Inventorying Capital Assets – Key Points for Taking Physical Inventory

​​In our last blog post, we explained the six preparation steps for inventorying capital assets.

In this blog post below are a few observation points to consider when conducting physical inventory of capital assets.

 

• ​Buildings and Improvements – As noted in our previous blog post, buildings and improvements typically represent a small number of high dollar-value assets. They are typically easy to observe because they don’t move, are above ground, and are long lived.

​The only challenges usually are a) to identify all the line items in the capital asset records that relate to a building so that they can be observed together, and b) to determine whether you will try to observe each component of the building.
In other words, will you consider all components of the building observed when you see a building that is being utilized? You may be able to observe buildings via review of aerial photographs.

• Infrastructure is usually composed of major asset systems such as power distribution system, sewer system, wastewater system, and roads. These systems are hard to observe because they are underground and/or spread over many miles. Therefore, the strategy for observing these assets should be:
  • Group assets – Similar to Buildings and Improvements above, you should combine line items in the capital asset records that are components of the same asset. For example, identify all line items that together make up the entire power distribution system. Then decide what level of observation may be adequate to consider the asset “observed”. For example, if you turn the light switch on in the various buildings, is that adequate evidence of a working power distribution system or will you put on a hard hat and go underground to observe various components? 
  • Geographic Information System (GIS) – If your government uses a GIS, many components of infrastructure will be maintained in that system. Determine whether the system is accurate and up to date enough to rely upon. If so, you may be able to trace assets to the GIS and consider them “observed.”
  • Engineering involvement – It is probable that you will need to rely heavily on a knowledgeable person in Public Works or Engineering to identify infrastructure assets. You may find lots of line items with descriptions like “General Construction progress payment #1” or “Earth Rock Fill & Grading”. The Public Works Director or Engineer may recollect details of those projects and help you identify the asset to be observed; or they may describe why the asset no longer exists and should be written off. In some cases, you may need to simply take the word of the Engineer or Public Works Director that the asset still exists.

​​Be creative on ways to prove the existence of assets. Remember that a capital assets physical inventory is not “observation” so much as “proof of existence/ownership.”

• Equipment is usually a very large number of very small dollar value assets. Therefore, depending on the scope of your observation project, you will spend a large amount of your time and effort observing equipment. Most equipment assets are easy to observe. My experience is that about 90% of these assets are easily identified by department staff. The other 10% of the time, the department disposed of the asset or otherwise can’t find it, or they can’t identify it from the asset description, or the asset they point out does not match the information in the accounting records. Obviously, you will need to track down these unusual items. However, don’t get bogged down in details since the dollar impact won’t be large.

I have seen observers spend inordinate time during the observations chasing discrepancies such as which department “owns” the asset, the asset’s gross book value, the asset description, reconciling capital asset records to department records, or linking as asset to its parent asset. When these issues come up, I suggest you note them in the count sheet (click the link to view and download in Excel-format) for follow up after the observation is over. It is important to get the observation done. Analyzing which items are worthy of follow up is better done when all the discrepancies can be looked at as a group.

• Vehicles can be hard to observe because they are usually in use at various locations. Consider using maintenance agreements to “observe” the vehicles. For example, evidence that a vehicle was maintained in the past year is evidence of its existence.

• IT assets can be particularly challenging because there is often a large number of them spread throughout the government, and many are identical except for serial numbers. Frequently, the IT department tracks IT assets, and if so, you may be able to rely on their list of IT assets. Just be sure their list of assets is accurate and up-to-date. You may want to trace a few IT assets to their list to confirm its accuracy. If your government owns software that can “ping” all network-connected devices, you will be able to quickly observe most IT hardware. If the IT department has no list and does not have pinging software, you may want to consider engaging temporary staff to help inventory IT assets the first time.
  
  • Software can be observed by reviewing maintenance agreements and invoices and by asking staff to show you a few working screens in the software.

• Land is usually composed of a few assets that are very valuable. However, they usually were acquired long ago and therefore carried on the books at small book value. Land can best be “observed” by tracing to ownership records in the County Assessor’s Office.

• Easements are intangible assets, so they cannot be physically observed. You can usually verify their existence and ownership by tracing to contracts and agreements.

When you are keeping the points above in mind when your agency is conducting a physical inventory of capital assets, the process can be expected to go more smoothly.
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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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