Although many high-performing companies have figured out how to manage the tax and financial accounting necessary for fixed and intangible assets, most still rely on older technology for this. Companies should be commended for taking time to build processes that attempt to combine multiple data sources, but many stop there when they could be achieving much more.
This item focuses on how to use technology to improve fixed-asset management — that is, the tracking of a business’s assets such as computers, motor vehicles, and other objects for financial accounting, tax accounting, and other purposes. A well-structured fixed-asset process increases the efficiency of data management and manipulation, provides quality control in the form of reduced human error, and heightens confidence surrounding tax decisions that can have economic benefit. How can you know that your company uses the most effective technology and processes to optimize fixed-asset management? First, you need to be certain the basics are, indeed, under control.
Fixed-asset fundamentals
Remember, assets are assets, so your processes must include all of them — both fixed and intangible — before you can look at areas of improvement. Review your procedures and confirm that you:
- Use the same process and technology approach, for both financial and tax accounting, related to identifying new asset additions, disposals, transfers, write-offs, impairments, currency translations, etc.
- Capitalize all required costs into the basis of the asset for both financial and tax accounting.
- Use standard asset profiles to ensure accuracy and consistency — accounting controls the book profiles, while the tax group manages the associated tax profiles.
- Maintain adequate sets of fixedasset books for all financial and tax accounting.
- Use a consistent approach for all companies, even joint ventures or other business entities you are responsible for managing.
- Leverage standard system attributes to associate fixed assets to companies and jurisdictions, including attributes required to align business units to tax-filing entities.
- Leverage standard reports and forms to meet as many fixed-asset–related data needs as possible, such as providing support for tax adjustments, earning and profit adjustments, state apportionment, and personal property tax filings.
- Maintain physical control over fixed assets and conduct regular audits to ensure up-to-date recordkeeping.
- Maintain accurate and up-to-date deferred tax asset and liabilities records as well as tax basis balance sheets for fixed and intangible assets.
- Periodically check to ensure your system accurately accounts for atypical transactions such as short periods and other tax reset events such as check-the-box elections.
The basics are all about consistency. Consistent processes, consistent technology approaches, and consistent decisions make it much easier to manage the fixed assets year in and year out while at the same time remaining flexible to changes introduced by your business operations.
Technology solutions
With the basics handled and your fixed-asset management processes clear, it is time to look for the opportunity to optimize using current technology solutions and tools. Companies typically fall into one of three categories:
- Those that use their financial accounting software (enterprise resource planning, or ERP) for tax depreciation calculations;
- Those that use tax-centric fixed-asset software aside from their ERP; and
- Those that maintain a rudimentary (or sometimes complex) spreadsheet to track tax depreciation.
The inflexibility inherent in the first category is discussed later in this item. Companies in the latter two categories face the major challenge of efficient transformation of fixed-asset data from the ERP “source” to the software that manages the tax depreciation.
Nonetheless, the advent of extraction, transformation, and loading (ETL) tools provides companies with low-code solutions that empower the tax department to automate many of the data management tasks that took many hours or weeks in the past. Something as routine as properly formatting fields in a spreadsheet or assigning the right recovery period, method, and convention to an asset can now be automated. In addition, data visualization tools can provide a better understanding of the underlying fixed-asset data by creating up-to-the-minute graphical insights. Most of these tools are intended for those with minimal code development training, allowing tax staff to create bespoke solutions to their fixed-asset challenges.
Ready for the next level?
With the fundamentals handled and your fixed-asset management technology solutions in place, it is time to look for the opportunity to optimize. By elevating your approach to fixed-asset management, your company can gain confidence that it is effectively capturing every available economic advantage. These may include bonus depreciation under Sec. 168(k), Sec. 179 election opportunities, proper application of required and optional provisions of the tangible property regulations under Sec. 263(a), and special shorter-life provisions for certain asset classes (i.e., qualified improvement property under Sec. 168(e)(6)). Optimizing processes typically involves looking closely at each step to determine where you can glean greater efficiencies through more effective use of available technology. Optimal processes minimize manual intervention and improve accuracy of data related to any tax calculation based in whole or in part on fixed-asset records, such as apportionment factors or tangible real property taxes. This minimizes the chance of misstated income or property taxes while maximizing resources.
Consider the following indications of an optimal fixed-asset solution:
Standard and customized reports have built-in checks and balances: Instead of relying on manual processes to tie out fixed-asset costs and accumulated depreciation between the asset roll forward, additions report, and gain-loss report, each report should include key check figures with variance flags to identify any exceptions. While verifying that reports tie out is a primary control, reliance on manual effort is not an effective use of time. Take advantage of automation tools wherever possible.
Customized report capabilities are fully leveraged to fill in data gaps: Although it may seem easier to just create or reformat the fixed-asset records in Microsoft Excel, it generally is not a sustainable long-term solution. For analysis requiring repetitive manual manipulation, consider spreadsheet macros or an ETL tool that can automate the tasks.
All tax data profiles have a time dimension: Applying effective dating principles to your fixed-asset records does not save time during system setup or conversions, but it can be a lifesaver in the event of an audit. With an active time dimension in place, any changes to profiles can be applied to specific time periods, creating a complete audit trail. For example, you may decide to undergo a cost-segregation study or transfer assets between tax legal entities throughout the useful life of the asset. Effective dating of the asset classification assigned (from MM/DD/YYYY through MM/ DD/YYYY) or effective dating of ownership periods can become a critical piece of metadata that helps you reconcile and support changes in your fixed-asset records over the examination period.
Last-minute tax extenders are captured and implemented: While changes enacted by Congress may generate additional work and frustration, especially at the end of the year, your fixed-asset systems need to seamlessly handle important retroactive changes to prior-period tax asset records. Business operations, IT, and tax must work together to ensure that the company can easily take advantage of year-end tax extender legislation. Many ERP systems do not provide timely updates and miss the critical implementation of new legislation.
Tax adjustment calculations and supporting information flow directly to related systems: A fully optimized fixed-asset management system delivers required data with minimal (preferably zero) manual intervention. Specifically, the fixed and intangible asset tax adjustment calculations and tax form supporting information should populate the appropriate fields in your tax-compliance and FASB Accounting Standards Codification Topic 740, Income Taxes, reporting systems. This important milestone may require custom “data bridges,” depending on your software.
International needs are met: Different jurisdictions handle fixed assets in different ways. It is important for companies to properly translate intended use and depreciable lives for the appropriate taxing authorities. Global companies should make sure that fixed-asset records are effectively translated into multiple languages, with and without foreign currency translations, so that stakeholders can easily understand the dollars and the descriptive information at the same time.
The right people are at the table at the right time: Although it may seem obvious, companies may easily overlook the critical role that people play in making tax technology work. As with any tax technology, proper configuration of fixed-asset management systems requires tax technical understanding. Any changes contemplated to the fixed-asset systems should include the tax department as a primary stakeholder and do so from the outset.
Upside potential
In summary, companies should not allow themselves to be precluded from taking advantage of any tax planning opportunity simply because it is a challenge to adjust their fixed-asset process and technology systems. Rather, they can implement resilient and sophisticated fixed-asset processes and technology systems that allow for changes while enabling them to maintain control.
If your company has achieved a basic level of fixed-asset management but has not yet reached the higher efficiencies outlined above, you may wish to approach improvements one at a time or conduct a more comprehensive update. Either way, you will have the benefit of building upon an existing asset management platform, so there is only upside potential to be gained.
Editor Notes
Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP. Contributors are members of or associated with RSM US LLP. For additional information about this item, contact Rafael Ferrales, E.A. (Ralph.Feralles@rsmus.com), New York; Daniel McGrath (Daniel.McGrath@rsmus.com), Chicago; and Elizabeth Sponsel, CPA (Elizabeth.Sponsel@rsmus.com), Minneapolis.
