Many accountants and small business financial advisors have looked at a client’s depreciation schedule at year-end, only to find it is not up to the task, or the auditor asks for depreciation support and it isn’t available. Maybe it does not agree with the general ledger, or it’s possible it doesn’t exist at all. You hit a roadblock when looking at the fixed asset register and something that should have been reasonably simple becomes a reconstruction, or even creation, of the fixed asset register.
Let’s cover some of the errors that you’re likely to encounter:
- Placed-in-service date: It’s not uncommon for the invoice date to be used instead of the placed-in-service date —the standard the IRS requires— which can be weeks later. Clearly if this happens the fixed asset register is wrong from the start, and that asset will forever be valued incorrectly.
- Disposals are never recorded: Known as ghost assets, sometimes clients forget to record a disposal, and because they have a number of assets the disposal is easy to miss. If a business has a handful of fixed assets they are likely to pick up this mistake. From a basic standpoint the fixed asset amount is simply wrong as assets are overstated. But there are other problems associated with this. Depreciation claimed on non-existent assets inflates depreciation and understates profit. This means underpaying tax and an unhappy tax authority. Plus insurance will be paid on a non-existent asset. There is little doubt that your client would be happy if you pointed this error out to them, as it saves them from falling foul of the IRS.
- Wrong categorization: An asset placed into the wrong asset class could have a similar problem to an asset that has used the invoice date, instead of placed-in-service date. It may have the wrong depreciation rate which will result in the wrong depreciation calculated every year as well as the wrong book value, almost from the outset.
- Depreciating fully depreciated assets: Clearly if an asset is fully depreciated it shouldn’t be depreciated any more. This is caused when the fixed asset register doesn’t flag an asset as having zero book value, or the useful-life was not captured when the asset was input. Depreciation continues to be calculated as no-one is aware the asset has zero value. It seems almost unnecessary to state this, but you can’t have an asset with a credit value, and this could result in that.
- Mixing GAAP/IFRS and tax depreciation. Clients may not know the difference, and sometimes may not even know that tax depreciation exists. They may keep one schedule assuming that it covers both GAAP/IFRS and tax depreciation. This could result in errors in the financial statements and/or tax returns.
Why does this keep happening: Too often clients don’t have the time, or the interest, to manage a fixed asset register. It may be seen as a nuisance and something that gets in the way of ‘real work’. That may mean that they manage the register reactively and sometimes even only at year-end.
Spreadsheets are only as good as their users, and they are prone to error and formula drift. A formula could be changed, a value typed in over the formula, or simply the wrong formula input. This spreadsheet is then rolled over to the next year and the problem compounds.
What’s more is that no one takes ownership of the problem, and maybe multiple people work on the register. On top of that each person doesn’t know what the other has done. There are no validation checks in a spreadsheet and thus they are prone to errors. They don’t enforce rules, flag errors or prevent overrides. Of course it is possible for a power user to add checks and balances to a spreadsheet, but one of the strong appeals of spreadsheets is their simplicity and flexibility, which is also their weakness in circumstances such as this.
How can CPAs help clients fix this? An annual fixed asset review may be helpful and is an area where you can add value.
- Check that the register reconciles to the general ledger
- Verify source documents
- Check that all fixed asset disposals have been recorded
- Compare invoice dates to placed-in-service dates
- Confirm that the depreciation methods and rates match the client’s accounting policy and have been applied consistently
- Check that no fixed asset has been depreciated below zero.
This review could be part of the year-end process and could be suggested as taking only a few hours to reduce audit risk. Alternatively, you could give your client a paint-by-numbers list. You’ll still do your own checks, but if the client has done their bit your work will be quicker, something your client is likely to appreciate.
This is a simple opportunity to strengthen your client relationship through work most CPAs don’t offer. You can finish the work knowing that the fixed asset register’s numbers are accurate and agree with the general ledger. Essentially it is now a reliable document. If your client continues to manage the fixed asset register using the advice you have given them, then future audits, and any work related to fixed assets, will be far easier both for you and your client.
Fixed asset management isn’t exciting but it’s easy to get wrong. That makes it an underserved advisory opportunity — one your clients won’t ask for, but will notice once you’ve delivered it.
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Gregg Hopfeldt is the founder of Simple Fixed Assets, a fixed asset management platform built for small businesses and the accountants who serve them. He helps firms maintain accurate, audit-ready fixed asset registers — calculating depreciation and book value, rolling assets forward each period, and generating reports without the manual upkeep spreadsheets require. Learn more at simplefixedassets.com.
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