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Fixed Asset Procedures

The following fixed asset procedures show how to handle all of the key events in the life of a fixed asset - evaluate a capital purchase proposal, record the acquisition of a fixed asset, record depreciation, test for impairment, and record any gain or loss on sale of the asset. Each event is listed under a separate header.

Evaluate a Capital Purchase Proposal

1. Verify that all fields in the capital proposal have been completed, and that all supporting documents are attached. If not, discuss the missing information with the sponsoring manager, and assist as requested to locate the additional information.
2. Review all assumptions used in the proposal. If they vary significantly from the assumptions used in the corporate budget, or are inconsistent with the assumptions used by other sponsoring managers in other proposals, discuss the issue with the sponsoring manager and request revisions as appropriate.
3. Review all assertions regarding changes in throughput, or alterations to operating expenses. Obtain verification from the industrial engineering staff that claimed changes to throughput can be achieved.
4. Review cash flow changes with anyone having knowledge about how the proposed project will impact cash flows. If there are inconsistencies in their statements from what is claimed in the proposal, discuss the issue with the sponsoring manager.
5. Obtain the cost of capital from the CFO, and use it to verify any net present value calculations used in the proposal.
6. Include your own assessment of the risk of the proposal.
7. Include the results of your investigation, any resulting changes made by the project sponsor, and a before-and-after analysis of the proposal. If the results are clear, issue a recommendation along with the analysis.
8. If the proposal is approved, include it in the capital purchases section of the corporate budget for the following year, incorporating the timing of cash flows noted in the proposal, unless senior management directs otherwise.

Record the Acquisition of a Fixed Asset

1. Upon receipt of a supplier invoice for a fixed asset, match it to the authorizing purchase order and receiving documentation.
2. If the purchase exceeds the corporate capitalization limit, record the purchase in the appropriate fixed asset account. If not, record it in an expense account, as directed by the assistant controller.
3. When recording the purchase in the accounts payable module, include in the fixed asset account the freight, insurance, taxes, customs fees, and installation costs associated with the asset.
4. Access the fixed asset register and enter in a new record the name, serial number, fixed asset tag number, asset class, and location of the asset. Scan the supplier invoice and link the digital image to the record in the fixed asset register.
5. Verify that the depreciation method selected by the fixed asset register software is appropriate, based on the asset class.
6. Copy the supplier invoice and the supporting authorization documents in the fixed assets storage binder.

Record Depreciation

1. Verify the asset class assigned to a fixed asset.
2. In the fixed asset register software, verify that the asset class is correct. The software will assign a depreciation method, based on the asset class, as well as the number of years over which the asset will be depreciated.
3. If there is a salvage value, record it in the fixed asset register software.
4. At the end of the month, the fixed asset register software will print the depreciation calculation for all assets. Ensure that the depreciation is correct for all assets newly entered during the past accounting period.
5. Print the depreciation report, and record a journal entry based on its results.
6. Store the depreciation report, along with the journal entry, in the journal entry binder.

Test for Impairment

1. Calculate the net book value (Original cost minus accumulated depreciation) of all assets on the fixed assets register.
2. Select for impairment testing those assets comprising 80% of the total net book value on the register.
3. Calculate the total undiscounted cash flows forecasted for each of the selected assets.
4. Compare the net book value of each selected asset to its total undiscounted cash flows, and note those items for which the net book value is higher. These are unfavorable variances.
5. Record an adjusting journal entry for all assets where there is an unfavorable variance.
6. Record the unfavorable variance in the fixed assets register, so that the net book values of all affected assets are reduced by their unfavorable variances.
7. Verify that the fixed asset register software is now recording adjusted depreciation for the newly revised net book values.

Record Gain or Loss on Sale of an Asset

1. Verify that the notice of asset disposition includes a signed authorization form, a bill of sale, and a payment from the buyer.
2. Access the fixed assets register, flag the asset as having been disposed of, and note the date of disposition.
3. In the register, note the original purchase cost of the asset, and its total accumulated depreciation.
4. Subtract the sale price and the accumulated depreciation from the original asset cost. A positive remainder is a loss, while a negative remainder is a gain.
5. Create a journal entry to record the sale. The original purchase cost is a credit, the accumulated depreciation is a debit, a loss is recorded as a debit, and a gain is recorded as a credit. The amount paid by the buyer is a debit to the cash account.
6. Obtain approval for the journal entry from the assistant controller, and forward the journal entry form to the general ledger clerk for entry into the accounting software.
7. File the completed journal entry in the journal entries binder, along with supporting documentation.

Related Topics

Asset impairment procedure
Budgeting procedure