Fixed assets are the assets that are purchased for a longer period of time to be used and are not likely to be converted into cash in a short period of fewer than twelve months. Examples of fixed assets are land, building, and equipment, etc.
The fixed assets are at risk of being misreported, which imbalance the whole books of accounts for a company. So, today we will discuss are vital risks and what are the critical internal controls for fixed assets.
What are the internal controls?
Internal controls are the subset of the accounting system to aid in proper reporting of a company while being remaining an internal risk.
Usually, there are two types of key internal risks and controls. The first is physical risks and the second is a financial risk. Both types of risks can be minimized with the help of internal controls.
The first risk i.e. physical risk can be dealt with as per particular excuses making. For further clarification, the primary risk is physical in nature and relates to assets getting lost, stolen, or damaged thereby.
Contrary to that, a further financial risk to identify and implement internal controls for fixed assets.
1) Physical risks and internal controls for fixed assets
The purpose of the physical controls is assessing, verify the existence, condition, and custody of the fixed assets.
Usually, fixed assets are conceived as low risk for any type of financial defalcation meaning thereby that fixed assets are less exposed to theft, misappropriation, or unrecorded damages.
It happens due to the nature of fixed assets. Imagine the fixed asset side of the balance sheet. The biggest value of fixed assets is usually in the land, building, heavy machinery and equipment.
All of these assets are less exposed to theft and misappropriation as no one can steal the land or building and there is no black resale market after stealing heavy machinery. So, in conclusion, these fixed assets require less internal controls.
However, fixed assets like vehicles, light equipment, and light tools are at high risk so companies focus on these fixed assets to place heavy internal controls.
2) Financial risks and internal controls for fixed assets
Financial controls are essential for every company as they ensure that the correct values of the fixed assets are reported on the balance sheet. Those values would be detrimental to depict the financial stability of the company.
The financial risks involved are being unable to account for the correct purchase price of the fixed assets. Imagine a company record the purchase price of the asset in the value of the fixed asset and another company report acquisition price of the same fixed asset.
Now the acquisition price of the fixed assets might include the delivery fee, tax payment, registration payment, fixation expenses, etc.
Now the increase of expenses incurred while acquiring the fixed has to be reported somewhere. The same is the case while recording of depreciation of fixed assets.
3) Key internal controls for fixed assets against physical risks and financial risks
Internal controls are essential to safeguard the interest of the company while dealing with fixed assets to minimize physical risks. Internal controls are devised according to the type and category of the fixed asset.
However, the formula to manage internal controls is to safeguard the consumption by fixing responsibility in the form of custody and protocols. Take the example of a delivery truck or vehicle.
The key internal controls for this fixed asset would be GPS monitoring, place, and rules of parking after working in the premises, key logs and custody register along with check-in and check out.
Additionally, monthly or annually complete audit and verification as per asset ledgers is done or not. Same will be the case with other vehicles depending on the category.
Regarding financial risks, it would be appropriate to go for the acquisition price of the fixed assets as it will depict the correct value of the assets.
However, the depreciation of the fixed assets should be calculated depending upon the category of the assets and one solution for all should be avoided.
Most of the companies opt to inflate the depreciation costs by decreasing the expected life of the assets to minimize the taxable income.
This should be done strictly in adherence to the internal controls like maintaining separate books for taxing purposes and reporting purposes.