Fixed Asset Policies and Procedures Manual

Editor’s note: This article is the 2nd in a series and provides an overview of the elements of a comprehensive fixed asset policies and procedure manual. Future articles in this series will expand upon and provide examples of specific fixed asset policies and the procedures.

Creating and maintaining a Fixed Asset Policies and Procedures Manual can provide the framework for effective management of an organization’s fixed assets.

Effective fixed asset management preserves the value and utility of an organization’s fixed assets and deploys those assets in a manner that creates value (returns in excess of the cost of capital) for the organization’s stakeholders. This thinking can be applied to SMBs as well as to organizations in the non-profit and governmental sectors.

The implementation of a set of fixed asset policies and procedures can provide a number of benefits including:

  1. Fixed asset data will be more complete, accurate and up-to-date so that the information necessary for accounting, financial and tax reporting and management decision making is available when needed.
  2. Control over asset inventory and movement as well as maintenance (from procurement/acquisition through disposal).
  3. Better definition of the capital budgeting process.

Specific fixed asset policies and procedures can vary from one organization to another according to size, type and the nature of its operations. A set of fixed asset policies and procedures that are consistent with its business vision, strategic goals and objectives can be benefical. However, even though every organization is unique, there are aspects of a fixed asset policies and procedures manual that are common to many companies.

  • Organizations that already have fixed asset manuals can use this guide to review and refresh their existing policies and procedures.
  • Organizations that want to create a fixed asset policies and procedures manual can use this guide to start or augment the process.

Policy vs. Procedure

Understanding the distinction between a policy and a procedure will help you better draft or refine a fixed asset manual.

  • A policy is a general statement of requirements and the rules that govern the actions used to achieve those requirements.
  • A procedure is a detailed set of instructions and actions used to implement a policy.

The policy is the “what” and the procedure is the “how”. An effective fixed asset manual will clearly state each policy and list the specific steps for the procedures required to implement each policy.

Organization and Management Considerations

Depending upon the size of an organization, there can be numerous people who will be both impacted by the fixed asset policies and responsible for different portions of their implementation. For that reason, a fixed asset manual will address the duties and responsibilities of people who play a role in fixed asset management—from the boardroom to the break-room and everyone in between.

Organizational and management issues to consider when preparing or reviewing a fixed asset policies and procedures manual include:

  • The overall purpose and scope of the fixed asset policies and procedures.
  • The departments and business groups that are impacted.
  • The roles and responsibilities of each team member involved the fixed asset process from asset acquisition all the way through to disposal.
  • The manner for maintaining, updating and communicating any changes to fixed asset policies and procedures.

Capital Budgeting and Resource Allocation

Capital budgeting describes the criteria and approach that an organization uses to authorize major expenditures including fixed assets purchases. There are a number of financial considerations that come into play when an organization is allocating its finite financial resources and drawing down its credit capacity.

There is one set of measures for business entities and another for set for non-profit and governmental agencies. Non-profits and governmental agencies present a challenge because of the difficulty of quantifying the return on investment and payback. The traditional measures of ROI and payback may not apply to non-profits. However, the same fundamental questions apply to all types of organizations when evaluating capital expenditures: “Will the investment create value for the organization? Will the returns on invested capital exceed the cost of capital?” (The unique challenges of measuring value-creation in non-profits and governmental agencies will be explored in a future installment of this series.)

Policy and procedure issues to be addressed include:

  • The organization’s rules governing the origination, authorization and approval of fixed asset purchases.
  • The criteria used to measure returns on investment.
  • The criteria including the threshold amount for determining whether an asset acquisition falls within the capital budgeting process.
  • The differences, if any, in the approval process for certain types of fixed assets.

Accounting Considerations

As discussed earlier, the accounting department is charged with keeping complete, accurate and up-to-date records of the organization’s fixed assets for financial and regulatory reporting. This requires the ability to properly classify and record fixed asset data in a consistent and uniform manner. The list of accounting issues that need to be addressed in a fixed asset policies and procedures manual include:

  • The organization’s working definition of a fixed asset. For example, an asset used in the production of goods and services, not part of inventory for resale, useful life greater than 1 year, replace rather than repair, etc.
  • Threshold dollar limit for capitalizing versus expensing fixed assets.
  • Requirements for fixed asset depreciation software in terms of maximum number of assets, single vs. multi-company, specific reporting requirements, etc.
  • Guidelines for classification of fixed assets.
  • The depreciation method(s) that are to be applied and under what circumstances. Are assets depreciated differently for book and tax?
  • The values to consider when determining the cost basis for fixed assets.
  • The criteria used to determine the useful life for fixed assets.
  • The approach for estimating salvage value when calculating depreciation.

Inventory and Asset Control

Fixed assets are subject to wear and tear in the normal course of their use and can deteriorate over time. Above normal deterioration or wear also reduces an asset’s value and may render it unusable for its intended purpose when needed. Fixed assets can be in transit (rolling stock) or relocated within your facility or to another one. Assets that are not accounted for represent a potential loss of value and a reduction in productive capacity that might be needed in the future.

The inventory and control elements of the fixed asset manual are about preserving the utility and value of your organization’s fixed assets. Key issues include:

  • Instructions for fixed asset purchases that require special handling or other special attention such as items that are extremely valuable, hazardous, fragile, highly sensitive or require security.
  • The information that needs to be collected in order to identify and inventory fixed assets.
  • The types of assets (movable) that require tagging and information to be included on the tag.
  • The maintenance requirements for fixed assets.
  • Requirements to comply with warranties and maintenance agreements.
  • Authorizations necessary before relocating or transferring any fixed asset.
  • The frequency of physical inventories of fixed assets and parties responsible for performing them.
  • The steps required to properly dispose of a fixed asset.

A Fixed Asset Manual is Not Just a Dust Magnet

Formally defining your fixed asset policies and procedures and documenting them in a manual is a major step forward, however it is not the last step. The policies and procedures set forth in the manual need to be approved, communicated to the people and then implemented—acted upon in a consistent fashion. A fixed asset accounting policies and procedure manual is of little value to your organization if it just sits on a bookshelf collecting dust.

The environment in which your organization operates is constantly changing. Accounting rules, tax laws and regulatory compliance requirements change over time. These changes can have an effect upon your fixed asset tracking and accounting. Periodic reviews of your fixed asset policies and procedures can ensure that your organization remains in compliance.

Adopting and consistently following a set of fixed asset policies and procedures requires the investment of a little work and discipline. However, the benefits to your organization can be significant: more effective capital budgeting and allocation, preservation of asset values and a repository of fixed asset data that is complete, accurate and up-to-date. Management, internal and outside accountants and auditors will appreciate the additional level of control and ability to retrieve data on a timely basis.

Matthew A. Shipley and Robert Machiz
© 2011 MoneySoft, Inc. All rights reserved worldwide.

Tags: , , ,

Comments are closed.