Any physical inventory is time consuming and can be costly. An initial inventory is the most time consuming and costly because of the large number of assets to be recorded, coded, tagged and valued. Several ways are available to reduce the time and cost of inventorying. First, the inventory can be conducted in phases - by department, location, or asset type. Inventorying in phases requires specific cutoff times and accurate documentation of the location of assets at the cutoff. Such documentation may be difficult if there are frequent departmental transfers of assets. Second, the inventory can be done by entity personnel during normally slack (or at least less busy) periods. Third, the inventory can be done using temporary help, provided sufficient direction and supervision is provided. A valuable source of such assistance for many entities has been college accounting students during the summer months.
Fixed asset control can be maintained by making four comparisons of fixed assets on hand and fixed asset records. They are:
- Compare a sample of fixed asset purchases to the fixed asset list to make sure they were properly recorded;
- Compare a sample of fixed assets sold to the fixed asset list to insure that the asset records now indicate that the asset was sold;
- Compare a sample of assets selected by observation from throughout the entity to the fixed asset list to make sure first that the assets are on the list and second that other attributes such as department, location, etc. have been properly recorded;
- Select a sample of assets from the fixed asset list, go to the location indicated in the record, and make sure that the asset is really there.
Making the comparisons by themselves is not sufficient. Any time a comparison indicates that a problem exists or is beginning to develop, additional steps should be taken. This may mean implementing better controls to insure all purchases and sales are recorded, tracking assets that are not at the listed location, retraining inventory takers so that all assets are listed, etc. The follow-up that is necessary will depend on the problem(s) identified by making the comparisons.
"Critical nature" fixed assets that cost less than the capitalization threshold are called controlled assets and are inventoried despite their low cost. Although they are part of the fixed asset record, controlled assets are not reported as fixed assets on the entity's financial statements. Controlled assets should be either generally defined or specifically identified when fixed policies are initially established. Controlled assets may differ from one department to another.
Inventorying is necessary for accountability and control. Inventorying establishes a direct relationship between actual and recorded fixed assets. An inventory insures that fixed asset transactions have been and are being recorded properly; and, the inventory provides the data base for fixed asset accounting and management systems.
Analysis and Review
Information development begins with an analysis or survey of potential fixed asset information necessary to derive the final product(s), use(s), or output(s), such as financial statements, cost accounting, or risk management.
It is also necessary to review accounting, statutory, management, and auditing requirements to determine what fixed asset information must be maintained by the fixed asset subsystem.
Special audit problems sometimes arise when historical cost records are incomplete for older fixed assets. In such instances, best available estimates of historical costs should be used. The notes to the financial statements may present fixed assets in two parts: 1) fixed assets acquired prior to the date when appropriate fixed asset accounting was implemented, and 2) those acquired after that date. As time assets, those older assets will become a smaller and smaller portion of total reported fixed assets.
After the fixed asset subsystem users have been surveyed and the requirements analyzed, the output is designed. Output design is determined by the intended use of the output. Uses may include risk management, financial statement preparation, capital improvement budgeting, cost accounting, and fixed asset management and control.
The third step in information development is input design. Input design includes all activities that are necessary to capture data and enter it into the fixed asset subsystem. The main source of data should be the physical inventory.
(See Valuing Fixed Assets - Sources of Cost Data).
Although it is important to determine the original cost of assets, it is necessary to input and maintain other data in the fixed asset subsystem to enable preparation of asset retirement or disposal reports, transfer reports, damage forms, and to document asset loss or theft.
The fourth step in information development is processing the data. The processing that occurs will depend upon the desired output.
Once output, input, processing and other requirements have been determined, cost estimates, work schedules, and timetables can be prepared.
Planning the Inventory
The most important step in inventorying is planning. Without proper planning, other steps in the inventory process may have to be repeated or, even worse, the information collected in the finished inventory may be useless and the whole process would need to be repeated.
Policies and procedures for inventorying must first be established. First, it is necessary to determine which assets will be included in the inventory and which will be excluded. Assets that are obviously not included in the inventory are supplies, computer reports, files, and spare parts. When inventorying, it is important to distinguish between assets which are owned from those which are leased. It also must be determined if assets that are to be included in the inventory are to be controlled individually or by group.
Uniformity and continuity of policies and procedures should also be considered before inventorying. Some entities have different policies for different asset classes and, therefore, maintain uniformity of policies within asset classes but not for the overall inventory. An issue that is seldom planned for but that can have long-term and far-reaching effects is policy revision. Too frequent policy revisions may render the inventory totally useless by creating confusion for the inventory takers, while too infrequent policy revisions may render information that does not reflect the present status of the fixed assets.
Form and report design should occur in the planning stage. The initial inventory forms should be designed to capture data that will be required in the final output.
Before the physical inventory is taken, it is necessary to:
- Establish an inventory timetable and procedures
- Establish inventory teams
- Conduct training of inventory takers
- Determine materials necessary to take the inventory:
- policies and procedures manuals
- lists of leased or rented equipment and vehicles
- building diagrams
Planning must also include designing a coding system and establishing tagging policies.
Coding refers to the asset identification system adopted by the district. Each asset identification number must be unique. On computerized systems the asset identification number serves as the key to data records on the property master file. The quantity of numbers and/or letters used to make up the asset identification number may be computer related. Possible basis for a coding system include:
- Identification number based on position of the numbers or letters having meaning. For example, the first position may represent the department or location.
- Identification number based on chronological order, i.e., assigning tags in numerical sequence to assets as they are purchased.
- Identification number based on the type of asset – land, buildings, site improvement, equipment, etc.
Subnumbers can be used for major components of an asset. All components of an asset carry the same asset identification number with varying subnumbers for each component. Subnumbers make it possible to replace or retire components without disturbing the coding system. For example, retiring an old motor and replacing it with a new one is a change in subnumbers only. Also, a new air conditioning system in a building receives a new subnumber of the building identification number.
Fixed assets are tagged as a means of positive identification, a form of asset location control, a way to make inventories easier and quicker, and a common ground for discussing an asset. Tags should be selected and placed on the assets so that they are not easily removed or destroyed by asset use.
Taking the Physical Inventory
The physical inventory begins with the preinventory training of personnel. The training consists of:
- Instructions on which assets to include and which to exclude;
- Which assets are controlled individually or by group;
- Where tags are placed;
- Writing asset descriptions;
- How to complete the fixed asset inventory form.
A zero-base inventory starts with all quantities at zero; in other words, the inventory does not start with an existing inventory list. Zero-base inventorying has several advantages. New assets are added to the inventory in the correct sequence or order. Likewise, retired assets are removed so that the inventory forms are constantly updated. By using zero-based inventory, management is assured that assets are actually counted. The main disadvantages to a zero-base inventory are that it takes more time and is more costly.
Once actual inventorying begins, it is important to obtain all necessary information while counting the asset. The asset is inspected and its present condition is evaluated. If applicable, the major components are listed on the inventory, assigned an identification number, and tagged. To improve inventorying techniques and the property data base, encourage inventory takers to include suggestions for improving inventory policies and procedures, for reducing inventory time, for improving communication between inventory takers and management, and for increasing feedback.