Best Practice Financial Processes Fixed Assets 2 Fixed
Best Practice Financial Processes: Fixed Assets
2 Fixed Assets - Best Practice Objectives Ø Ø Ø Organisation Asset recording integrated with maintenance and non financial data Centralised asset accounting Asset ownership devolved to business unit level People Fixed Assets Objectives Ø Processes Ø Ø Ø Maintain asset register Acquisitions and disposals Depreciation charge Verifying asset base Maintaining of valuation basis Ø Ø Ø To maintain a complete register of all the organisation’s fixed assets which reflects location, age, current values, associated cost centres To calculate depreciation consistently with financial reporting requirements To optimise replacement policies To minimise ownership costs Control focused Challenge asset requisition proposals Information Systems Ø Ø Ø Controls Ø Ø Ø Pw. C 175 Ø Ø Asset verification Asset valuation Acquisition and disposal authorities Measures Ø Ø Ø Number of assets maintained Cost of department Elapsed time to record asset Asset ledgers integrated with GL and AP Depreciation and project control by cost centre Automated depreciation calculation
3 Fixed Assets - Best Practice Features Maintain fixed asset register Control acquisitions and disposals Manage periodic asset depreciation Verify and value asset base Process Features Ø Determine asset categories for internal and statutory purposes Ø Monitor asset maintenance charges insurance valuation to key assets Ø Set up appropriate control of asset acquisition and disposals across company Ø Report on acquisitions and disposals on a monthly basis Ø Apply Ø Monitor Ø Ensure asset responsibility at BU level Ø Identify tax issues related to acquisitions or CIP BU responsibility for assets in their use and for disposal losses Ø Depreciate at point of asset use Ø Apply depreciation rules to asset classes Ø Depreciation rates in management accounts in line with statutory rates Ø Links asset depreciation to production and product costs/development asset usage Ø Revalue key assets on a regular basis based on book value and high risk Ø Comprehensive asset verification on regular periodic or rolling basis where asset cannot be verified via technical assumptions (most telco’s do not verify network assets: the fact that the networks is verification enough) Ø Verify non capitalised assets System Features Ø On line asset register holding key data and current cost allocation Ø Cost code validation with GL Ø Automatic links to AP and Project Accounting system to capture acquisitions Ø Revaluation of features and mass transfers of assets to new cost centres Ø Leased asset features compliant with accounting standards Pw. C 175 Ø Acquisition linked to purchase order and accounts payable ledger Ø Disposals linked to sales ledger Ø CIP linked to capital project accounting Ø Effective tax management integrated with the fixed assets system Ø Depreciation Ø Variable Ø Forecast Ø Complete charged automatically to cost centres in GL asset depreciation for budget purposes Ø Variable depreciation rules for classes of assets Ø Assets can be grouped for depreciation rules asset valuation mechanisms eg historic, current replacement asset reports by physical location and cost centre Ø Report on identified or missing assets Ø Hold non capitalised physical assists for verification Ø Bar coding of assets for verification
4 Fixed Assets - Measures/Cost Drivers No of Business Unit FTEs per Fixed Assets FTE Fixed Assets cost per Business Unit FTE (in £s) £ 31 5, 200 1, 400 350 £ 7 £ 151 10 percentile Median 90 percentile 10 percentile Median Fixed Assets processing time 1 day 10 percentile 14 days Median 40 days 90 percentile Cost drivers Ø Complexity of assets Ø Number of assets on register Ø Number of asset movements Ø Complexity of depreciation policies Ø Complexity of authorisation procedures Ø Range of data held Ø Number of users of data range Source: Statistics taken from Benchmarking database: 21 February 1997 Pw. C 175
5 Fixed Assets - Trends From To Ø Ø Separate fixed assets module Ø Lack of asset ownership Ø Cost of asset usage not attributed to product Ø Performed by Finance Department Integrated systems for: – Asset tracking via Geographical Information System (GIS) – Asset usage – Network Capacity Planning – Asset Maintenance – Capital project planning and control – Product/service costing Ø Pw. C 175 BU responsibility for ownership
6 Fixed Assets - Critical Success Factors These are a summary of the key business requirements, which must be met to achieve the objectives. Ø Asset accounting policies clearly documented Ø Appropriate coding by asset category established Ø Authority levels clearly defined Ø Procedures surrounding Fixed Asset process are documented and communicated to staff Ø Budgets in place for capital expenditure Ø All existing assets identified and classified Ø Staff trained in FA process and have clear roles and responsibilities Ø Statutory and tax requirements understood Ø FA calendar in place and communicated to staff Ø Standing data set up on the system reflecting asset accounting policies Ø Ability to model depreciation scenario Pw. C 175
7 Context Diagram General Ledger os a ls Mgt Reports Management Accounting e rts ata ed ycl po re ag y or Us ut Pw. C 175 ets Purchasing ass mm Co at nts e itm d ise a l pita e iqu Un Accounts Payable St Ca t id d Asset details & asset payments r e ss ss si od Go Fixed Assets ifie t en ue e. C td isp ac se Inventory en c) et a at ion t d iat se ec As epr (d As Maintenance int Accounts receivable Ma Fixed Assets - Level 0 Circuit Provisioning Project accounting Audit
8 Fixed Assets - Level 1 Changes in FA Policies and Procedures Overview Notification procedures System validation controls Change request procedures Authorisation rules Amend/update asset types or categories Maintain Standing Data Authorisation procedures Maintenance policy System controls Accounting policies FA register structure maintained GL a/c’s maintained for additions Add Assets Updated FA Register FA 1. 2 FA 1. 1 Maintain Asset Register Perform Period End Routines Reports FA 1. 4 Updated FA register & reports Reconciled GL A/ c’s FA 1. 5 FA accounting staff Cost centre manager Management accountant Adjustments AP system FA accounting staff Cost centre managers Requester FA accountant Finance manager Depreciation policies Maintenance policies Systems controls Month end reconciliation Period end timetable Cost centre analysis Verification timetable Inventory control system Audit trial Authorisation for write off’s Verified FA Register Verify Physical Assets FA 1. 6 FA accounting staff FA system Authorised GL adjustments FA accounting staff Inventory staff Asset addition notification Assets from AP or project accounting Reporting guidelines System controls Disposal procedures, validation procedures, authorisation, reconciliation procedures Request for adhoc reports Asset Addition notification Dispose of Assets Updated FA Register Reports Answer Adhoc Queries GL a/ c’s maintained for disposal Reports FA 1. 7 FA 1. 3 FA accounting staff FA systems Cost centre manager, FA accounting staff, FA requester, financial manager Activities FA 1. 1 Maintain Standing Data Ø Raise request e. g. new asset class Ø Prepare formal request Ø Review and approve Ø Set up new codes / data Ø Notify affected users and departments Pw. C 175 FA 1. 2 Add Assets Input automatic data Input manual data Add additional information Ø Post asset details Ø Ø Ø FA 1. 3 Dispose of Assets Select assets to dispose Ø Obtain quote if applicable Ø Sell / dispose of assets Ø Notify relevant accountants Ø Record transactions in accounts Ø Reconcile GL accounts Ø Calculate profit/loss on disposal Ø FA 1. 4 Maintain Asset Register Ø Receive request Ø Transfer assets Ø Adjust assets Ø Revalue assets Ø Capitalise WIP assets Ø Report on Ø amendments Write - off / down assets FA 1. 5 Perform Period End Routines Ø Capitalised labour calculation Ø Depreciation calculated Ø Depreciation posted to GL Ø Reconcile accounts Ø Send monthly reports to owners FA 1. 6 Verify Physical Compile. Assets accurate Ø data for asset verification Ø Conduct inventory check Ø Highlight exceptions Ø Track asset history & reconcile Ø Update FA register & prepare GL journals FA 1. 7 Answer Adhoc queries Ø Receive requests for adhoc reports Ø Produce reports
9 Fixed Assets - Level 2 Change request procedures Changes in FA Policies and Procedures Raise request FA 1. 1 Maintain Standing Data Change request procedures Request Prepare formal request Formal request Review and approve FA 1. 12 FA 1. 11 Requester System validation controls Authorisation rules Accepted request Set up new codes / data FA 1. 13 FA Accountant Finance Managers Amend/update asset types or categories Notification procedures Actioned request Notify affected users & groups FA 1. 14 FA Accountant FA 1. 15 FA Register structure maintained FA Accountant Rejected request Sub Processes / Notes FA 1. 11 Raise request Ø Send request to FA accountant by e-mail with full explanation / reason for request Pw. C 175 FA 1. 12 Prepare formal request Evaluate request against current FA Register to identify actual need for new standing data Ø Raise request and attach original Ø FA 1. 13 Review and approve Ø Ø Evaluate request Communicate acceptance or rejection to originator FA 1. 14 Set up new codes / data FA 1. 15 Notify affected users and groups Set up standing data by FA Accountant Ø Review set-up data and codes periodically Ø Ø Ø Send formal notification of set-up Notify that request rejected and why
10 Fixed Assets - Notes on Maintain Standing Data Best Practice Features Ø Asset accounting polices clearly documented; Master Data set up on the system to reflect these policies Ø Appropriate coding by asset category established Ø Procedures surrounding the Fixed Asset process are documented and communicated to staff including requirements for issuing new codes Ø Asset Register Rules incorporated into Master File, which control issues of new numbers within structured coding scheme Ø Staff trained in Fixed Asset Accounting processes and have clear roles and responsibilities. They should have a good understanding of network and engineering areas Ø Supervisory staff understand statutory and tax requirements Internal Control Requirements Ø Once entered, updates should be verified against the original requests Ø Codes will be received from the Master File and updates will be confirmed against the Master File Ø The system will check that all required data fields are complete Ø There must be supervisory review for Master Data updates Key Performance Indicators Ø Speed of update: time from receipt of request to modification and verification of records: this should not exceed one day Ø Number of input errors when asset details are validated: this should be zero Cost Drivers Ø Complexity of assets Ø New types of assets Ø Number of changes to physical location coding Pw. C 175
11 Fixed Assets - Level 2 FA 1. 2 Add Assets System controls Accounting policies Accounting Policies System Controls Assets from AP or Project Accounting GL a/c maintained for additions Input automatic data FA register structure maintained Add additional information AP lines with Skeleton details FA 1. 21 AP System FA accounting staff System controls & accounting policies Updated FA Register Post asset details FA 1. 23 FA 1. 24 FA accounting staff FA register structure maintained Added Assets Input manual data Asset addition notification AP lines with additional information FA 1. 22 FA accounting staff Cost centre managers Sub Processes / Notes FA 1. 21 Input automatic data Receive asset addition notifications from AP into FA Register Ø Run interfaces with AP to transfer invoice lines Ø Tag/label asset with unique identifier Ø Pw. C 175 FA 1. 22 Input manual data FA 1. 23 Add additional information Manually enter assets which do not have invoice information Ø Identify assets as ; – WIP; – Expenses; and – Capitalised assets. Ø Ø Add additional asset datail to lines e. g. – assign asset categories; – split or merge assets; and – add to existing as cost adjustment. Ø Assign asset life Ø Assign asset to departmental manager, location FA 1. 24 Post asset details Ø Post prepared lines to fixed asset register
12 Fixed Assets - Notes Add Assets Best Practice Features Ø Ø Ø Ø Linked databases used in recording asset details, to increase accuracy of the asset register and to eliminate duplicate paper trails Appropriate asset “numbering” methods driven by users of asset information; bar coding used on relevant assets Direct links to Project Accounting Clear policy established for treatment of assets and guidance on how to classify different types of assets, to reduce the number of reclassifications needed System interconnection to MIS (Management Information Systems) for tax and insurance planning Assets identified by “custodian”, i. e. person who controls the asset, rather than a department or the company as a whole Unified transfer pricing in all Business Units for asset transfers Use of asset transfer strategy to optimise the usage of assets Internal Control Requirements Ø Ø Ø Asset number controls All asset register updates reviewed after entry, to limit period end differences Update details sent periodically to source and asset custodian (or other initiator of the update) for information and coroboration purposes Key Performance Indicators Ø Ø Ø Number of reconciliation at period end: if a reconciliation is needed between Fixed Assets and other accounts, this indicates that one or other of the accounts is not up to date Number of changes processed Number of verification adjustments Cost Drivers Ø Ø Number of assets Average useful life of assets (i. e. rate of asset turnover) Number of changes in Master Data leading to manual adjustments. (e. g. change in organisation codes) Number of revaluation's / disposals Pw. C 175
13 Fixed Assets - Level 2 Disposal procedures Asset disposal notification FA 1. 3 Dispose of Assets Valuation procedures Assets identified FA 1. 31 for disposal Select assets to dispose Authorisation procedures Sales price and buyer FA 1. 32 confirmed Obtain quote (if applicable) Sell/dispose of assets Asset sale or disposal registered with FA 1. 34 Accounts dept Sale/Disposal completed Notify finance FA 1. 33 Reconciliation procedures Disposal procedures Record transactions in accounts FA Register updated FA 1. 35 Interface Reconcile GL accounts FA 1. 36 to GL Cost centre managers Cost centre manager FA accounting staff FA register GL a/c’s maintained for disposals Update FA register FA accounting staff Financial manager Sub Processes / Notes FA 1. 31 Select assets to dispose. FA 1. 32 Obtain quote (if applicable) Ø Cost Centre managers identify items for disposal Pw. C 175 Ø Cost Centre manager to obtain quote for asset, place item in auction, or advertise as appropriate FA 1. 33 Sell / Dispose of Asset FA 1. 34 Notify Accountants Asset sold and monies received by Cost Centre managers Ø Cost Centre managers to ensure monies received for assets as agreed or expected from auction Ø Invoices raised by AR for sale of assets on credit Ø Cost Centre managers to notify FA staff /accounts of disposals Ø Cost Centre manager to ensure asset payment received and registered. Ø FA 1. 35 Record Transactions in accounts Ø FA accountant to update register with disposals FA 1. 36 Reconcile GL accounts Ensure FA register reconciles with asset values in GL Ø GL maintained for Disposals Ø Ensure that all details of profit / loss have been recorded accurately to the correct cost centres in GL Ø
14 Fixed Assets - Level 2 FA 1. 4 Maintain Asset Register Systems controls Transfer Assets FA 1. 42 Authorisation procedures Maintenance policy Adjust Assets FA 1. 43 Approved request Receive request Updated FA Register Write-off / down Assets FA 1. 4 Asset register updated FA 1. 44 FA accounting staff Cost centre managers Management accountant Report on adjustments Reports FA 1. 47 FA Accounting staff Cost centre managers Revalued Assets FA 1. 45 Capitalise WIP Assets FA 1. 46 FA accounting staff Sub Processes / Notes FA 1. 41 Receive Request. FA 1. 42 Transfer Assets FA 1. 43 Adjust Assets Ø Receive request to alter fixed assets register Pw. C 175 Transfer single asset between GL depreciation expense accounts or departments Ø Transfer a group of assets between GL depreciation expense accounts or departments Ø Ø Reserve adjustments i. e. adjust for accumulated depreciation for single or groups of assets FA 1. 44 Write-off / down assets Fully or partly write off assets Ø Calculate gains and losses before running depreciation Ø FA 1. 45 Revalue Assets Ø Ø Revalue assets Run depreciation FA 1. 46 Capitalise WIP Assets Ø Recognise ‘go live’ status Ø Commence depreciation FA 1. 47 Report on adjustments Ø Run reports detailing changes to FA register
15 Fixed Assets - Level 2 Depreciation policies Maintenance policies FA 1. 5 Perform Period End Routine Month end reconciliation Period end timetable Cost centre analysis Systems controls Period end timetable Updated FA register & reports Calculate depreciation Reports Depreciation amounts Post depreciation to GL FA 1. 52 FA accounting staff FA interface with GL Reconcile accounts FA 1. 53 Adjustments Spend monthly reports to asset owners FA 1. 54 FA accounting staff FA system FA accounting staff FA 1. 55 FA accounting staff FA system Adjustments Sub Processes / Notes FA 1. 52 Calculate depreciation Ø Pw. C 175 Calculate cumulative depreciation to date in the year based on current asset register with reference to relevant asset rules FA 1. 53 Post depreciation to GL FA 1. 54 Reconcile accounts Prepare all postings for GL e. g. additions, disposals, depreciation, adjustments Ø Post to GL automatically Ø Ø Reconcile Asset register to Balance Sheet Ø Report on adjustments / corrections required FA 1. 55 Send monthly reports to asset owners Ø Generate standard month end asset / depreciation report for relevant managers Reconciled GL accounts
16 Fixed Assets - Notes Depreciation calculation Best Practice features Ø Integrated fixed asset systems to calculate depreciation charges for tax and accounting purposes Ø Depreciation rates by asset category are based on useful life of the asset, rather than designed to meet accounting requirements only Ø Consistency of depreciation methods and rates across the business Internal Control requirements Ø Results of depreciation run compared to expected amounts (from budget or forecast) to identify potential errors and over-runs Ø Updates to assets’ depreciation information must only be accepted if properly authorised and consistent with management/tax policy Key Performance Indicators Ø Time taken to update depreciation data in fixed asset register at period close Ø Reconciling items on depreciation accounts: should be zero Cost Drivers Ø Number of depreciation rates Ø Number of assets Pw. C 175
17 Fixed Assets - Notes Perform Period End Routine Best Practice Features Ø Automatic data flows between ledgers, e. g. , between Fixed Asset Register and General Ledger, Project Accounting, etc. , to remove manual reconciliation effort Ø System allows assets to be grouped or desegregated for reporting purposes Internal Control Requirements Ø System internal controls (e. g. user profiles) Ø Timely and accurate clearance of system reject reports Ø Reconciliation of budget Vs. actual period end totals Ø Reconciliation of movement in fixed asset accounts for the month (e. g. new NBV = old NBV + additions - disposals - depreciation) Key Performance Indicators Ø Time taken to close Fixed Asset Register at period end Ø Time taken to complete the GL/FA reconciliation Ø Differences during reconciliation Ø Time to print out the period end reports Cost Drivers Ø Number of asset records Ø CPU time for generation of reports Ø Reconciliation required to clear General Ledger mis-matches Ø Number of necessary changes during reconciliation with General Ledger Pw. C 175
18 Fixed Assets - Level 2 Updated FA register & reports FA 1. 6 Verify Physical Assets Verification timetable Inventory control system Compile accurate data for asset verification Conduct inventory check FA 1. 61 Complete list for Inventory control FA accounting staff FA 1. 62 Feedback on items held Inventory staff FA accounting staff Inventory control system Audit trial Authorisation for write off’s Highlight exceptions Track asset history and reconcile Update FA register & prepare GL journals FA 1. 63 Items to be further investigated FA accounting staff Identified corrections FA 1. 64 FA accounting staff Verified FA register Authorised FA 1. 65 GL adjustments FA accounting staff Sub Processes / Notes FA 1. 61 Compile accurate data for asset verification Ø Ø Validation checks on FA register Compile FA reports to required specifications Pw. C 175 FA 1. 62 Conduct inventory check FA 1. 63 Highlight exceptions Conduct inventory check / FA verification Ø Complete formal check reports Ø Identify book value and physically check variances Ø Report differences Ø FA 1. 64 Track asset history & reconcile Ø Track asset histories / audit trial Ø Reconcile differences FA 1. 65 Update FA register & prepare GL journals Ø Enter write-off on FA register via adjustment or disposal journals
19 Fixed Assets -Notes Verify Physical Assets Best Practice features Ø All existing capitalised assets identified and classified Ø Regular physical verification, focused on high-value and high-risk areas Ø Use alternative verification methods where appropriate eg review maintenance log, establish that asset is operating effectively Internal Control requirements Ø Regular physical verification exercises and reconciliation to the Fixed Asset Register Ø Fixed Assets must ensure that transferred assets retain their original project number identification in the asset record, to ensure appropriate access to archived records Cost Drivers Ø Number of verifications required Pw. C 175
20 Fixed Assets - Level 2 - FA 1. 7 Answer Adhoc Queries System controls FA register routines FA Register Reports Request for adhoc reports Receive request for adhoc reports FA Report routine Produce reports FA 1. 71 FA 1. 72 FA accounting staff FA systems Cost centre managers FA accounting staff FA systems Sub Processes / Notes FA 1. 71 Receive request for adhoc non-standard specification Ø Receive reports Pw. C 175 FA 1. 72 Produce reports Ø Ø Prepare reports routines Generate reports Reports
21 Fixed Assets - Appendix 1 : IDEF Process Flow The diagram below provides a key to the process diagrams used in this document. Controls (i. e. Ø Procedures Ø Standards Ø Requirements for rework) Input (i. e. Ø Information Ø Material) Process / activity Resources (i. e. Ø People Ø Functions Ø IT systems Ø Machines) Pw. C 175 Output (i. e. Ø Information Ø Material)
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