Common valuation and reporting errors
Not every cost error arrives on an invoice. Some sit in your own books. Asset registers, depreciation schedules and lease records can drift from reality, and the reports built on them carry the error forward. This article covers common faults in valuation and reporting records and a way to test them. Accounting standards are specific and change. Treat this as general orientation. [VERIFY: the standards that apply to your entity and reporting framework]
Assets that no longer exist
A fixed asset register lists what you own. RSM, an accounting network, describes a familiar fault: assets that were scrapped or sold stay on the register and keep being depreciated. The reverse also happens. Equipment in use never makes it onto the register, so it is never depreciated or insured at the right value.
A physical check is the plain remedy. Walk a sample of the register to the floor, then walk a sample of the floor to the register.
Useful lives and methods that were never revisited
Useful life is set when an asset is bought. If operations change, or equipment becomes obsolete sooner than expected, the original estimate no longer fits. Review useful lives when something significant changes, not only at year-end. A baseline assessment is a structured way to establish where your records stand before a larger project.
Capitalizing and expensing the wrong things
A repair is an operating cost. An improvement that extends an asset's life may be a capital cost. Writing down a clear policy for thresholds and for repairs versus improvements helps prevent inconsistent treatment. One source on reconciliation errors notes the two directions of error: operating costs capitalized, and capital items expensed. Both misstate asset values and depreciation.
Records that disagree with each other
The register should agree with the general ledger. The ledger should agree with what operations tracks. When these are reconciled only once a year, differences accumulate until they are hard to untangle. Move to a regular schedule, and assign one person to own the register.
Lease records and new standards
Leases create their own reporting records. Lease terms, payment dates, options and modifications feed the numbers on the balance sheet under the current lease accounting standard, ASC 842 in the United States. [VERIFY: scope and current requirements of ASC 842 for your entity] A lease abstract that misses an extension option or a rent change will pass the error to the reporting. Our article on common lease billing errors covers the billing side of the same documents.
Valuations used for insurance, tax or financing
Valuations can age. An appraisal done for one purpose may be reused for another, though the basis may differ. Note the date, purpose and basis of each valuation you hold, and flag any that you use for a different decision than the one it was prepared for. [VERIFY: valuation standards that apply to your purpose]
A review checklist
- Export the fixed asset register and reconcile its total to the ledger.
- Select a sample of assets and confirm each exists and is in use.
- Look for items with zero value that are still in service.
- List assets bought in the last year and check each capitalization decision against policy.
- Review useful lives for any asset class affected by a change in operations or technology.
- Confirm that disposals and transfers were recorded with dates.
- Check lease records for options, modifications and payment changes.
- List each valuation on file with its date, purpose and preparer.
Where outside support fits
A partner firm offering accounting and valuation support covers areas such as baseline assessment, asset valuation, conversion to new accounting standards and litigation support. These are accounting and valuation tasks, not clerical ones, so expect the firm to ask for your policies, registers and supporting files. You remain responsible for your own reporting. Fairview performs none of this work. To see how a request is routed, read how it works.
Sources
- Asset registers: the overlooked foundation of financial integrity, RSM Australia
- Common Mistakes in Fixed Asset Reconciliation and How to Avoid Them, Asset Accountant
Tell us what you need reviewed. We match you by hand with an independent partner firm. You keep your existing vendors.Find out what you are overpaying.