A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 13, Issue 2 April 2011

Verification of Fixed Assets

Fixed Assets – very often an overlooked line item in the balance sheet

Fixed assets of commercial entities tend to be overlooked very often or be taken for granted by the management. Fixed assets are one of those line items which one expects to see on the balance sheet but which, generally, do not get the same attention and scrutiny as do other items like inventories, trade debtors, and cash and bank balances. Fixed assets, especially in a manufacturing set-up and in many service organizations, are very often a very significant item in the entity’s balance sheet and, more often than not, critical to the health and indeed the survival of the entity. Often the only time fixed assets get noticed is when they break down, leading to loss of productivity and profitability, or go missing. Given the level of investment and their importance to an entity it becomes imperative that fixed assets, like other tangible and intangible assets, are continually monitored, controlled and properly accounted for.

Fixed assets generally do not get the same attention and scrutiny as do other items in the balance sheet like inventories, trade debtors, and cash and bank balances

It is often the case that a fixed assets register is a hard-to-find item. Either it is created in the initial stages of an entity’s life and then relegated to a drawer or filing cabinet, never to see the light of day or worse, never created in the first place!!! In the heady rush to commence business/production the mundane matter of preparing the fixed assets register is often overlooked or even ignored. Even when the register is created, it is often never updated for additions and deletions, and other changes. Consequently, the fixed assets register, often, is totally out of sync with the fixed assets actually owned by an entity. In fact, depreciation is often charged to the income statement each year based on opening balances and additions thereto and, unless the asset is significant, the adjustment for disposal or write-off is often overlooked. In many cases, the asset has often been disposed of, been damaged or outlived its useful life without this reality being reflected in the register. Conversely, an asset may be fully depreciated in the accounting records and may therefore be eliminated from the register, though it continues to exist and be used. All of these situations, along with routine business complications lead to a loss of control over, and possibly misuse and loss of, an entity’s assets.

Given the software available, it is now relatively easy to create a fixed assets register and keep it up-to-date. The software can be configured to keep a detailed track of the fixed assets by including information as to their nature, class, location, ownership, date of purchase, cost, details of supplier, packing list and technical drawing numbers (in case of assembled components), estimated useful life, etc. The software also performs other useful functions like sending e-mail reminders when the asset has to be serviced or maintained or when the warranty period is nearing expiry. Facilities for capturing electronic images of the asset for easier identification, bar coding the assets and linking these to the labels affixed on the asset are also routinely featured in the software. As a matter of fact, RFID (Radio Frequency Identification) technology can be used now to facilitate the physical verification of fixed assets and control their movement.

Creation of a fixed assets register is only the first step in the process of exercising control over the fixed assets of an entity. Thereafter, the fixed assets have to be verified physically on a periodic basis to determine whether they still exist and are in good working condition. In some instances, fixed assets below a certain value are not capitalised but are charged-off to expense in accordance with the entity’s accounting policy. However, accounting control still needs to be exercised over these assets, which is achieved by including them in the fixed assets register but writing these off fully in the year of acquisition.

Physical verification of fixed assets and their mapping with the fixed assets register can be a tedious, time consuming and frustrating exercise. Routine duties and responsibilities of the accounts and technical departments along with limited resources often lead to this exercise being postponed or not being conducted at all. Many times the verification exercise is conducted in a haphazard manner just to address comments by internal and statutory auditors, who routinely emphasise the lack of control over fixed assets. Thus, very often, this area is a chink in the Financial Controller’s armour.

The physical verification exercise and the creation of the fixed assets register can be easily outsourced to a professional service provider with relevant experience. Once the register is created and the assets are properly identified and tagged by such a service provider, it is easier for the entity’s finance team to continue to maintain it.

The physical verification of fixed assets and the creation of the related register can be easily outsourced to a professional firm with the right tools and expertise

Whilst the bulk of the exercise can be conducted by the outsourced agency, some assistance with documentation and identification of the fixed assets, especially fixed assets of a technical nature, may be required from the entity’s technical or finance teams. The starting point of a physical verification exercise can differ depending on the nature of the fixed assets and their complexity. The starting point can be the source documents like invoices, or packing lists if the packing list is likely to give more details of the asset than is evident from just verifying the asset physically, and especially if the fixed asset comprises many subcomponents. If the fixed assets are not very complicated and are easy to identify and locate, the starting point could be the actual fixed assets.

Using appropriate software, an outsourced agency can capture details of the fixed assets which can then be cross-referenced to the related supplier invoices, packing lists and even drawings. Using bespoke printers, barcoded labels can then be generated, printed and affixed to the fixed assets for immediate identification. Different types of labels can be used for different assets depending on the use to which the fixed assets are put or their location and consequent exposure to varying degrees of ambient temperatures. Thus, for example, metallic labels are generally used for plant and machinery, kitchen equipment, etc., which are exposed to heat, dust and humidity while paper and resin labels are used for assets used in controlled temperature environments. These labels can be read by a bar code reader (which also synchronises with the Software) and instantly display the details of the assets. Digital images can be captured and linked for easier identification of the fixed aseet. Once the details are captured and the fixed assets are labelled and tagged, it becomes easy for the entity to control and monitor them. Since the fixed assets register also captures the bar code label details, the auditors can also derive comfort that the fixed assets indeed exist and can be physically verified with a minimum of effort. Once the process is in place, additions and deletions can be easily captured thereby ensuring that the fixed assets register is up to date.

In summary, a professional firm with the right tools and expertise, can create a fixed assets register with all relevant details. Thus, entities with significant investment in fixed assets can now be assured that with some investment in time and financial resources, and incorporating relatively simple procedures and processes, the management can assure themselves and their internal and external auditors, and other interested stakeholders that the entity’s fixed assets are monitored and controlled adequately.

[This article has been contributed by our Director, Management Consulting Division, Mr. Hoshedar J. Cooper, who has overseen several assignments for the verification of fixed assets and their subsequent incorporation into a fixed assets register.]