Common Challenges in Inventorying Capital Assets –“Sticky Wickets”

​In our previous two blog posts, we discussed how to prepare for and conduct physical observation of capital assets. In this post, we discuss some of the common challenges (aka “sticky wickets”) that you will likely come across during the observations and the subsequent reconciliation of the results to the accounting records. We also provide suggestions about how to address each of the sticky wickets.

1. Unlocated Assets

The most common challenge in inventorying capital assets occurs when an asset listed in the accounting records cannot be found by departmental personnel.
This happens for one or more of the following reasons:

• The asset was disposed, but Accounting was not notified to remove it from the accounting records;
• The asset description is not clear enough to allow departmental personnel to identify it; or
• The asset was moved to another location or transferred to another department.

When this happens, you will need to gather further information to allow you to decide how to adjust the accounting records.
Specifically, ask these questions:

• Was the asset sold, transferred, traded, or trashed?
• When and why was the asset disposed?
• Does this situation represent a control breakdown? In other words, is this an isolated event or does it indicate there are other similar problems?
• If the asset was disposed, was there a replacement asset and was it properly capitalized?

​Sometimes, when you ask these questions, department personnel cannot answer them. What do you do then? How much time and effort should you put in with further research? This depends on:

• Dollar value – If the net book value of the asset is low, then there is less need to follow-up.
• Isolated event - If this was not a control weakness, there is less need to follow-up.
• Age – If the asset has not been seen for many years, it is less likely that further research will be fruitful.

 
In these cases, you will just need to write the asset off. If you can’t find it, you can’t leave it capitalized in the accounting records.

Click here to see a Sample Fixed Asset Disposal Form ​(click the link to view and download in Excel-format) to use to document approvals for Accounting to write off an unlocated asset. 

2. Unrecorded Assets

You will undoubtedly find assets that are not listed in the accounting records. When this happens, you will need to gather information to know whether/how to record these assets. Ask the following questions:

• When was the asset acquired?
• Why was it not capitalized? Is it indicative of a control breakdown?
• Is this a replacement asset for a disposed asset? If so, has the disposed asset written off?

​It may be difficult to determine whether an unrecorded asset is in fact not capitalized because:

• It might be capitalized as part of a project or group of assets.
• Many similar assets purchased at once may be capitalized as a single line item.
• It can be difficult to tell what assets are included in line items like “General Construction”.  

​If this happens, use this Sample Fixed Asset Addition Form (click the link to view and download in Excel-format) to document approvals for Accounting to add an unrecorded asset to the accounting records. 

3. Asset Identification Tags

​If assets aren’t already tagged, you will need to decide whether to tag them as they are being observed. Once an asset is tagged, it is easier to identify it during future observations. If assets are already tagged, you will likely find some during your observation that are not tagged. This can be because the tag fell off, was defaced or never affixed.

You will need to decide what assets should be tagged. Generally, you should tag equipment, especially moveable equipment. These are the hardest assets to keep track of and the easiest to be stolen.

Generally, the following types of assets are not tagged: intangibles including software, infrastructure and buildings.

​You will need to decide whether to tag other assets, such as vehicles, weapons, furniture, immoveable equipment, child assets, and assets under capitalization thresholds.

4. Parent / Child Relationships

Many line items in accounting records are not separate assets in their own right. Most modern accounting systems have the capability of linking a child asset to its parent via a Parent ID Number field. The parent and child assets should be observed together. Therefore, you will want to identify parent and child relationships for the observations.

Examples of parent and child assets are:

• Construction costs after an asset is placed into service may be capitalized as a separate line item.
  
• Multiple assets needed to work together such as a battery pack and a portable welder capitalized as separate line items.
  
• Replacement of part of an asset, such as replacing the engine of a vehicle or a portion of a roadway’s paving.

5. Transfers

When you find an asset during the observations that is not on the asset list, you frequently get this reaction from department personnel:  

Dog: “It's not mine I. I don't know where it came from... HONEST!”

Situations that can lead to assets being recorded in the wrong department include:

• Input errors
• Asset has physically been moved to a different location
• Vehicle recorded in division that bought it instead of Fleet Fund
• IT asset recorded in department where it is being used instead of IT department

If this happens, see this Sample Fixed Asset Transfer Form (click the link to view and download in Excel-format) that can be used to document approvals before Accounting records a transfer.

6. Non-Cap Assets

The Government Finance Officers Association’s Recommended Practices for Capital Asset Management suggest that capital assets with values less than the capitalization thresholds be tracked at the discretion of the departments.
Also, some governments have policies that require tracking of certain assets regardless of value, such as weapons & IT assets.
Departments would use their discretion to decide which small assets to track based on the following considerations:

• Track those assets subject to theft or loss
• Track those assets with higher dollar value
• Track those assets with legal or compliance requirements. For example, grant funded assets may need to be tracked separately so that they are properly reported to grantor when disposed
• Other management need or discretion

7. Assets Held by Others, or Assets Owned by Others

It will be helpful to identify any assets that are not on-site before beginning the observations. You may need to arrange an observation with another organization or obtain a written confirmation of assets they have in their possession.
Examples of assets not on-site are:

• Assets in off-site storage
• Equipment purchased but not yet received
• Equipment loaned to others

It will also be helpful to identify any assets on-site that are not owned. In these cases, you will need to make sure not to capitalize them as unrecorded assets.
Examples of unowned assets are:

• Equipment provided by contractors
• Rented equipment
• Heavy equipment borrowed from another government
• Jointly constructed assets capitalized by another entity

​A well-planned physical observation of capital assets will avoid most of these “sticky wickets.”
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Please also visit our Resources page for a collection of all of our attachments and templates, as well as a link to a recent presentation for inventorying capital assets.

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If you have more questions related to inventorying capital assets, feel free to reach out to Kevin directly:

Kevin Harper, CPA
kharper@kevinharpercpa.com
(510) 593-503

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