Fixed assets can involve very large sums of cash, so controls are needed over their initial acquisition, as well as their subsequent tracking and ultimate disposition.
The first control over fixed asset acquisitions is to obtain funding approval through the annual budgeting process. This is an intensive review of overall company operations, as well as of how capital expenditures will be integrated into the company’s strategic direction. Expenditure requests included in the approved budget should still be subjected to some additional approval at the point of actual expenditure, to ensure that they are still needed. However, expenditure requestsnotincluded in the approved budget should be subjected to a considerably higher level of analysis and approval, to ensure that there is a justifiable need for them.
Given the significant amount of funds usually needed to acquire a fixed asset, always require and review a completed capital investment approval form before issuing a purchase order. An example is shown in Exhibit 4.5. Depending on the size of the acquisition, a number of approval signatures may be required, extending up to the company president or even the chairperson of the board of directors.
A good detective control to ensure that all acquisitions have been properly authorized is to periodically reconcile all fixed asset additions to the file of approved capital expenditure authorizations. Any acquisitions for which there is no authoriza- tion paperwork are then flagged for additional review, typically including reporting of the control breach to management.
Compare fixed asset serial numbers with the existing serial number database.
There is a possibility that employees are acquiring assets, selling them to the company, then stealing the assets and selling them to the company again. To spot this behavior, always enter the serial number of each acquired asset in the fixed asset master file, and then run a report comparing serial numbers for all assets to see if there are duplicate serial numbers on record.
There are a number of downstream errors that can arise when fixed asset information is incorrectly entered in the fixed asset master file. For example, an incorrect asset description can result in an incorrect asset classification, which in turn may result in an incorrect depreciation calculation. Similarly, an incorrect asset location code can result in the subsequent inability to locate the physical asset, which in turn may result in an improper asset disposal transaction. Further, an incorrect
Capital Request Form
Project name:
Name of project sponsor:
Submission date: Project number:
Constraint-Related Project Approvals
Initial expenditure: $ All
Additional annual expenditure: $
$100,000 Impact on throughput: $
Impact on operating expenses: $ $100,001–
$1,000,000 Impact on ROI: $
$1,000,000+
Risk-Related Project Approvals
Initial expenditure: $
Additional annual expenditure: $ < $50,000
Description of legal requirement fulfilled or risk issue mitigated (attach description as needed):
$50,001 +
$1,000,000+
Non-Constraint-Related Project Approvals
Initial expenditure: $ All
Additional annual expenditure: $
<$10,000 Improves sprint capacity?
Attach justification of sprint capacity increase
$10,001–
Other request $100,000
Attach justification for other request type
$100,000+
(Attach calculations)
Process Analyst
Supervisor
President
Board of Directors
Process Analyst
Supervisor
President
Board of Directors President Chief Risk Officer Corporate Attorney
Board of Directors
Exhibit 4.5 Capital Investment Approval Form
4-11 How Do I Control Fixed Assets? 107
acquisition price may result in an incorrect depreciation calculation. To mitigate the risk of all these errors, have a second person review all new entries to the fixed asset master file for accuracy.
If a company acquires assets that are not easily differentiated, then it is useful to affix an identification plate to each one to assist in later audits. The identification plate
Issuing Department Name: Department Manager Signature:
Step 1: List all equipment being dispositioned in the following spaces:
1.
2.
3.
4.
5.
Step 2: Check one of the action categories listed below (limit of one):
Return to Seller Lost/Stolen
Supplier RMA Number: Insurance Claim Number Filed:
Shipping Supervisor Signature: Risk Manager Signature:
Date: Date:
Transfer to Another Department Trade-In
Department Name: Purchase Order Number:
Receiving Manager Signature: Shipping Supervisor Signature:
Date: Date:
Cannibalize for Parts Disposal
Purchasing Manager Signature: Administrative Officer Signature:
Warehouse Manager Signature: Warehouse Manager Signature:
Date: Date:
Copies: to (1) Accounting, (2) Department Receiving the Assets, (3) Issuing Department
Capital Asset Disposition Form
Tag Number Item Name Model Number Serial Number
Exhibit 4.6 Capital Asset Disposition Form
can be a metal tag if durability is an issue, or can be a laminated bar-code tag for easy scanning, or even a radio frequency identification tag. The person responsible for tagging should record the tag number and asset location in the fixed asset master file.
There is a significant risk that assets will not be carefully tracked through the company once they are acquired. To avoid this, formally assign responsibility for each asset to the department manager whose staff uses the asset, and send all managers a quarterly notification of what assets are under their control. Even better, persuade the human resources manager to include ‘‘asset control’’ as a line item in the formal performance review for all managers.
Fixed assets decline in value over time, so it is essential to conduct a regular review to determine whether any assets should be disposed of before they lose their resale value. This review should be conducted at least annually, and should include representatives from the accounting, purchasing, and user departments. An alternative approach is to create capacity utilization metrics (which are most easily obtained for production equipment), and report on utilization levels as part of the standard monthly management reporting package; this tends to result in more immediate decisions to eliminate unused equipment.
There is a risk that employees could sell off assets at below-market rates or disposition assets for which an alternative in-house use had been planned. Also, if assets are informally disposed of, the accounting staff will probably not be notified, and so will continue to depreciate an asset no longer owned by the company, rather than writing it off. To avoid these problems, require the completion of a signed capital asset disposition form such as the one shown in Exhibit 4.6.
If the company owns fixed assets that can be easily moved and have a significant resale value, then there is a risk that they will be stolen. If so, consider restricting access to the building during non-work hours, and hire a security staff to patrol the perimeter or at least the exits. An alternative is to affix a radio frequency identification (RFID) tag to each asset, and then install a transceiver near every building exit that will trigger an alarm if the RFID tag passes by the transceiver.
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Financial Analysis Decisions
The accountant is constantly asked to conduct a variety of financial analyses regarding key management decisions. These analyses usually require a knowl- edge of analysis techniques well beyond the typical transaction processing and accounting presentation skills learned in college. Instead, the accountant must understand breakeven analysis, product mix analysis, how to create a what-if analysis with an electronic spreadsheet, how to create a cost variance table, how to allocate funds, and how throughput analysis can assist with a number of major decisions.
This chapter provides answers to all of these issues and more. The following table itemizes the section number in which the answers to each question can be found:
Section Decision