How to control over fixed assets? [Guide and tips]
Are you looking for a guide of control over fixed assets for your annual financial reporting?
Knowing the exact situation of its fixed assets is not a matter of comfort for a company. Internal control is a very important concept for companies, for their management, and the aim of which is to better control all the processes implemented by the business to achieve its objectives.
This is most often an obligation, imposed by an increasingly restrictive legal and regulatory framework. However, good control over fixed assets can significantly improve the profitability of the business.
Discover what control over fixed assets is, their importance, key internal risks, and how to control it in this article.
What is control over fixed assets?
Internal control is a company mechanism, defined and implemented under its responsibility. It includes a set of means, behaviors, procedures, and actions adapted to the specific characteristics of each business which:
- contributes to the update of its activities, the efficiency of its operations, and the efficient use of its resources and budget management,
- must allow it to appropriately take into account significant risks, whether operational, financial, or compliance.
The management of fixed assets is undoubtedly one of the most important aspects of the management of the assets of an industrial or commercial enterprise. To guarantee the protection of its fixed assets, the business must put in place a reliable internal control system and carry out a periodic physical inventory. In addition, fixed assets obey specific accounting and tax rules that the business must comply with.
Importance of control over fixed assets
For the main operations relating to fixed assets, the main objectives of internal control are as follows:
- Ensure the control of investment funds: these must be financially sound and be regularly approved;
- Ensure and verify the good physical conservation of investments within the business;
- Ensure the control of divestment operations: asset withdrawals from fixed assets must be justified and regularly approved;
- Provide, on each asset, individual information that is sufficient for its accounting monitoring and management decisions.
It's a priority not only to have an exact and reliable view of the company's assets at the time of the balance sheet, but also to have a permanent follow-up of the various fixed assets, and their book value through the follow-up of depreciation, in order to deal with any eventuality, in particular a legal obligation of a government or fiscal obligation.
Key internal risks and controls
For the internal control over fixed assets, compliance with which must be examined in one year, are the following requirement :
- All fixed assets, as well as related expenses or expenditure and revenue, are registered (completeness);
- All fixed assets, as well as the corresponding expenses and income are real, owned by the business, and are properly protected;
- All fixed assets, as well as the corresponding expenses and income, are correctly evaluated.
Physical risk control
Assets include not only "tangible assets" such as machine, equipment, ... but also "intangible assets" such as capacity, image, or reputation. These assets can disappear as a result of theft, fraud, unproductivity, errors, or the result of poor management decisions, or weak internal control.
Particular attention should be paid to the related processes. The same applies to the processes relating to the preparation and processing of accounting and financial information. These processes include not only those that directly deal with the production of financial reporting, but also the operational processes that generate accounting data.
Each prime contractor who acquires, owns, manages, uses, changes, and/or controls a fixed asset must monitor this asset and guarantee that it is not lost, damaged, stolen, or misused, including fraudulently. The prime contractor will therefore need to have adequate policies and procedures to manage operational aspects related to fixed assets such as, among others, distribution, use, insurance, maintenance, repair, and physical metering of the assets concerned.
Fixed assets generally constitute a large part of the company's assets. It is therefore important that the business protects itself against risks that may threaten its physical existence. Most often, the measures that should be required in this area are:
- The implementation of periodic physical inventories, which makes it possible to identify losses or thefts, destruction, etc., and possibly take the necessary protective measures. One of the most important elements of internal control is periodic physical inventories;
- The existence of service responsible for the "maintenance" of fixed assets. This measure particularly concerns production companies that use a whole fleet of machines, whose operation and maintenance must be ensured. In this regard, a production or maintenance work order system can be put in place;
- Sufficient insurance of fixed assets against major claims. Securing a program's assets properly transfers risks associated with potential loss and damage and mitigates inherent supply chain risks and other risks that can compromise program results;
- Periodic verification of the existence of assets by means of an inventory. This physical control must be carried out through a risk-based approach. It is the responsibility of the prime contractor who acquires, owns, manages, uses, and/or controls fixed assets to make sure that these assets are properly maintained and that, as part of its fixed asset management practices, regular maintenance is planned to maintain these assets in good condition;
- Review or assessment of the current condition of fixed assets and their remaining useful life;
- Reconciliation of the results of the physical control with the register of fixed assets, then research and corrections/adjustments concerning any differences observed with regard to the location of the assets, ... ;
- Validation of internal controls and audits to make sure that the fixed assets register is used, kept up to date and complete, and that the information it contains is accurate;
- Stolen or missing fixed assets should be reported immediately to the country team. Moreover, in the event of loss, theft, or deterioration of a fixed asset (whether or not it has been acquired, owned, managed, and/or controlled by the principal recipient himself), the asset concerned should be immediately replaced by a similar asset (same quantity and identical quality).
- In addition, in the event of proof of misuse or mismanagement of an asset, the PR / project manager may be asked to reimburse an amount equal to the acquisition cost of the asset concerned, which will be reallocated to the grant.
Financial risk control
While the management of fixed assets is in itself a constraint for the business, it is also a potential profitability lever that should not be overlooked. It is therefore advisable to see the management of fixed assets from this dual angle of regulatory constraint and profitability.
Precise knowledge of the company's assets and monitoring of the book value of fixed assets, compared to their market value, in particular, makes it possible to: manage the disposal of fixed assets as effectively as possible, and therefore to deal with obsolescence of the production while generating any capital gains on the disposal of fixed assets.
It is up to each business to set up an internal control system adapted to its situation. As part of a group, the parent company guarantees the existence of internal control systems within its subsidiaries. These arrangements should be adapted to their specific characteristics and to the relations between the parent company and the subsidiaries.
For significant holdings value, in which the parent company exercises significant influence, it is up to the latter to assess the possibility of acquainting itself with and examining the measures taken by the holding concerned with regard to internal control.
How to control all those risks?
Tangible and intangible assets: control of upstream processes and accounting production
The accounting rules applied in the business define intangible and tangible fixed assets:
the identification criteria including, in particular, the rules for distinguishing between charges (maintenance, repairs) and fixed assets; the criteria for recognizing fixed assets dealing with the following issues:
- the components of the value of a fixed asset, including the methods for determining and monitoring the value of site remediation for tangible fixed assets;
- the methods and starting point of depreciation: This section includes the methods of application of the component-based approach and the methods used to determine residual values;
- the criteria for determining impairment losses and in particular the method of establishing discount rates and the level (sectoral, for example) used to define the cash-generating units and the calculation of rates;
- the criteria for classification as fixed assets held for sale;
- the categories of fixed assets that are revalued, and the revaluation method adopted (fair value or index).
These rules are reviewed regularly:
- Movements of fixed assets are monitored with a view to their recognition.
- Commitments to purchase fixed assets are monitored, in order to be taken into account in the preparation of the appendices to the accounts code.
- The classification of leasing or rental contracts is clearly established for their accounting treatment.
- The existence of tangible fixed assets is checked regularly by inventory. Disposals or scrapping are subject to the approval of a manager and the necessary accounting corrections are planned.
- The title deeds are subject to adequate conservation (for example, at least compliance with legal obligations).
- Disposals of fixed assets are subject to an authorization procedure disseminated within the organization.
- A process for identifying, recognizing, and monitoring intangible assets and goodwill is put in place, in particular concerning goodwill and the allocation of the acquisition cost, brands, patents, goodwill, customer files, etc. contractual rights, etc.
- The legal and IT protection of intangible assets is subject to regular monitoring and measures aimed at securing the resources that the company can obtain from these assets (protection of brands, domain names, etc.).
Financial fixed assets
- Securities transactions (acquisitions, disposals, price supplements, asset, and liability guarantees) are monitored with a view to their recognition.
- Firm or optional commitments of any kind (promise, call, put, etc.) are identified with a view to their recognition or inclusion in the appendix.
- The allocation of loans (in particular loans to subsidiaries, etc.) is the subject of an organized process.
- Title deeds and loan contracts are subject to adequate custody.
- Income relating to financial fixed assets is valued at each closing.
- The existence of an objective indication of impairment of financial assets is assessed at each closing. The depreciation to be recognized is determined if necessary.
Limits of internal control of fixed assets
The internal control system of fixed assets, no matter how well- designed and applied, cannot provide an absolute guarantee as to the achievement of the company's objectives. The likelihood of achieving these goals is not a matter of the will of society alone. There are in fact limits inherent in any internal control system.
These limits are the result of many factors, including uncertainties in the outside world, the exercise of judgment, or malfunctions that may arise from human failure or simple error.
In addition, when setting up controls, it is necessary to take into account the cost/benefit ratio and not to develop unnecessarily costly internal control systems, even if it means accepting a certain level of risk.
In conclusion, knowing how to control fixed assets is essential. Remember that there are 2 types of control: physical and financial control. Physical control is used to confirm the existence, and condition of the fixed asset while financial control is designed to verify if the values recorded in the books of the record are accurate.