Considerations for Capital Asset Controls
Capital assets often are one of the largest areas on your statement of net position; however, for many entities, little time is devoted to establishing controls around capital assets. In this article, we will look at key controls you should consider when designing effective controls in this area.
The first area that we will look at is the acquisition of capital assets. Acquisition controls are important and can be tricky due to the range they cover. Acquisitions could consist of anything from mundane office furniture to multi million-dollar construction projects. Your organization should determine whether capital additions will follow normal cash disbursement processes of the organization or have enhanced disbursement controls. Enhanced controls could include additional approvals, different processes depending on payment accounts or authorized signers, or further involvement from department heads or project managers. In either scenario, considerations should include bidding requirements (either by law or internal policy), purchase order requirements, special board approval, budget or grant restrictions, review of progress for constructed assets, and policies for acceptance and valuation of contributed assets.
The second area that we will look at is the record-keeping of capital assets. Establish controls to determine if purchases qualify as a capital asset based on criteria of having a useful life greater than one year and having a value greater than the entities internally developed capitalization threshold. Much debate can be made on what is an appropriate capitalization threshold; however, let what is most relevant and significant to your organization drive your decision on an appropriate amount. Segregate assets within the general ledger for ease of tracking. Consideration for separate general ledger accounts should be given for each significant asset grouping as well as substantial capital projects. Having controls in place to establish these accounts will aid in ensuring all capital assets are correctly identified and ease tracking for inclusion in the capital asset listing.
Consider groups of transactions for constructed assets or groups of similar assets purchased around the same time period prior to adding to capital asset listings, for example, the purchase of 100 meeting room chairs. Management should establish controls for determining the depreciable lives of assets based upon their best estimate of the asset’s useful life. Often individuals outside of the accounting function are key to these controls, such as department managers or engineers.
Once assets are recorded, and depreciation has begun, significant control is having a member of management review those schedules and comparing them against the recording in the accounting system.
Another critical control is the tagging and inventory of capital assets. Tagging should allow you to identify the asset on the listing to the physical asset. This control helps eliminate misappropriation of assets by identifying the same asset to multiple listings and aids in determining what specific asset was disposed of. Controls should include processes for the inventory of capital assets. Those controls should include frequency, process, and follow up from the process.
Disposition of Capital Assets
The third area that we will look at is the disposition of capital assets. Controls over disposition of capital assets should consider whatever laws or grant restrictions apply to the organization. The organization should have controls that specifically identify any bidding or board approval that is necessary to dispose of capital assets. In determining what controls are required for different types of capital assets, consideration should be given to the nature of the item. Considerations such as, is the asset highly susceptible to theft; is there significant scrap value; is there any residual value at the end of the asset life, should direct the significance of controls over the disposition of those assets. Controls should also specify processes for recording dispositions and establish appropriate review by management to verify they have been properly recorded.
The entity’s controls should incorporate a periodic review of the capital asset schedule to identify assets that are no longer in service or potentially impaired. Review of the removal or write-down of impaired assets should be done by management and proper approval of that removal documented. In addition, if the entity has a legal obligation to perform future asset retirement activities related to its capital assets, controls should be established over calculation, recording, and reviewing of those liabilities.
There is a lot of detail and complexity when establishing proper controls over capital assets. If you need assistance in establishing controls or would like to have a detailed review of your current controls, SEK CPAs and Advisors have qualified accountants and consultants that can help.