Fixed assets often represent one of the most significant sources of organizational capital investment, but specifically identifying what a fixed asset is and tracking it over time can be a challenging process. Fixed assets are tangible assets that can be purchased, constructed, or donated. They are typically acquired for long-term organizational use and are not expected to be sold in the short term. As such, fixed assets are initially recorded to an organization’s balance sheet and expensed over time, requiring an additional level of tracking not found with other expenditures. Organizations with fixed assets will need to develop and maintain sound fixed asset management processes and procedures as a part of their accounting and finance operations.
Establish a capitalization policy
To effectively manage fixed assets, businesses first need to establish a capitalization policy. That policy should be written and periodically reviewed to assess whether it is in alignment with both organizational objectives and regulatory requirements. A well-written capitalization policy should include:
- Capitalization Dollar Amount Threshold – the minimum per-item cost for a cost to be recorded as a fixed asset
- Estimated Useful Life – assets are typically only capitalized if they are expected to have an economic useful life longer than one year
- Group Purchase – additional consideration should be given to items that individually fall below the capitalization threshold, but collectively may exceed the threshold amount
- Repair Identification – identification of when costs should be expensed as repairs rather than capitalized
- Capital Project Requirements – large improvement projects may require their own analysis of cost capitalization
Determine reporting methodology
Due to varying regulatory requirements and underlying tax incentives, it may be advantageous for organizations to maintain separate fixed-asset accounting for both federal and state income tax purposes and financial statement reporting. Organizations will need to carefully develop, analyze, and compare the strategy and approach to fixed-asset accounting. Doing so will require the organization to determine the appropriate reporting methodologies and how fixed assets will be deducted over time. The chosen reporting methodologies will specify characteristics for a given class of assets that will be used in depreciation calculations, including:
- Economic useful life
- In-service dates
- Depreciation methods and conventions
Evaluate tracking system alternatives
In addition to keeping separate fixed-asset schedules for income taxes and financial reporting purposes, many organizations may also have the need to separate reporting needs to report information for company departments, divisions, and locations. While it is possible to maintain fixed-asset records in spreadsheet form, there are fixed-asset management applications that can help streamline the management process and maintain an organization’s fixed-asset inventory. While these applications carry their own licensing fees, they can offer considerable advantages, including (but not limited to):
- Specialized reporting
- Alignment with current income tax requirements
- Budgeting and forecasting
- Scenario analysis
- Enhanced review processes
Even the most well-designed fixed asset management system is susceptible to failure if the policies are not properly communicated and adhered to. The policies and procedures related to fixed asset management should be thoroughly communicated to accounting and finance teams at implementation, staff transition, and on a continual basis to help ensure appropriate fixed asset accounting from asset acquisition through final disposal.
Fixed asset management is an ongoing process over the collective lives of the organization’s assets. A sound fixed asset management process should be incorporated into the organization’s periodic accounting close process. The closing process should include review of asset additions, disposals, charges to depreciation, and evaluation of the income tax implications associated with the method of reporting. Sound policies and procedures governing fixed assets will ultimately help enhance the value of financial statement and tax reporting.
This article is a selected piece from By the Books: FORVIS' Complete Guide to Small Business Accounting & Finance, which we are excited to release in April 2023. Subscribe to our Small Business list to get future updates and articles and be the first to receive the full guide.