Don’t just control fixed asset management, optimize it
Build on a strong foundation to achieve greater efficiency
INSIGHT ARTICLE |
High performing companies have typically figured out how to effectively manage the financial and tax accounting for fixed and intangible assets. They should be commended for taking the time to build a solid foundation by addressing all of the fixed asset management basics. But many companies stop there when they could be achieving much more.
A well-structured fixed asset process provides efficiency around data management and manipulation, quality control in the form of reduced human error, and confidence surrounding tax decisions that can have economic benefit. So how can you know that your company is optimizing fixed asset management? First, you need to be certain the basics are, indeed, under control.
Fixed asset fundamentals
Remember, assets are assets, so your processes must include all of them–both fixed and intangible–before you can look at areas of improvement. Review your procedures and confirm that you:
- Use the same process and technology approach for both financial and tax accounting – identification of new asset additions, disposals, transfers, write-offs, impairments, currency translations, etc.
- Capitalize all required costs into the basis of the asset for both financial and tax accounting
- Use standard asset profiles to ensure accuracy and consistency – accounting controls the book profiles while the tax group manages the associated tax profiles
- Maintain adequate sets of fixed asset books for all financial and tax accounting
- Use a consistent approach for all companies – even joint ventures or other business entities you are responsible for managing
- Leverage standard system attributes to associate fixed asset to companies and jurisdictions – including attributes required to align business units to tax filing entities
- Leverage standard reports to meet as many fixed asset related data needs – tax adjustments, earning and profit adjustments, state apportionment and personal property tax filings
- Maintain physical control over fixed assets and regular audits to ensure record keeping is up-to-date
- Maintain accurate and up-to-date deferred tax asset and liabilities records as well as tax basis balance sheets for fixed and intangible assets
- Periodically check to ensure your system accurately accounts for atypical transactions such as short-periods and other tax reset events such as check-the-box elections
The basics are all about consistency. Consistent processes, consistent technology approaches and consistent decisions make it much easier to manage the fixed assets year in and year out while at the same time remaining open to changes introduced by your business operations and regulatory changes.
Ready for the next level?
With the basics handled and your fixed asset management functioning well, it is time to look for the opportunity to optimize. By elevating your approach to fixed asset management, your company can gain confidence that it is effectively capturing every available economic advantage. These may include bonus depreciation, acceleration of credits in lieu of bonus depreciation under section 168(k)(4), section 179 election opportunities, proper application of required and optional tangible property regulations, and special shorter life provisions for certain asset classes (i.e., qualified leasehold improvements, qualified restaurant and improvements, and qualified retail improvements).
This typically involves looking closely at each step in the process to determine where you can glean greater efficiencies through more effective use of available technology. Optimal processes will minimize manual intervention and improve accuracy of data related to any tax based in whole or in part on fixed asset records such as apportionment factors or tangible real property taxes‒minimizing the chance of misstated income or property taxes while maximizing resources.
Consider the following indications of an optimal fixed asset solution:
Standard and customized reports have built-in checks and balances
Instead of relying on manual processes to tie-out fixed asset costs and accumulated depreciation between your asset rollforward, additions report and gain-loss report, each report should include key check figures with variance flags to identify any exceptions. While verifying that reports tie-out is a primary control, reliance on manual effort is not an effective use of time. Take advantage of automated controls wherever possible.
Customized report capabilities are fully leveraged to fill in data gaps
It may sound easier to just create or re-format the fixed asset records in Microsoft Excel–it generally is not a sustainable long-term decision.
Analysis requiring repetitive manual manipulation in Microsoft Excel is automated via macros
Comparative and variance analysis, sample testing and exception identification are highly conducive to business logic rules. Excel macros can drive the analysis process and save time and effort with higher quality results. The time or dollars committed to achieving proper Excel functionality will be returned many times over.
All tax data profiles have a time dimension
This tip does not save time in the processing as much as it can be a lifesaver in the event of an audit. With an active time dimension in place any changes to profiles can be applied to specific time periods, creating a complete audit trail.
Last minute tax extenders are captured and implemented
While it can be frustrating to watch Congress, especially at the end of the year, it is important for your fixed asset systems to seamlessly handle retroactive changes to prior period tax asset records. Business operations, IT and tax should be working together to ensure that the company can easily take advantage of year-end tax extender legislation.
Tax adjustment calculations and supporting information flows directly to related systems
A fully optimized fixed asset management system delivers required data with minimal (preferably zero) manual intervention. Specifically, the fixed and intangible asset tax adjustment calculations and tax form supporting information should populate the appropriate fields in your tax compliance and ASC740 reporting systems. Depending on your tax software, custom bridges may be required to achieve this important milestone.
International needs are met
Fixed assets are handled differently by different jurisdictions and it is important that the intended use and depreciable life considerations are translated properly to appropriate taxing authorities. Global companies should make sure that fixed asset records are effectively translated into multiple languages, with and without foreign currency translations, so that stakeholders can easily understand the dollars and the descriptive information at the same time.
The right people are at the table
This seems obvious, but can be easily overlooked. As with any tax technology, fixed asset management systems require tax technical understanding in order to be properly configured. Any changes contemplated to the fixed asset systems should include the tax group as a primary stakeholder.
Companies should not be precluded from taking advantage of any tax planning opportunity simply because it is a challenge to adjust their fixed asset process and technology systems. Rather your fixed asset process and technology systems should be resilient and sophisticated enough to allow for changes while enabling you to maintain control.
If your company has achieved the basics but has not yet reached the higher efficiencies outlined above, you may wish to approach improvements one at a time or conduct a more comprehensive update. Either way, you have the benefit of building on a functioning asset management platform, so there is only upside potential to be gained.