules and regulations for the countries to obey.

Suppose the business lacks robust accounting or fixed asset tracking and fixed asset management systems. In that case, they are likely to struggle in the long run. For this purpose, IFRS encourages businesses to follow a set of authorized accounting directives for fixed asset tracking, management of fixed capital, and fixed assets management process or systems. Thus, helping rectify mistakes and avert neglect and fraudulent pursuits.

Using these standards permits organizations to construct and implement sophisticated fixed asset management strategies for various processes such as: 

  • Documentation of financial records
  • Revenue calculations
  • Employee welfare practices
  • Fixed asset valuation
  • Income tax regulation compliance

The choice of a widely agreed mechanism, such as the IRFS, thus benefits all businesses. It makes it easier to record figures without having to make expensive conversions. If you want to compete in foreign markets, it is better to look for a financial framework to do so easily.

Best Practices For Fixed Asset Management And Accounting

Asset accounting and fixed asset management are some of the primary activities of all organizations. Therefore, organizations need to ensure that the procedure is carried out with the utmost care.

A single mistake in financial reporting in the asset accounting or fixed asset management systems can lead to significant implications – potentially detrimental to the business’s reputation. The easiest way to do this and avoid mistakes is to implement the following best practices:

  1. Establish An Upper Limit For Capitalization

The first step towards preserving error-free accounts in the fixed assets management process includes establishing a criterion for separating assets from expenditure products. Experts suggest tracking objects that are to be used as properties for more than a year. Doing so is handy, as it also allows you to distinguish between various accounts. It also protects you from material misstatement in your financial reports.

  1. Ensure That Your Assets Have Tags

Many businesses have fixed assets that they ship to different locations for off-site ventures. However, all this movement could make it difficult to monitor these fixed assets at the time of the fixed assets management process. With the failure to track properties comes the result of a major loss of fraud or misplacement.

It is important to tag all properties in order to monitor such unfavorable practices. Barcode and QR Code labels are a nice choice for quick check-in and check-out. These tags allow you to track asset positions at different locations, thus having appropriate records in the fixed asset management systems. With fixed asset tracking tags, you also have more reliable data for your financial reports for effective management of fixed capital.

  1. Choose The Correct Form Of Depreciation

Many businesses do not have the right depreciation rate for their properties due to inaccurate measurement methods. If the company continues to implement the wrong rate, its data would be full of errors. This is often the case when the fixed assets management process starts and further leads to developing a fixed asset management system.

To prevent such situations, identify your properties by their use, longevity, and expected life. Based on the unique attributes of these distinct groups, decide the best possible depreciation process. What works for a bunch of laptops, for example, would not necessarily be the best choice for heavy plant machinery.

  1. Get An Insurance And Record It

Since fixed assets are usually used for more than a year, it is good to get them insured. An insurance policy helps you to deal with unforeseen losses to your estate without emptying your bank account.

Make sure that you report insurance claims against their respective accounts during the fixed asset management. This requires the correct indication of the damage and the specifics of its pay-out. You will find this useful later on as it provides a true representation of assets’ use to construct the firm’s reputation.

Hire An Expert Or Outsource Your Fixed Asset Management Process

At TRC Corporate Consulting, we follow the Accounting Standards (AS) as per the suitability to fixed assets’ accounting needs, including fixed asset management. Our fixed asset management solutions utilize the accounting of fixed assets rigorously based on the AS-6: Accounting for Depreciation, AS-10: Accounting for Fixed Assets, AS-11: Accounting of the Effects of Changes in Foreign Exchange Rates, and such.

Besides helping you implement fixed asset management solutions, we also offer an audit trail prepared on a spreadsheet, together with numerous other reconciliation reports such as:

  • Matched Assets
  • Unrecorded Additions
  • Unrecorded Retirements

We are recognized for establishing the best practices for the fixed asset management process or fixed asset reconciliation. We ensure that you get accurate outcomes within the stipulated deadlines. For an understanding of our fixed asset management solutions or accounting services, contact us!