Introduction:

Most stakeholders take the correctness and accuracy of business reports and financial statements very seriously. One of the reasons is that they use these reports to control that business and make business decisions. Fixed assets are that reports the balance sheet of every business normally have the material values compare to others assets.

Therefore, the correctness of assets is essential for both accountants and auditors. Many controls are used by accountants or fixed assets controllers to ensure that the reporting of fixed assets reflects their fair value, physical conditions, and maximized fixed-asset conditions.

Performing regular fixed assets reconciliation is one of the most important processes. It controls the assurance of the accuracy and existence of fixed assets reported on the balance sheet.

Fixed assets:

Fixed assets are the assets long-term assets belonging to and used by an entity every day for its business. Those assets are including building, land, office furniture, office equipment, vehicles, cars, computer equipment, etc.

In the balance sheet, fixed assets are reported at a reliable value. The values of assets are decreased due to depreciation as well as impairment.

Reconciliation

Reconciliation is an accounting process to compare two sets of records to ensure the figures are in agreement and are accurate. Reconciliation is an important process to determine the money trail.

The statement of fixed assets reconciliation shows a summary of book value, credits, and debits to fixed assets accounts and accumulated depreciation which is vital in reconciling the balance sheet and the register of fixed assets.

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The fixed asset reconciliation statement generally deals with the following on a broader horizon:

  • Whether the depreciation has been properly charged or not.
  • Whether the addition of new assets to the particular accounts is justifiable or not.
  • Whether the disposal of assets has been correctly booked or not.
  • Whether the fixed assets show the proper value as on the closing date or not after various adjustments.

The above list is only an indicative list, and there is much more complication involved in preparing the statement. The reconciliation statements are prepared by the large corporate entities dealing in billions and are generally asset-heavy backed enterprises.

Many large organizations use excel or have their own SAP to prepare fixed assets reconciliation. They also have their own standards and guidelines to prepare and reconcile the fixed assets.

However, the steps are more or less the same in the organizations. Let us now discuss the steps, in brief, to perform and prepare fixed assets reconciliation statement:

1) Previous Year Balances

  • Firstly, the closing balances of the previous year’s fixed assets balance from the balance sheet shall be brought forward.
  • The depreciation rates applied and useful lives of the asset used in the preparation should be kept handy for ready references.

2) Current Year Purchases and Disposals

  • This can be verified by preparing the fixed assets register, where the date of placement and date of removal of the asset from the performance is noted.
  • The balances of purchases and disposals can be verified from the invoices and should be cross-checked for authorization.
  • The ancillary costs such as shipment and delivery and installation and set up costs need to be ascertained and checked whether they are capitalized or not.
  • If the assets are in construction, capitalization of interest needs to be checked.
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4) Useful lives, impairment and depreciation:

  • The useful lives of assets can be revised if there is higher or lesser deterioration in the performance of the asset. The independent evaluator does this in the case of large assets.
  • If there is a permanent decline in the value of the assets, impairment has to be provided for. This has to be reconciled along with guidelines prepared by the organization and the accounting standards applicable to them.
  • The depreciation rates are applicable as per the regulations or in their absence, as per the organization’s guidelines. The depreciation rates for current-year purchases and disposals need to be closely checked and reconciled.

5) Physical verification of assets and logs:

  • The internal control systems make it mandatory to check the assets physically. This is done to check their health status and how they are maintained to their original condition.
  • The logs shall be checked to know the actual hours the assets are put to use.

6) Closing Balances:

  • After all the verification of accounts and balances, we arrive at the closing balances, which should be reconciled with the closing balance as per the books.
  • The reconciliation statement is, in a nutshell, a double check on the closing balances of the fixed assets.

Here is the short statement of fixed assets impairment for an individual asset.

Fixed Asset A
Nature of Asset  
Useful Life X
Depreciation rate X
   
Opening Balance as on 01.01.2019 XX
Purchases X
Disposals (X)
Closing balances as on 31.03.2020 XX
Depreciation X
Accumulated depreciation till date (X)
Provision for Impairment (X)
Written down value of the asset on 31.03.2020 XX