What are Fixed assets?

Fixed assets are defined as items that provide future economic value for a business, generally owned for more than a year. Examples of fixed assets are land, building, plant & machinery, furniture, vehicles, Computer equipment, etc.

Fixed assets are the building blocks of a business and are vital to its operations. They are also a substantial part of the balance sheet of the business. A business has to maintain a line-item level Fixed Asset Register (FAR) to record and maintain all financial and non-financial transactions related to fixed assets. It helps ascertain the accurate value and position of fixed assets owned by the business.

Fixed asset management

Over the useful life, the assets may be used and managed by various departments and offices across multiple locations. In some cases, the assets are assigned to employees or even issued to external vendors for various reasons. You would need to have a standard mechanism to track fixed asset issuance, movement, and maintenance, else, a business is bound to quickly lose track of the availability, usage, and condition of their fixed assets. And if you extrapolate this to the addition of multiple new offices, plants, and employees over the years, you will notice a gaping mismatch between physical assets and records.

These discrepancies are generally higher for capital-intensive industries like manufacturing, healthcare, hospitality, telecom, infrastructure, etc.

Importance of physical verification of fixed assets

As a business owner, you may wish to maintain an up-to-date and accurate Fixed asset register. It may also be statutory compliance in a few cases. But, due to the continuous addition, movement, maintenance, discard of fixed assets, this is easier said than done. 

Periodic physical verification of fixed assets can bridge the gap between the actual physical assets available on the ground against the fixed assets as per records.

First, let’s look at the possible challenges your business may need to face for not performing periodic physical verification of fixed assets.

• Not having up-to-date and accurate information of all your fixed assets.
• The physical assets on the ground do not match with those in your books.
• No easy way of identifying and mapping assets records.
• Not using the assets optimally and ghost assets can impact your bottom line.
• Incorrect mapping of Capital and revenue expenses.
• Not having accurate FAR for compliances.
• Difficulty in ensuring process controls and Unwanted procurement of new assets.

Objectives of physical verification of fixed assets

As we can see, not performing periodic physical verification of fixed assets can lead to multiple business and compliance challenges. So, the objectives of physical verification activity could be as listed below.

• Up to date and accurate record of physical assets.
• Minimize discrepancy between physical assets and financial records.
• Real-time fixed asset tracking to prevent theft & pilferage, equipment failure, down-time.
• Identify ghost assets and cut down insurance and maintenance-related spending on such fixed assets.
• Improved asset life span with increased visibility on the condition of assets, in-time maintenance, and replacement.
• Increase efficiency of assets through better management, allocation, and usage.
• Better compliances through improved visibility, simplified audits, and reporting processes.
• Perform faster asset verification activities by tagging fixed assets with Bar code, QR Code, RFID, or BLE labels and tags.

Different techniques of physical verification of fixed assets

Fixed asset physical verification can be done in numerous ways depending on the nature of the fixed assets, the geographical spread of assets, etc. Listed below are a few commonly used methods for 1st-time physical verification of assets.

1. Floor-to-book verification
2. Book-to-floor verification
3. User self-certification
4. Category-level count-based verification

Let’s understand each of these methods in detail.

1. Floor-to-book verification of fixed assets

It is the most commonly used method when the assets are required to be verified after a long period or if a fixed asset verification has never been carried out. In this method, it is an assumption that the FAR is not accurate or comprehensive. The FAR may not have line-item level details and other information needed for the identification of assets.

• The physical verification team starts out by doing a preliminary physical inspection of assets to determine the nature and categories of assets.
• Physical verification of assets belonging to the identified categories is carried out to identify and tag all available the assets on ground.
• Fixed asset information like make, model, serial number, user, location, department, etc are captured and digitized.
• If available and required, all fixed asset purchase invoices are digitized for better reconciliation and mapping.
• Physically verified assets are mapped to the FAR.
• Reports for discrepancies are prepared and submitted.

Fixed asset management software is used to auto-capture and reconcile verified assets against the records if the fixed assets are already tagged with bar code or QR code labels.

2. Book-to-floor verification of fixed assets

This method is generally used when the business has a structured and comprehensive FAR with line-item level details of fixed assets are readily available. In this method, the physical verification team along with the respective department SPOCs identifies specific assets against records. The identification of assets against individual records generally takes much longer.

• The physical verification team starts by sanitizing the existing FAR to standardize the asset nomenclature.
• On-ground physical verification, identification, tagging of specific assets is carried out along with the department SPOCs
• Fixed asset information like make, model, serial number, user, location, department, etc., are captured and digitized.
• Physically verified assets are mapped to the FAR. 
• Reports for discrepancies are prepared and submitted.

3. User self-certification of assets assigned to them

This method is used in specific cases where the FAR has information on assets assigned to users, like computers, mobile phones, tablets, vehicles, etc. The process involves using asset management software with the requisite capabilities to initiate user self-confirmation of assets assigned to them.

• The physical verification team starts by sanitizing the existing FAR and identifying assets assigned to specific users.
• Data is uploaded to the Fixed asset management software. 
• A physical verification plan is created to request all users to confirm the availability of the respective assets with them and their working conditions.
• An email with asset information is sent to all users and their confirmation is taken.
• Reports for discrepancies are prepared and submitted.

This method is generally not useful for assets which are not assigned to employees. For example, land, building, plant & machinery, furniture etc.

4. Category-level count-based verification

This method of asset verification is generally used for assets that are lower in value or do not have a unique distinguishing factor. For example, furniture, lights, fixtures, cutlery, upholstery, etc. These assets are generally only counted and not tagged.

• The physical verification team starts by identifying specific assets which can only be counted and not tagged.
• Assets are counted and details captured for unique items.
• Counted assets are reconciled against records.
• Reports for discrepancies are prepared and submitted.

As you can see, the above-mentioned are a few popular and widely used methods for assets verifications and tagging. In a few cases, the physical verification team takes a hybrid approach for better accuracy and faster completion of the verification activity.

The expert team decides the method to be used based on the nature of business and assets and other limitations.

Talk to us for comprehensive and expert help on the physical verification of your fixed assets.