Fixed Assets Register
What is a Fixed Asset Register (FAR)? Fixed Assets are assets such as land, machines, office equipments, buildings, patents, trademarks, copyrights etc held for the purpose of production of goods or rendering of services and are not held for the purpose of sale in the ordinary course of business. Fixed assets constitute a major chunk of the total assets in the case of all manufacturing entities. Even in the case of service entities such as hotels, banks, financial institutions, insurers, mobile / telephone service providers etc. it has become imperative to invest heavily in furnishing, equipment, and technology to attract, and retain customers.
As a man investing on the NASDAQ must know his investments, so it is important for every business entity starting from a small department store to a large corporation to have a list of its fixed assets. The important objectives in maintaining a Fixed Asset Register (FAR) are as follows: a) To keep track of details of each fixed asset, starting from its acquisition to disposal, such as -:*i. Description.*ii. Vendor.*iii. Invoice number, Purchase Order number, and Inward Receipt number.*iv. Location. *v. Date of installation. *vi. Rate of depreciation. *vii. Warranty, maintenance dates & costs.*viii. Components and attachments, cost center. *ix. Movement to different locations / cost centers / people. *x. Historic cost, or other amounts substituted for historic cost (i.e. revalued amount). *xi. Accumulated depreciation. *xii. Sale value, profit / loss on sale or scrapping.b) To ensure control, and to prevent misappropriation of fixed assets.c) To ensure compliance with the requirements of the Act governing companies / corporations / government institutions.d) To obtain correct value at which fixed assets are to be insured so as to minimize premiums.e) To compute depreciation for financial accounts, and tax purposes.f) To obtain insurance claim when fixed assets are destroyed by acts of God, terrorism, accidents etc.g) To generate accurate, complete, and customized reports that suits the needs of management.h) To keep track of owned, and leased assets. No depreciation is admissible on leased assets.i) To keep track of fixed assets under construction or assembly. Generally, list of capital work-in-progress is maintained separately.j) To aid in capital budgeting.k) To keep track of cost of imported assets purchased. Cost of imported assets purchased on loan basis keeps changing due to exchange rate fluctuations. l) To keep track of amount provided for Asset Retirement Obligation (ARO) in respect of each asset as required by US GAAP (FAS – 143). Making entries in the FAR. Not all assets are capitalized. Keeping in view the concept of materiality, a company may have a policy to capitalize only those assets, which cost more than a specified amount. In the US, government agencies are required to expense all equipments whose value is below a threshold limit. Similarly, fixed assets which have a useful life of less than one year are not capitalized. Precautions while making entries in the FAR. In some companies, improvements / alterations / betterments made to an asset are capitalized separately in the FAR, which is not correct. If such mistakes are made, it is highly probable that the auditors while undertaking physical verification of assets will notice irreconcilable differences. Where improvements / alterations / betterments made to an existing asset justify capitalization, such additions should be made to the cost of the original asset. Fixed Assets Accounting Software. A wide-range of software is available suiting every type of business need starting from a small businessman to a large corporation. The cost varies from a few hundred dollars to thousands of dollars. A team comprised of Certified Public Accountants, Tax Experts, and Programmers develop the software. Every aspect of the fixed asset accounting is taken care of starting from reports needed by management to compliance with requirements of FASB / GASB, and tax authorities. It is always advisable to buy Fixed Asset Accounting Software after taking into account the following factors-: a) Will it work with the company’s hardware?b) Does it meet the company’s requirements?c) Is the implementation simple? d) What is the quality and extent of documentation?e) Is it easy to use?f) Does the vendor provide training? g) What is the vendor’s track record of performance? h) Can any modifications be made to the software as per the requirements of the company?i) Will updates be made available at a nominal cost?j) Is the price reasonable? Out of the above factors, points (b), (e), (f), (g), and (i) are very important.
The format / details to be provided in a FAR generally depends upon the following factors -: a) Nature of assets.
i. If moveable assets constitute a significant portion of total fixed assets, details will be necessary on their movement from one department / cost center / people to another.
ii. Cost of assets. Greater control and security is required for costly equipment. b) Customized Reports on fixed assets required by management.c) Disclosure norms / regulatory compliances as per statutory laws applicable to the entity.d) Extent of owned, and assets taken on lease / hire purchase.e) Requirements of insurance company.f) Location of fixed assets. If fixed assets are located at numerous locations, greater details will have to be given. In the case of a construction company, the assets are located at different work sites. These work sites maybe in different cities / countries / continents.g) Maintenance costs. Some fixed assets require regular servicing to keep them running in an efficient and satisfactory manner. It would be necessary to keep a tab on the maintenance costs, dates of servicing etc. during a stated period. Maintenance of a FAR in a Multi-National Corporation (MNC) can be onerous and complex. Presence in a large number of countries leads to the following problems: a) Different regulatory and compliance requirements in each country.b) Different currencies. Generally, a MNC sets up a subsidiary in the country in which it intends to start operations. Maintenance of FAR is decentralized. The FAR is maintained as per company’s policy, and regulatory / compliance requirements which are country specific. If consolidation of holding company and its subsidiaries (whether domestic or foreign) is required by the law applicable to companies, and relevant Accounting Standards, the task may become a bit complex. The crucial point is related to selection of exchange rate for conversion of fixed assets. Most companies either use average annual rate or year-end exchange rate.
Similarly, for companies having their shares listed on American Stock Exchanges, the fixed assets are required to be stated in accordance with the requirements of US GAAP. Identification of a fixed asset. In a large corporation, the task of identifying and locating a specific fixed asset can be onerous unless numbering is scientific, systematic, and up-to-date. A common problem in most companies is the improper maintenance of the FAR. Physical verification of fixed assets becomes a futile exercise unless the FAR is properly maintained.
It would be advisable to use a scientific numbering technique to identify fixed assets. The process of numbering fixed assets is called tagging. An identification number (combination of alphabets, and numbers) is written / engraved on the asset. Engraving the identification number on the asset is advisable in the case of Plant & Machinery where due to heavy wear and tear / rough use, there is every possibility of the painted number getting erased.
The objectives of tagging are -: a) To help in taking physical verification of assets. b) To control the location of all physical assets.c) To provide a common ground for communication between the Accounts Department and the end-users.d) To aid in maintenance of fixed assets. To keep a track of the dates on which maintenance has been carried out, and the costs incurred.e) To know the net book value of asset in case of sale / scrapping. It is not necessary to tag all fixed assets. The following fixed assets are generally not tagged. a) Land: Land is commonly identified with reference to the survey numbers, and registration papers.b) Buildings: Buildings are identified on the basis of registration papers.c) Vehicles: Identification of vehicles is done by reference to the registration number allotted by the Motor Vehicles Department.
How is Scientific Numbering done? Let us take an example to clarify the concept. Unilever intends to give a number to an imported machine. The following are the details about this machine-: 1) It’s a boiler.2) It has been imported from the United Kingdom (UK).3) It is being used in the Fast Moving Consumer Goods (FMCG) factory at Mississippi, USA.4) It is located in the Production Department (Soaps & Detergents).5) There are four other similar boilers. The machine will be numbered as follows: Unilever / Mississippi / FMCG / Production / Soaps & Detergents / Plant & Machinery / Boiler / 5. Generally, abbreviations are used while numbering. Soaps & Detergents will be written as S & D, Plant & Machinery as P & M, Production as PD, and so on.
All other fixed assets should be numbered in a similar manner. It is important to be consistent in numbering fixed assets throughout all factory locations. Whenever any asset is transferred from one country / factory / department to another, the numbering will have to be changed. The asset will get a new identification number.
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