Fixed asset accounting policies present a conundrum for many businesses. 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. How the rules are applied requires a certain amount of judgement, and the results are often questioned by auditors. This creates headaches for accounting managers trying to justify their decisions.
The Challenges of Managing Fixed Assets
Despite its importance, managing depreciation is a largely manual task. Simply developing a complete list of existing assets can be extremely difficult, especially for companies with machinery and equipment in multiple locations. That's because asset inventories are often decentralized, with each facility keeping track of its own equipment.
Decentralization makes capturing acquisitions and disposals in a timely manner particularly challenging, as facilities personnel may not think to alert accounting to these events. In addition, key details required by accounting, such as the purchase date, purchase price plus directly attributable costs and expected useful life, are also difficult to gather when information is stored in multiple locations.
Even when a central asset register does exist, there is no guarantee that the information will be up to date. Newly acquired assets may not be entered immediately, and assets that have been disposed of may not be removed at all. In fact, by some estimates, assets that are no longer in service—so-called phantom assets—represent up to a quarter of all fixed assets carried on a company's balance sheet.
While performing a thorough asset inventory at least once a year is a recommended practice, few organizations actually do so. As a result, companies risk over-reporting the value of fixed assets, which can lead to overstating depreciation, and may carry more insurance than needed, increasing costs unnecessarily.
Asset Management the Hard Way
Gathering and entering data into a spreadsheet is a time-consuming, manual process prone to errors. Due to the need to pull information from various departments and/or facilities, spreadsheets are often passed between multiple people, further increasing the potential for errors and resulting in multiple versions of the same spreadsheet. For companies with hundreds of fixed assets, it's easy to overlook errors, and it’s difficult to ensure that the correct version of the spreadsheet is used for reporting.
If multiple people are updating the spreadsheet, there is also a risk that information will be entered in the wrong place, that depreciation methods will be applied inconsistently or that formulas will be applied incorrectly or changed. This lack of version control and audit trails makes knowing who did what next to impossible. This may cause auditors to spend more time reviewing the data, which increases costs.
Because the process happens outside of the accounting system, depreciation expense must be entered manually, creating further data integrity issues. Every time data is moved from one system to another, you increase the risk of introducing more errors. Even if the data is being transferred via an export / import process or via an integration, there is potential for data to be lost, changed or added to the wrong field. Manual data entry only makes matters worse.
Automate the Management of Your Fixed and Leased Assets
The solution to these problems is to replace spreadsheets with a dedicated fixed asset management solution that centralizes fixed asset and lease data so it can be accessed and updated as needed by all authorized users, regardless of their location or role within the organization. The application should automate depreciation calculations, using the designated depreciation method and schedule for each asset, saving time and ensuring that depreciation rules are applied consistently. Finally, the solution should be integrated with a company’s accounting system, saving time and reducing errors by avoiding the need to manually re-enter data.
NetSuite Fixed Asset Management automates the entire fixed asset lifecycle, from acquisition and depreciation to reevaluation, impairment and disposal. The combination of flexible depreciation options, automated calculation and detailed reporting helps minimize errors and ensure correct allocation of fixed asset expense.
To learn how NetSuite helps you manage fixed asset depreciation and comply with lease accounting standards, watch this webinar.