Fixed Asset Policy
A fixed asset policy is a set of procedures and guidelines set by a company to manage and control its fixed assets, also known as Property, Plant, and Equipment (PP&E). The fixed asset policy serves as a reference for the company’s management, employees, and auditors to ensure the proper accounting, tracking, use, and disposal of fixed assets.
The policy usually outlines:
- Capitalization Thresholds: These are the minimum cost amounts that an asset must have to be treated as a fixed asset for accounting purposes. Items costing less than the threshold are usually expensed in the year they are purchased. The thresholds can vary depending on the type of asset (e.g., furniture, machinery, computer equipment).
- Depreciation Methods: The policy should specify the method(s) to be used for depreciating assets over their useful life. Common methods include straight-line, declining balance, and units of production.
- Asset Tracking: The policy should detail how assets will be tagged and tracked, and how the fixed asset register will be maintained. This register should include details such as the asset’s description, location, purchase date, cost, accumulated depreciation, and net book value.
- Asset Use and Maintenance: The policy may also outline how assets should be used and maintained to prolong their useful life and protect the company’s investment.
- Disposal of Assets: The policy should specify the procedures for disposing of assets, whether through sale, scrapping, or donation. It should also outline how to record the disposal in the company’s financial statements and update the fixed asset register.
- audit and Verification: The policy should include a regular audit of the fixed assets to ensure that the asset register matches the actual assets owned by the company.
A comprehensive fixed asset policy helps a company protect its investment in fixed assets, ensure accurate financial reporting, and comply with applicable accounting standards and regulations.
Example of the Fixed Asset Policy
Let’s consider a hypothetical example of a fixed asset policy for a company named “ConstructCo,” which is a construction company.
- Capitalization Threshold: ConstructCo may set a capitalization threshold of $5,000. This means that any item costing $5,000 or more and having a useful life of more than one year would be treated as a fixed asset. Items costing less than this amount would be expensed in the year of purchase.
- Depreciation Method: ConstructCo might decide to use the straight-line method for depreciating its assets, which evenly distributes the cost of the asset over its useful life. For instance, if a piece of equipment costing $10,000 has a useful life of 10 years, the annual depreciation expense would be $1,000.
- Asset Tracking: All fixed assets in ConstructCo are labeled with a unique asset number and recorded in a fixed asset register. The register includes details such as the asset’s description, location, purchase date, cost, accumulated depreciation, and net book value.
- Asset Use and Maintenance: ConstructCo’s policy could specify that all construction machinery must be used according to the manufacturer’s instructions and undergo regular maintenance checks to keep them in good working order and prolong their useful life.
- Disposal of Assets: When an asset is to be disposed of, ConstructCo would require the department responsible to fill out a disposal form detailing the reason for disposal and the method (sale, scrap, etc.). Once approved, the accounting department would record the disposal in the financial statements and update the fixed asset register.
- Audit and Verification: ConstructCo would conduct an annual physical verification of its fixed assets to ensure the accuracy of its fixed asset register. Any discrepancies found would be investigated and resolved.
This fixed asset policy helps ConstructCo manage its significant investment in construction machinery and equipment, ensures that its financial statements are accurate, and helps the company comply with relevant accounting standards and regulations.