Fixed asset accounting pose a lot of challenge to many businesses. Not to mention the conundrums in the decision making. The decisions like which depreciation method to apply or the estimated salvage value of an asset can have a significant impact on tax liability and earnings. Fixed asset management system in India has to see for the applicable rules as this requires a certain amount of judgement, and the results are often questioned by auditors. No wonder the accounting managers have a hard time to justify their decisions.
Challenges involved in Managing Fixed Assets
Managing tasks like creating and compiling the list of existing assets especially for companies with machinery and equipment in multiple locations, depreciation calculation, is a difficult task.. The prime reason of this difficulty is the fact that the asset inventories are often decentralized, with each facility keeping track of its own equipment.
It is this decentralization of the assets which makes capturing acquisitions and disposals challenging, and there is always a matter of maintaining time for these acquisitions as well. Moreover, the facilities personnel may not think to alert accounting to these events. Capturing key details required by accounting, such as the purchase date, purchase price plus directly attributable costs and expected useful lifestorage details in multiple locations poses challenge.
Even when a central asset register does exist,fixed asset valuation may not guarantee that the information will be up to date. Newly acquired assets may not be enlisted or recorded, and the assets that have been disposed of may not be removed at all. As a matter of fact, it has been found in quite a few fixed asset valuations that the assets that are no longer in service ( also known as Phantom assets) reflect up to a quarter of all fixed assets at the time company’s balance sheet preparation.
It is a regulation to perform a thorough asset inventory at least once a year. However, there are very few organizations which actually do so. This results in companies risking over-reporting the value of fixed assets, which in turn leads to overstating depreciation, and may carry more insurance than needed, increasing costs unnecessarily.