Best Practice Financial Processes: Fixed Assets

1. Best Practice Financial Processes: Fixed Assets

2. Fixed Assets - Best Practice Objectives Organisation • Asset recording integrated with maintenance and non financial data • Centralised asset accounting • Asset ownership devolved to business unit level People • Control focused • Challenge asset requisition proposals Fixed Assets Objectives • To maintain a complete register of all the organisation’s fixed assets which reflects location, age, current values, associated cost centres • To calculate depreciation consistently with financial reporting requirements • To optimise replacement policies • To minimise ownership costs Information Systems Processes • Maintain asset register • Acquisitions and disposals • Depreciation charge • Verifying asset base • Maintaining of valuation basis • Asset ledgers integrated with GL and AP • Depreciation and project control by cost centre • Automated depreciation calculation Measures Controls • Number of assets maintained • Cost of department • Elapsed time to record asset • Asset verification • Asset valuation • Acquisition and disposal authorities

3. 5,200 1,400 350 Median 10 percentile 90 percentile Fixed Assets - Measures/Cost Drivers No of Business Unit FTEs per Fixed Assets FTE Fixed Assets cost per Business Unit FTE (in £s) £31 £7 £151 10 percentile 90 percentile Median Fixed Assets processing time Cost drivers • Complexity of assets • Number of assets on register • Number of asset movements • Complexity of depreciation policies • Complexity of authorisation procedures • Range of data held • Number of users of data range 40 days 14 days 1 day 10 percentile 90 percentile Median Source: Statistics taken from Benchmarking database: 21 February 1997

4. Fixed Assets - Trends From To • Integrated systems for: • Asset tracking via Geographical Information System (GIS) • Asset usage • Network Capacity Planning • Asset Maintenance • Capital project planning and control • Product/service costing • BU responsibility for ownership • Separate fixed assets module • Lack of asset ownership • Cost of asset usage not attributed to product • Performed by Finance Department

5. Fixed Assets - Critical Success Factors • These are a summary of the key business requirements, which must be met to achieve the objectives. • Asset accounting policies clearly documented • Appropriate coding by asset category established • Authority levels clearly defined • Procedures surrounding Fixed Asset process are documented and communicated to staff • Budgets in place for capital expenditure • All existing assets identified and classified • Staff trained in FA process and have clear roles and responsibilities • Statutory and tax requirements understood • FA calendar in place and communicated to staff • Standing data set up on the system reflecting asset accounting policies • Ability to model depreciation scenario

6. Fixed Assets - Level 0 Context Diagram Accounts receivable Maintenance Inventory General Ledger Asset data (depreciation etc) Asset disposals Goods issued Maintenace Cycle Management Accounting Accounts Payable Fixed Assets Asset details & asset payments Mgt Reports Statutory reports Unique asset identifier Capitalised assets Usage data Commitments Purchasing Circuit Provisioning Project accounting Audit

7. Maintain Asset Register Answer Adhoc Queries Verify Physical Assets Perform Period End Routines FA 1.7 FA 1.6 FA 1.4 FA 1.5 Dispose of Assets Add Assets FA 1.2 FA 1.3 Fixed Assets - Level 1 Overview Depreciation policies Maintenance policies Systems controls Month end reconciliation Period end timetable Cost centre analysis Notification procedures System validation controls Change request procedures Authorisation rules Verification timetable Inventory control system Audit trial Authorisation for write off’s Authorisation procedures Maintenance policy System controls System controls Accounting policies Updated FA register & reports Changes in FA Policies and Procedures FA register structure maintained Verified FA Register GL a/c’s maintained for additions Maintain Standing Data Reconciled GL A/ c’s Reports Updated FA Register FA 1.1 Authorised GL adjustments Amend/update asset types or categories FA accounting staff Cost centre manager Management accountant FA accounting staff FA system FA accounting staff Inventory staff AP system FA accounting staff Cost centre managers Requester FA accountant Finance manager Adjustments Asset addition notification Assets from AP or project accounting Reporting guidelines System controls Disposal procedures, validation procedures, authorisation, reconciliation procedures Request for adhoc reports Updated FA Register Reports Reports Asset Addition notification GL a/ c’s maintained for disposal FA accounting staff FA systems Cost centre managers Cost centre manager, FA accounting staff, FA requester, financial manager

8. Raise request FA 1.11 Notify affected users & groups Review and approve Set up new codes / data Prepare formal request FA 1.14 FA 1.15 FA 1.12 FA 1.13 Fixed Assets - Level 2 FA1.1 Maintain Standing Data Change request procedures Change request procedures System validation controls Authorisation rules Notification procedures Changes in FA Policies and Procedures Request Formal request FA Register structure maintained Accepted request Actioned request Requester FA Accountant Finance Managers FA Accountant FA Accountant Amend/update asset types or categories Rejected request

9. Fixed Assets - Notes on Maintain Standing Data • Best Practice Features • Asset accounting polices clearly documented; Master Data set up on the system to reflect these policies • Appropriate coding by asset category established • Procedures surrounding the Fixed Asset process are documented and communicated to staff including requirements for issuing new codes • Asset Register Rules incorporated into Master File, which control issues of new numbers within structured coding scheme • Staff trained in Fixed Asset Accounting processes and have clear roles and responsibilities. They should have a good understanding of network and engineering areas • Supervisory staff understand statutory and tax requirements • Internal Control Requirements • Once entered, updates should be verified against the original requests • Codes will be received from the Master File and updates will be confirmed against the Master File • The system will check that all required data fields are complete • There must be supervisory review for Master Data updates • Key Performance Indicators • Speed of update: time from receipt of request to modification and verification of records: this should not exceed one day • Number of input errors when asset details are validated: this should be zero • Cost Drivers • Complexity of assets • New types of assets • Number of changes to physical location coding

10. Add additional information Input manual data Post asset details Input automatic data FA 1.22 FA 1.24 FA 1.23 FA 1.21 Fixed Assets - Level 2 FA1.2 Add Assets System controls Accounting policies Accounting Policies System Controls Assets from AP or Project Accounting GL a/c maintained for additions Updated FA Register AP lines with Skeleton details AP lines with additional information FA register structure maintained AP System FA accounting staff System controls & accounting policies FA accounting staff FA accounting staff FA register structure maintained Added Assets Asset addition notification FA accounting staff Cost centre managers

11. Fixed Assets - Notes Add Assets • Best Practice Features • Linked databases used in recording asset details, to increase accuracy of the asset register and to eliminate duplicate paper trails • Appropriate asset “numbering” methods driven by users of asset information; bar coding used on relevant assets • Direct links to Project Accounting • Clear policy established for treatment of assets and guidance on how to classify different types of assets, to reduce the number of reclassifications needed • System interconnection to MIS (Management Information Systems) for tax and insurance planning • Assets identified by “custodian”, i.e. person who controls the asset, rather than a department or the company as a whole • Unified transfer pricing in all Business Units for asset transfers • Use of asset transfer strategy to optimise the usage of assets • Internal Control Requirements • Asset number controls • All asset register updates reviewed after entry, to limit period end differences • Update details sent periodically to source and asset custodian (or other initiator of the update) for information and coroboration purposes • Key Performance Indicators • Number of reconciliation at period end: if a reconciliation is needed between Fixed Assets and other accounts, this indicates that one or other of the accounts is not up to date • Number of changes processed • Number of verification adjustments • Cost Drivers • Number of assets • Average useful life of assets (i.e. rate of asset turnover) • Number of changes in Master Data leading to manual adjustments.(e.g. change in organisation codes) • Number of revaluation's / disposals

12. Reconcile GL accounts Record transactions in accounts Notify finance Sell/dispose of assets Select assets to dispose Obtain quote (if applicable) FA 1.36 FA 1.34 FA 1.33 FA 1.32 FA 1.35 FA 1.31 Fixed Assets - Level 2 FA1.3 Dispose of Assets Reconciliation procedures Disposal procedures Valuation procedures Disposal procedures Authorisation procedures Disposal procedures FA Register updated GL a/c’s maintained for disposals Asset sale or disposal registered with Accounts dept Assets identified for disposal Sales price and buyer confirmed Sale/Disposal completed Asset disposal notification Interface to GL Update FA register Cost centre managers Cost centre managers Cost centre managers Cost centre manager FA accounting staff FA register FA accounting staff Financial manager

13. Report on adjustments Capitalise WIP Assets Revalued Assets Write-off / down Assets Receive request Transfer Assets Adjust Assets FA 1.43 FA 1.44 FA 1.45 FA 1.4 FA 1.47 FA 1.42 FA 1.46 Fixed Assets - Level 2 FA1.4 Maintain Asset Register Systems controls Authorisation procedures Maintenance policy Authorisation procedures Maintenance policy Asset register updated Approved request Updated FA Register Reports FA accounting staff Cost centre managers Management accountant FA Accounting staff Cost centre managers FA accounting staff

14. Reconcile accounts Spend monthly reports to asset owners Post depreciation to GL Calculate depreciation FA 1.55 FA 1.54 FA 1.53 FA 1.52 Fixed Assets - Level 2 FA1.5 Perform Period End Routine Month end reconciliation Period end timetable Cost centre analysis Depreciation policies Maintenance policies Systems controls Period end timetable Updated FA register & reports Adjustments FA interface with GL Depreciation amounts Reports Reconciled GL accounts FA accounting staff FA accounting staff FA system FA accounting staff FA accounting staff FA system Adjustments

15. Fixed Assets - Notes Depreciation calculation • Best Practice features • Integrated fixed asset systems to calculate depreciation charges for tax and accounting purposes • Depreciation rates by asset category are based on useful life of the asset, rather than designed to meet accounting requirements only • Consistency of depreciation methods and rates across the business • Internal Control requirements • Results of depreciation run compared to expected amounts (from budget or forecast) to identify potential errors and over-runs • Updates to assets’ depreciation information must only be accepted if properly authorised and consistent with management/tax policy • Key Performance Indicators • Time taken to update depreciation data in fixed asset register at period close • Reconciling items on depreciation accounts: should be zero • Cost Drivers • Number of depreciation rates • Number of assets

16. Fixed Assets - Notes Perform Period End Routine • Best Practice Features • Automatic data flows between ledgers, e.g., between Fixed Asset Register and General Ledger, Project Accounting, etc., to remove manual reconciliation effort • System allows assets to be grouped or desegregated for reporting purposes • Internal Control Requirements • System internal controls (e.g. user profiles) • Timely and accurate clearance of system reject reports • Reconciliation of budget Vs. actual period end totals • Reconciliation of movement in fixed asset accounts for the month (e.g. new NBV = old NBV + additions - disposals - depreciation) • Key Performance Indicators • Time taken to close Fixed Asset Register at period end • Time taken to complete the GL/FA reconciliation • Differences during reconciliation • Time to print out the period end reports • Cost Drivers • Number of asset records • CPU time for generation of reports • Reconciliation required to clear General Ledger mis-matches • Number of necessary changes during reconciliation with General Ledger

17. Update FA register & prepare GL journals Track asset history and reconcile Highlight exceptions Conduct inventory check Compile accurate data for asset verification FA 1.63 FA 1.65 FA 1.64 FA 1.62 FA 1.61 Fixed Assets - Level 2 FA1.6 Verify Physical Assets Inventory control system Inventory control system Verification timetable Audit trial Authorisation for write off’s Verified FA register Updated FA register & reports Complete list for Inventory control Feedback on items held Items to be further investigated Identified corrections Authorised GL adjustments FA accounting staff FA accounting staff Inventory staff FA accounting staff FA accounting staff FA accounting staff

18. Fixed Assets -Notes Verify Physical Assets • Best Practice features • All existing capitalised assets identified and classified • Regular physical verification, focused on high-value and high-risk areas • Use alternative verification methods where appropriate eg review maintenance log, establish that asset is operating effectively • Internal Control requirements • Regular physical verification exercises and reconciliation to the Fixed Asset Register • Fixed Assets must ensure that transferred assets retain their original project number identification in the asset record, to ensure appropriate access to archived records • Cost Drivers • Number of verifications required

19. Receive request for adhoc reports Produce reports FA 1.71 FA 1.72 Fixed Assets - Level 2 - FA 1.7 Answer Adhoc Queries FA Register System controls FA register routines Reports FA Report routine Reports Request for adhoc reports FA accounting staff FA systems FA accounting staff FA systems Cost centre managers

20. Fixed Assets - Appendix 1 : IDEF Process Flow The diagram below provides a key to the process diagrams used in this document. Controls (i.e. • Procedures • Standards • Requirements for rework) Process / activity Input Output (i.e. (i.e. • Information • Material) • Information • Material) Resources (i.e. • People • Functions • IT systems • Machines)