Why You Should Reconcile Fixed Assets into Property Records

Reconciling physical fixed assets—into existing property records, is often the case of a company that has just established new policies for minimum capitalization going forward. In supporting the new policy, say, that its asset lives are based on realistic expected lives—not on tax
requirements. Acquisition, transfer, and retirement policies will be followed so that the accounting records correspond to the physical assets, and vice versa

. At that point a fixed assets manager or a controller maybe satisfied that in the future fixed assets will be under control. But, what is missing here is the fact that the ‘existing-property-records’ and the ‘actual-physical-assets’ present in the company, are not in sync. So what to do?
That was a good question of my staff ever asked to me five or seven years ago—when I was an accounting manager. To that question, I answered her with “Nothing.” What she would need to make sure, on that time, was to follow the new policy (with new minimum capitalization) going forward—just let the old problems sorted themselves out overtime. I have a set of good and appealing reason of why I took the approach. Read on…

• First: I have had a better policy—means better system in place
• Second: Every year from that time on future-year depreciation charges would bring any past errors closer to resolution.
• Third: I knew that once all the old assets on the books were written down to zero—or to salvage value, I no longer would have a problem.
• Forth: meanwhile, all the new additions would be controlled.

That sounded perfect, no extra-works need to be performed, didn’t that?
Well, even such sound technical, in-depth, consideration sometimes has no failure-free guaranteed, in the accounting life. The audit committees were able to live with both the former system and a new and better system I put in the place. BUT the outside auditors WERE NOT!
So, I got failed with the approach, but I took valuable lesson. Now, you don’t need to have the same failure.

The truth is, with the approach I actually kept and lived with one giant problem: Sarbanes-Oxley’s (SOX’s) requirement for management to certify that a good system of internal control is in place NOW!—not to be in place sometime in the future.

If there can be a significant difference between what the books of account state are today’s company assets, and what you believe is there you may have a real problem in currently signing the applicable SOX forms. Is the solution then not to take a physical inventory of your fixed assets in the first place?
Do the right, correct, and long-term problem-solving approach. As far as internal control is concerned, is to take the inventory, make the necessary adjustments (even though they may be painful), and be able to certify that the company does, at this point, have internal control over its fixed asset.
An essential element of any internal control system is correspondence between the records and the underlying assets. Consider this:

• A control system for finished goods is checked at least once a year through a physical count or with a perpetual inventory system that has frequent cycle checks.
• Internal control over cash requires reconciliations of bank statements in order to assert that the banks concur that the company really has the cash that is shown on the balance sheet.
• Control over accounts receivable is often performed by outside auditors, when they send written confirmation to the firms who the books show-still owe for past sales.

These three major aspects of current assets (cash, inventory, and receivables) are routinely monitored by internal and external auditors. Even intangible assets and goodwill are now routinely tested for impairment at least once a year.
Among all asset classes in the balance sheet, in many companies, more than 20% of total assets are in the fixed assets category. So why fixed asset should be an exception to a reconciliation.
If you ever had auditing process, you may very well know that in the “management letters,”  auditors almost always tell the company (its clients) to take a physical inventory of its fixed asset and make necessary adjustments. While it is true, in many cases, that the auditors do not really conduct in-depth analysis to make sure the reconciliation has been done by the company, many clients (companies) blindly assume that auditors include the requirement is merely for the shake of protection to the auditor her/him self, therefore they simply ignore the requirement.
In my case, on that time the auditors seriously analyzed the property records so they’re aware of lacks on the fixed assets reconciliation. Fortunately the auditors didn’t state those in their SOX report—on internal control. Instead, they gave me time to reconcile the fixed assets into the existing property records and released the audit certificate after it’s finished.
Again that was a valuable lesson to me about how important the task of reconciling fixed asset into the property records, and I hope you learn too.
On the next post I plan to discuss: what approach you can take to reconcile the fixed asset, what to do with fixed assets that are listed on the property records but they are not physically exist, what to do with fixed asset that are physically exist but have not been in the list, how to net out such fixed assets, how to net out overages and shortage fixed assets, how to net out gain/loss during the fixed assets reconciliation, and more.