Fixed Asset Verification - How It Affects Depreciation

An assets devaluation over a fixed period of time is known as depreciation. For many mid-size and large companies, depreciation consumes a rather large part of their profit and loss statement. But what are the consequences if the planned depreciation doesn't balance with the actual state of your fixed assets? In other words, what happens when all doesn't go as planned?

The most common type of depreciation calculation is the straight-line method. Let's say you just bought a new wheeled loader for $250,000 and you expect it to last for 10 years, at which point you think you can scrap it for $50,000. Using the straight-line method, the annual depreciation would be $20,000 ($250,000 - $50,000/10 years). While common, this calculation is also subjective. Both the service time maturity, as well as the future scrap metal value, are just educated guesses. A financial plan doesn't suffice in itself. The plan also requires a financial umpire, so to speak, as well. It needs someone who can double-check your data to ensure that the plan is working on a developing basis.

The advantage of a rolling asset audit is that not only are your assets verified but it also verifies that your company is properly performing its maintenance as scheduled. In our example above, what if the loader wasn't serviced at the proper times and the environment was actually creating more wear and tear on the tyres than originally assumed? In other words, the loader's maximum lifespan is actually 8 years instead of 10. What are the consequences of such an error to the bottom-line?

First, the financial standing of the company isn't accurate and needs adjusting. Second, when the unexpected depreciation of your asset increases, it adversely decreases the expected profit margin. Also, the company has probably been paying higher taxes than it would because, conversely, the greater the depreciation the less taxable funds are on the books. Finally, it's incredibly difficult for a company to ensure that the capital resources are available if decisions aren't made from accurate data. From both a financial as well as an operational perspective, it just creates a mess. 

The best advice is to augment your ERP system with an outside asset verification team.  A company cannot make accurate long-term planning without also ensuring that there is a measure in place to track the status of your assets. 

Please contact us when you are ready to firm-up your data and we will work with you to ensure that an asset verification plan is in place for your company.