Introduction
The role of fixed assets in business management has been emphasized by most business executives and reduced to elements with a physical presence. According to Investopedia, it is long-term tangible property that a business owns and uses in the production of its income and is not expected to be consumed or converted to cash for at least one year.
The International Accounting Standard, IAS (ie IAS 16) also considers them as assets whose future economic benefit is likely to flow to the entity and whose cost can be measured reliably. It belongs to one of 2 types: “Freehold assets”: assets that are purchased with legal ownership and used, and “Lease assets”: assets used by the owner without legal rights for a specified period of time. Typical examples include plant and equipment, buildings, fixtures and fittings, machinery, heavy vehicles and equipment, computers and IT equipment, etc.
Attempts to maintain, use, and track them are called fixed asset management. It is basically an accounting process that seeks to track fixed assets for financial accounting, preventive maintenance, theft deterrence purposes and to track the location, quantity, condition and depreciation status of the asset. To include the qualitative attributes as well and generally you will consider processes such as asset planning, provisioning, tracking, depreciation and disposition. The most common management system is the fixed asset register, which is basically a manual register that is used to keep track of the fixed assets of a company and shows information related to the value of the assets, the date of acquisition, the provider name, reference code and other necessary details. to calculate for tax and depreciation purposes.
Relevance in business
Fixed asset management is not often considered a key priority by companies, but effective fixed asset management provides numerous benefits that cannot be underlined. Among some of the relevance are:
• Helps an organization keep track of all its assets and can know where they are located, how they are used, and when changes were made to them.
• Helps ensure that depreciation rates are accurately calculated and regular evaluation of them ensures that your reporting on the financial statements is accurate.
• Creates more operational efficiencies because asset management enables an organization to understand the capabilities of its assets and how they can be operated most effectively to improve profitability.
• Helps take advantage of tax breaks through capital relief. With the application of the capital reserve for depreciable assets, effective asset management will ensure the full enjoyment of the tax benefits available for all identifiable fixed assets.
• Helps avoid misrepresentation in financial statements. Effective asset management will ensure that the values of fixed assets are accurately recorded in the financial statements to avoid any possible overstatement or underestimation of asset values.
• Helps to assess and identify risks related to the use and ownership of assets so that the relevant mitigating factor is considered.
• Likely incidents of theft are reduced as proper accounting of the asset recovery process will ensure that the business maximizes returns without loss of items during the process.
Adverse effects on business
Probably, the fact that fixed assets are not liquid in nature could explain some of the reasons why business executives pay less attention to it even though it can include a significant portion of total assets on a company’s balance sheet. However, its adverse effects are not negotiable for any business. Possible adverse effects include
• May result in inaccuracies in the value of fixed assets reported in financial statements, as adequate data on assets may not be available and eventually reduce investor confidence in financial reports.
• The asset report might also take longer to produce, as the data may be incomplete or not exist.
• Without fixed asset management, a company’s assets can be exposed to theft or misuse due to poor tracking.
• Its absence could cause excessive capital spending without any accompanying productivity, affecting cash flow.
• Has the potential to contribute to the undervaluation or overvaluation of the company’s operations.
• It could also affect the general performance of the company if inaccurate gains or losses are recorded in the disposal of assets with their associated tax implications, particularly in the case of earnings.
• It could cause additional or increased audit costs, as auditors may have to spend more time auditing assets due to incomplete or missing records.
• Could result in poor capital budgeting, especially when the main source data that forms the basis of the budget is full of inaccurate or incomplete information
How to effectively manage fixed assets in companies
Profitability is not just a function of revenue, but also better management of resources, including fixed assets, hence the need to ensure their efficient management Possible practical ways to manage fixed assets are as follows:
Guarantee the responsibility and safe custody of assets. – Safe custody of assets is a very important part of the process and is accomplished by assigning a responsible officer as custodian. Only when this is done can asset liability be established, which can result in a higher level of security and help reduce the incidence of theft or misuse, including servicing as a risk management measure.
Institute asset tracking System– Companies that have a large number of assets, particularly mobile assets, should implement fixed asset tracking systems to ensure security and productivity. Keep asset details up to date by tracking their location, use, custody, maintenance, etc. it could help ensure safety, productivity and efficiency.
Perform tagging or tagging of fixed assets – Labeling or labeling assets with unique identifiers goes a long way towards ensuring effective and proper management and control of assets. For example, when a company has multiple fixed assets and some are even nearly identified, a mistake could be made when creating duplicate asset records, hence the need to correctly tag and label assets. Such tagging or tagging could also speed up the audit of fixed assets as they can be easily identified.
Perform asset verification – To ensure optimal asset management, a periodic verification of physical assets must be carried out to ensure their existence and identification, so that the results of the verification are reconciled with the asset records in the company’s books , with all important exceptions noted and investigated accordingly. It could also reveal inefficiencies in the asset acquisition and control process that may require the necessary attention and correction for their protection.
Establish standard operating procedures or a fixed asset policy and strong internal control. – The existence of standard operating procedures (SOPs) or a policy on fixed assets or internal controls is considered a prudent means to manage them effectively in a company. As they tend to be huge capital expenditures, putting these mechanisms in place will ensure that their acquisition, maintenance, movement and disposal are properly managed with a lower risk of incidents such as theft, existence of phantom assets, misuse and errors that have the potential to affect profitability. Duly accepted and documented depreciation and disposal policies with proper implementation will reduce the risk of financial reporting misstatements or errors.
Acquire reliable fixed asset software – Reliable fixed asset software will not only have data available on asset components, location, quantity, etc., it will also improve reporting. The application of manual means to calculate depreciation could have various errors that will affect the reliability of the value of fixed assets in the financial statements, however, the use of such software offers relatively improved reports that could be generated at any time or day. Practices such as comparing, scanning, and attaching invoices to asset records are recommended as they will provide management with an accurate assessment of fixed assets within the entire business and facilitate auditing of fixed assets.
conclusion
It is proven that with effective fixed asset management, companies have the potential to maximize return on capital investments, reduce risk and increase asset management efficiency, save administrative time and costs, improve accuracy of financial and tax reporting compliances and to make effective decisions to improve overall organizational profitability and support growth.
