Fixed Asset Reconciliation: Definition, and all you need to know!

What is Fixed Asset Reconciliation?

Fixed Assets are long-term assets that are possessed by different entities for their operations. Examples of Fixed Assets include building, land, office furniture, equipment, vehicles, as well as computer equipment. Fixed Assets outlay is critical for businesses in order to ensure that their financial coverage is at par with other players in the market.

Depending on the size of the company, and its operating capacity, the volume of Fixed Assets across companies differs. While some companies have a considerable fixed asset outlay, other companies might not have a strongly fixed asset setup. For example, a production concern might have higher fixed assets on their financial statements, as compared to service-related businesses.

Regardless of the volume of Fixed Assets possessed by a company, Fixed Asset Reconciliation tends to be one of the most critical aspects for different organizations.

Fixed asset reconciliation refers to the process of assurance, as well as the accuracy of the existence of fixed assets report on the financial statements of the company.

Therefore, after reconciliation of the Fixed Assets, a statement of Fixed Asset reconciliation is created in order to show a summary of the book value, credits, as well as debits to the fixed asset accounts, as well as accumulated depreciation.

Despite the fact that Fixed Asset reconciliation might not be an annual compulsion on the part of companies, it is highly advisable to conduct this at regular intervals. This task is performed either by seasoned accountants within the company or by external vendors. A lot of third-party companies offer their services in enabling fixed asset reconciliation. Once Fixed Asset reconciliation has been carried out, companies normally report this in the Notes to Financial Statements of the company.

How to perform Fixed Asset reconciliation?

As mentioned earlier, it can be seen that fixed asset reconciliation is one of the most essential steps undertaken by accountants in order to ensure that these assets are reconciled at their best. Here are a few steps that should be taken into consideration when it comes to fixed asset reconciliation within organizations. These steps are given below:

  • Determining previous year Fixed Asset balances

These is the first steps in the Fixed Asset reconciliation process. The previous year’s balances should be brought forward in the current year as opening balances.

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Similarly, all the depreciation rates that are applied on fixed assets, as well as their useful lives should also be kept alongside so that it is easier to reconcile and tally the amounts for the current year.

  • Current Year Fixed Asset Purchases and Disposals

This is mostly verified by preparing the Fixed Assets register, where the date of the placement, as well as the date of the removal of the asset from the performance, is duly noted. In the same manner, the balance of purchases, and disposals should also be duly verified from the invoices, and they should be double-checked for further authorization. Furthermore, all additional costs that have been incurred on the fixed assets should also be double-checked to make sure if they have been correctly capitalized or not.

It is important to keep a proper record of all the additions and disposals of Fixed Asset purchases for the current year. For disposals, the process is relatively simpler, since the carrying amount of fixed assets just needs to be subtracted from the balance sheet. However, in case of additions during the year, the cost of the asset, as well as all capitalization costs and depreciation needs to be accurately calculated in order to make sure that the amounts have been entered correctly.

  • Useful lives, impairment, and depreciation

The useful life of the asset needs to be checked at regular intervals to make sure that it is correctly ascertained by the businesses. If it is not entered correctly, it needs to be adjusted because it directly has an impact on the financial positioning of the business. Hence, it can be seen that it is imperative for business organizers to make sure that they are able to verify the actual useful life of the assets so that they can be properly disclosed in the financial statements.

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In the same manner, it is also important to make sure that organizations also impair and depreciate assets with the required efficiency and accuracy. Different assets need to be depreciated on different grounds based on their usage and allowed depreciation methods. Hence it is imperative to go through depreciation and impairment fundamentals during the fixed asset reconciliation process.

  • Physical verification of assets and logs

Physical verification of assets and logs is also crucial in order to ensure that the disclosed assets on the financial statements actually exist within the company. Therefore, it is common practice during the reconciliation process to make sure that the assets that are mentioned on the balance sheet actually exist as they are disclosed. This also verifies the existence, as well as the condition of the underlying asset.  

  • Closing Balances

Once all the verification has been completed, the closing balances are then mentioned so that it can be seen if there is any discrepancy between the accounts and the actual value of the financial assets.

Just like any other reconciliation, the closing balance needs to be tallied with the opening balance, and the transactions that took place during the course of the year. This helps to show the movement in Fixed Assets.

Importance of Fixed Asset Reconciliation

Fixed Asset reconciliation holds tantamount value for organizations from various different perspectives. The importance of fixed asset reconciliation is given below:

  • Internal Assessment

Fixed Asset reconciliation helps companies to make sure that they are able to have an idea regarding the actual asset outlay of the company. As a result of this reconciliation process, companies are able to ascertain the assets that they have on hand, and if the assets disclosed on the balance sheet are actually a true representation of the asset position the company has.

  • Reconciliation as a planning tool
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Based on the outcomes of the reconciliation process, organizations can choose to decide the future trajectory for their fixed asset expense. Since the reconciliation process reevaluates the useful life of assets, it gives an opportunity to reevaluate fixed asset strategy based on which further decisions can be made.

Hence, it is important to realize the fact that reconciliation helps organizations prepare for the future so that they can plan out their expenses properly.  

  • For external stakeholders

Reconciliation holds tantamount importance from the perspective of external stakeholders. Shareholders, as well as other investors, are able to gauge the actual financial standing of the company, based on which they are able to decide whether it is a safe investment option for them. Hence, if they are aware that the company has carried out a fixed asset reconciliation, they would then be able to make decisions in a much better manner.