Fixed Asset Tagging is Important for Good Physical Control

Fixed asset tagging is a good practice in the pursuit of better fixed assets actual control. Putting tags on fixed assets, not only help custodians to determine the fixed asset during a actual count session, but also sends a strong signal to other person (in within the organization)  that the assets are under close administer of certain custodian, hence prevent it from moving & leads person to treat the asset better.

Yes, candidly say, no label is going to stop a determined thief, & there is no such thing as a label or tag that can’t   be dropped. What the asset tag can do is reduce scam.  It is possible that a disgruntled employee could purchase an costly laptop & transfer the asset number from the firm-supplied MacBook Air, is the best example.

How can a so called ‘FIXED’ asset move?” you people may ask. How if I say that fixed assets, in practice, are NOT ACTUALLY FIXED, actually? Okay that sounds contradict, but those who have taken a actual inventory control of fixed assets know about that very well—many goods  listed in the book of the fixed assets can’t  be found during actual counts. They could be proceeded or even gone for best! Fixed asset tagging is one among important internal control system that one can implement, but there are at least 3 different ways for fixed asset tagging (1) traditional; (2) barcode; & (3) Radio Frequency Identification (RFID) tagging system. Hence which one is really better?

There are at least 2 essential elements of internal control when you are dealing with fixed assets: (1) knowing what you are assumed to have—which is the aim of the fixed-asset register or master file; & (2) being able to locate the actual assets, to provide assurance that the property register represents what is actually present.

There is only one way to be absolutely sure that the property register is right, this is by ensuring that the control totals for fixed assets on the general ledger are act for  by actual assets where they are recorded as being. This assurance can only be obtained from a actual inventory. Before going to fixed asset tagging, let’s see 1st, why does accountant seldom adjust fixed asset records (as they do for inventor)?

Why Do Accountants people Rarely Reconcile Fixed Asset Records (As Accountants Do for Inventory)?

Periodic inventories of raw materials, work in process (WIP), & finished goods have to be taken at least once a year, & that inventory must  be monitored by independent auditors. Having said reconciling, means inventories are priced out, reconciled to the books, & the control totals adjusted based on what is owned by the organization & found during the actual   inventory.

The same testing of the controls has not usually been performed for fixed assets. Why?

Essentially because it is not definitely mandated by the Generally Accepted Auditing Standards (GAAS). The only at the instance of to fixed assets is in SAS-106, “Audit Proof’’ that requires auditors to challenge management assertions about the reality of assets actually shown on the balance sheet. Also the valuation of those assets (should there be an impairment charge) must  be challenged, according to the Guide. But again, nowhere is there an explicit requirement that periodic inventories of fixed assets be taken, compared to the property record & differences reconciled.

Many management letters from auditors to the organization recommend year after year that a actual   inventory be taken of fixed assets. In most instances this recommendation goes to the bottom of management’s priority list, & does not get accomplished before the next year’s audit. The next year’s management letter provides the identical recommendation of taking a actual inventory. This can go on for years.

Therefore, I feel safe to say that, obviously auditing focus has been on proper authorizations for acquisition & disposition of fixed assets & correct calculation of expense items.

Given the perfection of modern software in the market, reviewing the devaluation calculations themselves is going to be an exercise in failure. What is important is that the basic records themselves are accurate & nowhere does it seem that auditors have to monitor a taking of a actual   inventory of fixed assets, the way they are required to do for inventory records of raw materials, WIP, & finished goods.

It may sounds cruelly as I am a CPA myself but have to say that it is tough to understand how management, as well as we—independent accountants, can assert the property register is accurate without confirmation from an inventory.

Fixed Asset Tagging for Better actual Control

Basically, it would be difficult—with only a description of an asset—to go from the detailed asset listing on a computer & try to determine a specific asset on the floor. Take desks, for instance, where there are hardly serial numbers, as there are on machine tools. Some easy means of identifying specific goods  is necessary.

Most companies tag assets as they are acquired. This tag number is actually attached to the asset itself. The tag number then go well with the earliest identifier in the property record. So, if you want to determine out about a particular machine tool, entering the tag number (sometimes called the asset number) into the master property file will bring up the complete record. This is essentially the only approach that will work when trying to determine a specific asset in a file that may have thousands of items.

To make it really works, the tag must  be actually placed on the asset at the time it is received. Some one separate, or agency, has to be tasked with this responsibility. It is fully unrealistic to expect someone in the accounting agency to run down to the receiving dock every time you receive goods classified as having to be capitalized. The tags are generally ordered from a source that specializes in this particular function, hence this may be received preprinted, each and every one with a unique number.

After the tag is affixed to the actual asset, a document have to be prepared that sends the information to the property accountant; alternatively with appropriate software the information could be transmitted automatically.

Since most goods  will have a purchase order (P.O.), it must  be sufficient for the receiving department to reference the tag number, a brief description of the asset, its manufacturer’s serial number, & the P.O. The property accountant person can then go to the P.O. file, or the capital expenditure control file, & obtain all of the data needed to add to the master record.

Consider when an item previously capitalized, one already in the master file, is disposed of; all that is necessary is to reference the asset or tag number which must  trigger accounting entries.

The accounting requirements—to record any cash received & reverse out the asset & accumulated depreciation—should immediately follow the actual   disposition. Too much Important as it is, this notification is even more so much important on a trade-in. There will have been no payment receipts to trigger an entry.

A Purchase Order could probably recommendation of the existing of a trade-in, or the trade-in may be in the ‘capital expenditure acceptance file’; in any event failing to record trade-ins is the basically cause of many errors in internal control.

The reverse is also sometimes true. A vendor will offer to accept a trade-in as a means of lowering the purchase price, the organization accepts that offer, but the vendor has zero use for the old asset & neglects to collect it & take it off the premises. Then what happens is that accounting records will reflect this assumption that the trade-in actually has taken place, when in reality the old asset is still there. The organization may well have written the old asset off the books, & stopped calculating depreciation expense. But, of course, the asset is still there & available for use.

Again, this practice, of a vendor not removing a trade-in, is one of the many causes for discrepancies between the file & the floor. There is no easy or good solution for this other than keep track of by internal auditing that corporate sector fixed-asset policies are being followed. This is not to suggest that a organization must  force a vendor to take the asset. It does mean that a potential uncertainty must  be resolved one way or the other.

Alternative Fixed Asset Tagging Systems

It is almost impossible to have effective internal control over fixed assets unless the organization assigns individual unique identifying numbers to each asset that will be capitalized. This asset number, actually attached to the goods & related with the master property record file, is the basis stage of all subsequent internal control. There are essentially two separate types of asset tags are available: (1) Barcode; & (2) Radio frequency identification (RFID) tagging system.

Talking about barcode tag, actually is nothing but a ‘‘numerical’’ label, where the number on the tag is act for  by a barcode font, & usually by a human readable font as well. There is really no difference between the tags, it is just a matter of making data entry faster & more accurate by using a barcode, & a barcode reader for data entry, rather than a person typing on a computer keyboard.

In as much as the cost of maintaining good internal control over fixed assets is substantial, considering periodic actual   inventories & subsequent reconciliation, while going for the absolute lowest cost approach makes little sense. Rather, the choice between barcode & RFID must  be made on a “Total Cost of Ownership” basis.

Now, let’s have a look both alternative options of tagging systems.

(1) Barcode Tagging System

Barcodes are what we see on consumer-goods packages. They are the so funny lines on the box that all time goes through a scanner at a supermarket  mall checkout and investigate counter. The printer has coded the label with an item number, & the scanner is hooked up to a computer that looks up the product number & prints out the unit price.

For fixed assets the barcode sticker would have on the tag the consecutive serial number previously allocated to the asset. This asset number is related, on the master property asset register, with all the relevant data maintained on that asset in the master file, not on the asset tag. In taking a actual   inventory, the auditor or analyst would point the barcode reader at the barcode label previously affixed to the asset.

The reader sends out a beam, often a laser, which hits the barcode & the asset number is transmitted back to the reader. The reader can either store or save the asset number, to be downloaded later use, or there can be a wireless Bluetooth connection to the desktop computer or laptop holding the master file. This transmission would then verify that the asset had been located in which place.

At the end of the actual   inventory, the computer would be set to print out a listing of all the assets that had not been located, at which point the reconciliation process would begin. Barcode labels stickers themselves can be made approximate any size & of any material.

The principal disadvantage of barcode tags is that they can get dirty & hard to read, as well as hard to locate. This is particularly absolutely true in a manufacturing environment, but also in a process facility (refinery  or brewery) where just what has been tagged in prior annual may not be as clear as from a visual examination. Barcode labels, to be read, have to be in direct line of sight. The one thing you want to strongly avoid if possible is to try & take a actual inventory from a printout of the property record showing the assumed location to be on the ground  floor or in that department  you are inventorying. So far better to see the tag visually, all record it with the reader, have the desktop computer exactly match up what you found, & print out an misfit listing.

(2) Radio Frequency Identification (RFID) Tagging System

RFID (Radio Frequency Identification) is a so far advance and effective way to tag fixed assets. With Radio Frequency Identification, you don’t have to have direct line of sight; your reader need only be within say 3 to 4 feet of the tag.

In the barcode stickers label tagging, the beam from the barcode label reader have to be directly aimed at the tag. Hence, if the machine with the asset tag attached has been proceed & the tag is no more in sight, then the inventory analyst person have to hunt for the tag, may be go behind the machine to spot the tag. In the very worst case, the tag can’t   be seen or located & this goods now becomes an exception that has to be reconciled & a new tag allocated.

The Radio Frequency Identification reader is different. It sends out radio waves, which are received on the antenna within the tag, & a response is sent, so passively, by the tag to the reader. Now the sensitivity of the reader can be problem. The reader doubtless has to be fairly so close to the tag, within a few-feet, to cause a response by machine. But the tag doesn’t have to be visible to the naked eye to obtain a hit. Thus, the inventory analyst person, carrying an RFID reader, need only be close to the tag & the item will be identified.

There are a couple of caveats, however, before going down the Radio Frequency Identification path. Initial capital expense for implementing a system may be considerably more. It’s not just the cost of the Radio Frequency Identification labels. Readers can run into the multi thousands of dollars, while barcode label readers can be less than hundred dollar. It gets even more costly if you want a real-time system that monitors all floors of building & rooms of your facilities, hence you can also locate an asset without having to do an inventory.

The one negative to the use of Radio Frequency Identification for controlling PP&E cited by suppliers is cost. Radio Frequency Identification tags can cost an order of magnitude more per tag than a barcode label & may require some notable system integration efforts through the IT sector department. As a guess, in a few years virtually all asset tagging will be with Radio Frequency Identification, but we aren’t there yet.

If you think about the cost of taking a periodic yearly inventory, & the work included, which would you prefer: the barcode label that have to be really seen, or the Radio Frequency Identification tag which need only be close to the reader even if it’s not visible?

It is tough to generalize how much time is going to be saved in taking an inventory with Radio Frequency Identification tags, rather than barcode label tags. It is tough to imagine, however, that the Radio Frequency Identification tagging system could take more time.

When you assumed the relatively high hourly rate of people taking a fixed asset inventory (not to mention subsequent reconciliation efforts), moreover, it takes very little time reduction to fully justify the initial expenditure on the Radio Frequency Identification tagging system. This of course consider that the organization has adopted a relatively high minimum capitalization threshold; this minimizes the number of assets that have to be accounted  & located for, thus making the higher starting initial unit cost virtually must  worth the investment.

 

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