Fixed asset tagging is a good practice in the pursuit of better fixed assets physical control. Putting tags on fixed assets, not only help custodians to find the fixed asset during a physical count session, but also sends a strong signal to other people (in within the company) that the assets are under close oversees of certain custodian, therefore prevent it from moving and leads people to treat the asset better.
Yes, candidly say, no label is going to stop a determined thief, and there is no such thing as a label or tag that cannot be removed. What the asset tag can do is reduce fraud. It is conceivable that a disgruntled employee could buy an inexpensive laptop and transfer the asset number from the company-supplied MacBook Air, for example.
“How can a so-called ‘FIXED’ asset move?” you may ask. How if I say that fixed assets, in practice, are NOT REALLY FIXED, physically? Okay that sounds paradox, but those who have taken a physical inventory control of fixed assets know about that very well—many items listed in the book of the fixed assets can not be found during physical counts. They could be moved or even gone for good! Fixed asset tagging is one among important internal control system that one can implement, but there are at least three different ways for fixed asset tagging (1) traditional; (2) barcode; and (3) Radio Frequency Identification (RFID) tagging system. So which one is practically better?
There are at least two essential elements of internal control when you’re dealing with fixed assets: (1) knowing what you are supposed to have—which is the purpose of the fixed-asset register or master file; and (2) being able to locate the actual assets, to provide assurance that the property register represents what is physically present.
There is only one way to be absolutely sure that the property register is correct, this is by ensuring that the control totals for fixed assets on the general ledger are represented by actual assets where they are recorded as being. This assurance can only be obtained from a physical inventory. Before going to fixed asset tagging, let’s see first, why accountants seldom reconcile fixed asset records (as they do for inventor)?
Many management letters from auditors to the company recommend year after year that a physical inventory be taken of fixed assets. In most instances this recommendation goes to the bottom of management’s priority list, and does not get accomplished before the next year’s audit. The next year’s management letter provides the identical recommendation of taking a physical inventory. This can go on for years.
Therefore, I feel safe to say that, obviously auditing focus has been on proper authorizations for acquisition and disposition of fixed assets and correct calculation of expense items.
Given the accuracy of modern software, reviewing the depreciation calculations themselves is going to be an exercise in futility. What is important is that the basic records themselves are accurate and nowhere does it seem that auditors must monitor a taking of a physical inventory of fixed assets, the way they are required to do for inventory records of raw materials, WIP, and finished goods.
It may sounds harshly as I am a CPA myself but have to say that it is hard to understand how management, as well as we—independent accountants, can assert the property register is correct without verification from an inventory.
Most companies tag assets as they are acquired. This tag number is physically attached to the asset itself. The tag number then becomes the primary identifier in the property record. So, if you want to find out about a particular machine tool, entering the tag number (sometimes called the asset number) into the master property file will bring up the complete record. This is essentially the only approach that will work when trying to find a specific asset in a file that may have thousands of items.
To make it really works, the tag should be physically placed on the asset at the time it is received. Some one individual, or department, has to be tasked with this responsibility. It is totally unrealistic to expect someone in the accounting department to run down to the receiving dock every time you receive an item classified as having to be capitalized. The tags are usually ordered from a source that specializes in this specific function, so this may be received preprinted, each with a unique number.
After the tag is affixed to the physical asset, a document must be prepared that sends the information to the property accountant; alternatively with appropriate software the information could be transmitted automatically.
Since most items will have a purchase order (P.O.), it should be sufficient for the receiving department to reference the tag number, a brief description of the asset, its manufacturer’s serial number, and the P.O. The property accountant can then go to the P.O. file, or the capital expenditure control file, and obtain all of the information needed to add to the master record.
Consider when an item previously capitalized, one already in the master file, is disposed of; all that is necessary is to reference the asset or tag number which should trigger accounting entries.
The accounting requirements—to record any cash received and reverse out the asset and accumulated depreciation—should immediately follow the physical disposition. Important as it is, this notification is even more important on a trade-in. There will have been no cash receipts to trigger an entry.
A Purchase Order could probably reference the existence of a trade-in, or the trade-in may be in the ‘capital expenditure approval file’; in any event failing to record trade-ins is the primary cause of many errors in internal control.
The reverse is also sometimes true. A vendor will offer to accept a trade-in as a means of lowering the purchase price, the company accepts that offer, but the vendor has zero use for the old asset and neglects to collect it and take it off the premises. Then what happens is that accounting records will reflect this assumption that the trade-in physically has taken place, when in reality the old asset is still there. The company may well have written the old asset off the books, and stopped calculating depreciation expense. But, of course, the asset is still there and available for use.
Again, this practice, of a vendor not removing a trade-in, is one of the many causes for discrepancies between the file and the floor. There is no easy or good solution for this other than monitoring by internal auditing that corporate fixed-asset policies are being followed. This is not to suggest that a company should force a vendor to take the asset. It does mean that a potential uncertainty should be resolved one way or the other.
Talking about barcode tag, actually is nothing but a ‘‘numerical’’ label, where the number on the tag is represented by a barcode font, and usually by a human readable font as well. There is really no difference between the tags, it is just a matter of making data entry faster and more accurate by using a barcode, and a barcode reader for data entry, rather than a human typing on a keyboard.
Inasmuch as the cost of maintaining good internal control over fixed assets is substantial, considering periodic physical inventories and subsequent reconciliation, while going for the absolute lowest cost approach makes little sense. Rather, the choice between barcode and RFID should be made on a “Total Cost of Ownership” basis.
Next, let’s have a look both alternative tagging systems.
(1) Barcode Tagging System
Barcodes are what we see on consumer-goods packages. They are the funny lines on the box that goes through a scanner at a supermarket checkout counter. The printer has coded the label with an item number, and the scanner is hooked up to a computer that looks up the product number and prints out the unit price.
For fixed assets the barcode label would have on the tag the consecutive serial number previously assigned to the asset. This asset number is associated, on the master property asset register, with all the relevant information maintained on that asset in the master file, not on the asset tag. In taking a physical inventory, the auditor or analyst would point the barcode reader at the barcode label previously affixed to the asset.
The reader sends out a beam, often a laser, which hits the barcode and the asset number is transmitted back to the reader. The reader can either store the asset number, to be downloaded later, or there can be a wireless Bluetooth connection to the computer holding the master file. This transmission would then check-off that the asset had been located.
At the end of the physical inventory, the computer would be set to print out a listing of all the assets that had not been located, at which point the reconciliation process would begin. Barcode labels themselves can be made almost any size and of any material.
The principal disadvantage of barcode tags is that they can get dirty and hard to read, as well as hard to locate. This is particularly true in a manufacturing environment, but also in a process facility (brewery or refinery) where just what has been tagged in prior years may not be clear from a visual examination. Barcode labels, to be read, must be in direct line of sight. The one thing you want to avoid if possible is to try and take a physical inventory from a printout of the property record showing the assumed location to be on the floor or in the department you are inventorying. Far better to see the tag visually, record it with the reader, have the computer match up what you found, and print out an exception listing.
(2) Radio Frequency Identification (RFID) Tagging System
Radio Frequency Identification (RFID) is a far advance way to tag fixed assets. With RFID, you do not have to have direct line of sight; your reader need only be within say three to four feet of the tag.
In the barcode tagging, the beam from the barcode reader must be directly aimed at the tag. So, if the machine with the asset tag attached has been moved and the tag is no longer in sight, then the inventory analyst must hunt for the tag, perhaps go behind the machine to spot the tag. In the worst case, the tag cannot be seen or located and this item now becomes an exception that has to be reconciled and a new tag assigned.
The RFID reader is different. It sends out radio waves, which are picked up on the antenna within the tag, and a response is sent, passively, by the tag to the reader. Now the sensitivity of the reader can be an issue. The reader probably has to be fairly close to the tag, within a few feet, to cause a response. But the tag does not have to be visible to the eye to obtain a hit. Thus, the inventory analyst, carrying an RFID reader, need only be close to the tag and the item will be identified.
There are a couple of caveats, however, before going down the RFID path. Initial capital expense for implementing a system may be substantially more. It is not just the cost of the RFID labels. Readers can run into the multi-thousands of dollars, while barcode readers can be less than $100. It gets even more expensive if you want a real-time system that monitors all floors and rooms of your facilities, so you can locate an asset without having to do an inventory.
The one negative to the use of RFID for controlling PP&E cited by suppliers is cost. RFID tags can cost an order of magnitude more per tag than a barcode label and may require some significant system integration efforts through the IT department. As a prediction, in a few years virtually all asset tagging will be with RFID, but we are not there yet.
When you consider the relatively high hourly rate of people taking a fixed asset inventory (not to mention subsequent reconciliation efforts), however, it takes very little time reduction to fully justify the initial expenditure on the RFID tagging system. This of course assumes that the company has adopted a relatively high minimum capitalization threshold; this minimizes the number of assets that must be located and accounted for, thus making the higher initial unit cost virtually should worth the investment.
Yes, candidly say, no label is going to stop a determined thief, and there is no such thing as a label or tag that cannot be removed. What the asset tag can do is reduce fraud. It is conceivable that a disgruntled employee could buy an inexpensive laptop and transfer the asset number from the company-supplied MacBook Air, for example.
“How can a so-called ‘FIXED’ asset move?” you may ask. How if I say that fixed assets, in practice, are NOT REALLY FIXED, physically? Okay that sounds paradox, but those who have taken a physical inventory control of fixed assets know about that very well—many items listed in the book of the fixed assets can not be found during physical counts. They could be moved or even gone for good! Fixed asset tagging is one among important internal control system that one can implement, but there are at least three different ways for fixed asset tagging (1) traditional; (2) barcode; and (3) Radio Frequency Identification (RFID) tagging system. So which one is practically better?
There are at least two essential elements of internal control when you’re dealing with fixed assets: (1) knowing what you are supposed to have—which is the purpose of the fixed-asset register or master file; and (2) being able to locate the actual assets, to provide assurance that the property register represents what is physically present.
There is only one way to be absolutely sure that the property register is correct, this is by ensuring that the control totals for fixed assets on the general ledger are represented by actual assets where they are recorded as being. This assurance can only be obtained from a physical inventory. Before going to fixed asset tagging, let’s see first, why accountants seldom reconcile fixed asset records (as they do for inventor)?
Why Do Accountants Rarely Reconcile Fixed Asset Records (As They Do for Inventor)?
Periodic inventories of raw materials, work in process (WIP), and finished goods must be taken at least once a year, and that inventory should be monitored by independent auditors. Having said reconciling, means inventories are priced out, reconciled to the books, and the control totals adjusted based on what is owned by the company and found during the physical inventory.The same testing of the controls has not usually been performed for fixed assets. Why?Basically because it is not absolutely mandated by the Generally Accepted Auditing Standards (GAAS). The only reference to fixed assets is in SAS 106, “Audit Evidence’’ that requires auditors to challenge management assertions about the existence of assets shown on the balance sheet. Also the valuation of those assets (should there be an impairment charge) should be challenged, according to the Guide. But again, nowhere is there an explicit requirement that periodic inventories of fixed assets be taken, compared to the property record and differences reconciled.
Many management letters from auditors to the company recommend year after year that a physical inventory be taken of fixed assets. In most instances this recommendation goes to the bottom of management’s priority list, and does not get accomplished before the next year’s audit. The next year’s management letter provides the identical recommendation of taking a physical inventory. This can go on for years.
Therefore, I feel safe to say that, obviously auditing focus has been on proper authorizations for acquisition and disposition of fixed assets and correct calculation of expense items.
Given the accuracy of modern software, reviewing the depreciation calculations themselves is going to be an exercise in futility. What is important is that the basic records themselves are accurate and nowhere does it seem that auditors must monitor a taking of a physical inventory of fixed assets, the way they are required to do for inventory records of raw materials, WIP, and finished goods.
It may sounds harshly as I am a CPA myself but have to say that it is hard to understand how management, as well as we—independent accountants, can assert the property register is correct without verification from an inventory.
Fixed Asset Tagging for Better Physical Control
Basically, it would be difficult—with only a description of an asset—to go from the detailed asset listing on a computer and try to find a specific asset on the floor. Take desks, for example, where there are rarely serial numbers, as there are on machine tools. Some easy means of identifying specific items is necessary.Most companies tag assets as they are acquired. This tag number is physically attached to the asset itself. The tag number then becomes the primary identifier in the property record. So, if you want to find out about a particular machine tool, entering the tag number (sometimes called the asset number) into the master property file will bring up the complete record. This is essentially the only approach that will work when trying to find a specific asset in a file that may have thousands of items.
To make it really works, the tag should be physically placed on the asset at the time it is received. Some one individual, or department, has to be tasked with this responsibility. It is totally unrealistic to expect someone in the accounting department to run down to the receiving dock every time you receive an item classified as having to be capitalized. The tags are usually ordered from a source that specializes in this specific function, so this may be received preprinted, each with a unique number.
After the tag is affixed to the physical asset, a document must be prepared that sends the information to the property accountant; alternatively with appropriate software the information could be transmitted automatically.
Since most items will have a purchase order (P.O.), it should be sufficient for the receiving department to reference the tag number, a brief description of the asset, its manufacturer’s serial number, and the P.O. The property accountant can then go to the P.O. file, or the capital expenditure control file, and obtain all of the information needed to add to the master record.
Consider when an item previously capitalized, one already in the master file, is disposed of; all that is necessary is to reference the asset or tag number which should trigger accounting entries.
The accounting requirements—to record any cash received and reverse out the asset and accumulated depreciation—should immediately follow the physical disposition. Important as it is, this notification is even more important on a trade-in. There will have been no cash receipts to trigger an entry.
A Purchase Order could probably reference the existence of a trade-in, or the trade-in may be in the ‘capital expenditure approval file’; in any event failing to record trade-ins is the primary cause of many errors in internal control.
The reverse is also sometimes true. A vendor will offer to accept a trade-in as a means of lowering the purchase price, the company accepts that offer, but the vendor has zero use for the old asset and neglects to collect it and take it off the premises. Then what happens is that accounting records will reflect this assumption that the trade-in physically has taken place, when in reality the old asset is still there. The company may well have written the old asset off the books, and stopped calculating depreciation expense. But, of course, the asset is still there and available for use.
Again, this practice, of a vendor not removing a trade-in, is one of the many causes for discrepancies between the file and the floor. There is no easy or good solution for this other than monitoring by internal auditing that corporate fixed-asset policies are being followed. This is not to suggest that a company should force a vendor to take the asset. It does mean that a potential uncertainty should be resolved one way or the other.
Alternative Fixed Asset Tagging Systems
It is almost impossible to have effective internal control over fixed assets unless the company assigns individual unique identifying numbers to each asset that will be capitalized. This asset number, physically attached to the item and associated with the master property record file, is the basis of all subsequent internal control. There are essentially two separate types of asset tags are available: (1) Barcode; and (2) Radio frequency identification (RFID) tagging system.Talking about barcode tag, actually is nothing but a ‘‘numerical’’ label, where the number on the tag is represented by a barcode font, and usually by a human readable font as well. There is really no difference between the tags, it is just a matter of making data entry faster and more accurate by using a barcode, and a barcode reader for data entry, rather than a human typing on a keyboard.
Inasmuch as the cost of maintaining good internal control over fixed assets is substantial, considering periodic physical inventories and subsequent reconciliation, while going for the absolute lowest cost approach makes little sense. Rather, the choice between barcode and RFID should be made on a “Total Cost of Ownership” basis.
Next, let’s have a look both alternative tagging systems.
(1) Barcode Tagging System
Barcodes are what we see on consumer-goods packages. They are the funny lines on the box that goes through a scanner at a supermarket checkout counter. The printer has coded the label with an item number, and the scanner is hooked up to a computer that looks up the product number and prints out the unit price.
For fixed assets the barcode label would have on the tag the consecutive serial number previously assigned to the asset. This asset number is associated, on the master property asset register, with all the relevant information maintained on that asset in the master file, not on the asset tag. In taking a physical inventory, the auditor or analyst would point the barcode reader at the barcode label previously affixed to the asset.
The reader sends out a beam, often a laser, which hits the barcode and the asset number is transmitted back to the reader. The reader can either store the asset number, to be downloaded later, or there can be a wireless Bluetooth connection to the computer holding the master file. This transmission would then check-off that the asset had been located.
At the end of the physical inventory, the computer would be set to print out a listing of all the assets that had not been located, at which point the reconciliation process would begin. Barcode labels themselves can be made almost any size and of any material.
The principal disadvantage of barcode tags is that they can get dirty and hard to read, as well as hard to locate. This is particularly true in a manufacturing environment, but also in a process facility (brewery or refinery) where just what has been tagged in prior years may not be clear from a visual examination. Barcode labels, to be read, must be in direct line of sight. The one thing you want to avoid if possible is to try and take a physical inventory from a printout of the property record showing the assumed location to be on the floor or in the department you are inventorying. Far better to see the tag visually, record it with the reader, have the computer match up what you found, and print out an exception listing.
(2) Radio Frequency Identification (RFID) Tagging System
Radio Frequency Identification (RFID) is a far advance way to tag fixed assets. With RFID, you do not have to have direct line of sight; your reader need only be within say three to four feet of the tag.
In the barcode tagging, the beam from the barcode reader must be directly aimed at the tag. So, if the machine with the asset tag attached has been moved and the tag is no longer in sight, then the inventory analyst must hunt for the tag, perhaps go behind the machine to spot the tag. In the worst case, the tag cannot be seen or located and this item now becomes an exception that has to be reconciled and a new tag assigned.
The RFID reader is different. It sends out radio waves, which are picked up on the antenna within the tag, and a response is sent, passively, by the tag to the reader. Now the sensitivity of the reader can be an issue. The reader probably has to be fairly close to the tag, within a few feet, to cause a response. But the tag does not have to be visible to the eye to obtain a hit. Thus, the inventory analyst, carrying an RFID reader, need only be close to the tag and the item will be identified.
There are a couple of caveats, however, before going down the RFID path. Initial capital expense for implementing a system may be substantially more. It is not just the cost of the RFID labels. Readers can run into the multi-thousands of dollars, while barcode readers can be less than $100. It gets even more expensive if you want a real-time system that monitors all floors and rooms of your facilities, so you can locate an asset without having to do an inventory.
The one negative to the use of RFID for controlling PP&E cited by suppliers is cost. RFID tags can cost an order of magnitude more per tag than a barcode label and may require some significant system integration efforts through the IT department. As a prediction, in a few years virtually all asset tagging will be with RFID, but we are not there yet.
If you think about the cost of taking a periodic physical inventory, and the work involved, which would you prefer: the barcode that must be physically seen, or the RFID tag which need only be close to the reader even if it is not visible?It is hard to generalize how much time is going to be saved in taking an inventory with RFID tags, rather than barcode tags. It is hard to imagine, however, that the RFID tagging system could take more time.
When you consider the relatively high hourly rate of people taking a fixed asset inventory (not to mention subsequent reconciliation efforts), however, it takes very little time reduction to fully justify the initial expenditure on the RFID tagging system. This of course assumes that the company has adopted a relatively high minimum capitalization threshold; this minimizes the number of assets that must be located and accounted for, thus making the higher initial unit cost virtually should worth the investment.
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