Financial executives believe current fixed assets accounting methods put them at risk for material misstatement in financial statements from tax provision.
When the software group at Bloomberg BNA initiated a study on the current state of fixed assets accounting, the assumption was that optimizing fixed assets management to realize tax cash savings would be a top priority.
While tax cash is always top of mind for financial executives, the survey of over 100 financial executives at U.S.-based corporations revealed another extremely important concern among executives. Over one-third of respondents felt that current fixed assets accounting methods put them at risk for material misstatement in financial statements from tax provision.
Current approaches to fixed assets accounting
Knowing how important the proper management of fixed assets accounting is to the financial health of a company, many organizations have looked to existing systems to help them manage their cumbersome and complex tax accounting function; based on the numbers, enterprise resource planning (ERP) systems are the most common solution. The study found that over 75 percent of respondents use ERP systems to manage and record their fixed assets.
A problem with this approach is that ERP systems are good at providing efficiency and accuracy gains for many parts of the accounting process but not for the complete management of fixed assets for tax purposes. As a result, companies end up supplementing their ERP systems with spreadsheets and homegrown databases for calculations, management, and reporting, which equates to more work.
Manual processes dominate fixed assets
While most areas of accounting are highly automated, the benefits of automation have yet to be fully applied to fixed assets management. This critical tax function seems to be “stuck in the past” and continues to be a time consuming and resource-intensive process. Research shows that organizations still rely on high-effort, high-risk, manual processes to manage their fixed assets tax data, calculate federal and state depreciation, reconcile depreciation with the general ledger, manage repair expenses, and report on fixed assets.
Fluid tax law codes, budget cut-backs, and the challenges inherent in corporate restructuring have added to the problem, resulting in an unruly amount of data. The massive amounts of data require an inordinate amount of time to manage, leaving many organizations at the breaking point where manual processes no longer suffice. For these companies, a dedicated fixed assets solution is a logical solution.
A better way to manage fixed assets
As an example of a best-in-class fixed assets management approach, let’s review how one company addressed the challenge. This multi-billion dollar, publicly traded company had over two million assets spread across more than twenty thousand stores located around the world. Prior to implementing a dedicated solution, this company tried to manage its fixed assets through an ERP system, augmenting it with several spreadsheets. It wasn’t long before it became clear that the process of conducting cost segregation and qualified leasehold improvement property (QLIP) studies was indeed unmanageable. Adding to the complexity was a dedicated effort by the company to acclimate to the new Final Tangible Property Regulations.
The tax team knew that following their traditional processes would hinder tax planning and compliance, putting them at risk for human error and material weaknesses on their financial statements. The tax team realized that they needed an innovative approach to streamline workflow, increase efficiency, improve compliance, and reduce manual errors.
After an extensive search for potential solutions, the team turned to a dedicated fixed assets solution. The true innovation came from the ability to implement and apply the results of their QLIP and cost segregation studies to their fixed assets tracking. In addition, because this company is in the retail/restaurant industry, they qualify for special rules under the final repair regulations that allow for a 75 percent immediate write-off of store improvement costs. Now that the latest tax laws are built into the company’s dedicated fixed assets solution, these special rules can be automatically applied to the fixed assets cost basis without manual intervention.
As exemplified by the best-in-class solution outlined above, fixed assets accounting no longer has to be an antiquated process. With the use of advanced automation techniques, it can be optimized to not only provide potential tax cash savings, but also to prevent material weaknesses associated with tax provision. Considering the far-reaching implications of a material misstatement, ensuring the accuracy of fixed assets data is a top priority for progressive financial executives and tax teams alike.
Diane Tinney is the Director of Product Management at Bloomberg BNA, Software.•