Fixed asset systems
Why the tax function needs
to have a stake in the game
While many tax functions do not “own” their organizations’ fixed asset systems, they do rely on access to current and accurate fixed asset data. But fixed asset system interface and integration issues can cause headaches for tax executives and require significant time on the part of their teams to produce the data needed for tax purposes. These solutions are improving, however, and the advancements provide a good opportunity to bring tax and finance functions back together to review business needs — and for tax leaders to think about how to make these systems an enabling tool rather than a burden.
Deloitte hosted a Dbriefs webcast to review common tax issues involving fixed asset systems and important considerations when replacing or upgrading current systems. More than 1,800 participants shared their own views through responses to polling questions posed during the webcast.
Traditional challenges of fixed asset systems Just about every tax department shares the challenge of managing an ever-expanding volume of data with limited resources. Fixed assets provide a classic example of this challenge — an area that requires substantial tracking and maintenance and poses problems if that rigor is missing. Systems can help control and manage fixed asset data, but only when used as part of a broader solution that also considers the people and processes involved (see exhibit).
Tax function enablers
As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Despite the presence of fixed asset systems, many tax departments still struggle with issues such as:
Outdated or unsupported technology. •
Integration with an outgrown legacy system. •
The need to better integrate tax and U.S. Generally •
Accepted Accounting Principles (U.S. GAAP) books. Compliance and risk management.
•
Extensive off-line calculations in order to perform •
planning activities.
Mergers or acquisitions that have led to disparate •
systems.
Adherence with International Financial Reporting •
Standards (IFRS) or other international requirements. Flexibility to keep up with changing tax laws. •
Financial accounting transfers, restarts, impairments, •
or other “book-only” adjustments that cause potential mismatches in asset tracking.
Ultimately, these issues may trigger a desire to change current systems and processes — to improve fixed asset inventory management generally and/or address specific needs such as expenditure tracking, real estate development, property tax reporting, capital budgeting, internal transfers, late additions, changes in asset use, or bifurcations.
Begin with clear business requirements
As with any technology solution, there is no fixed asset system that is right for every situation. If your organization is considering replacing its fixed asset solution(s), it will be important to clearly define the business requirements driving change. In the case of fixed asset solutions, these requirements typically span multiple groups or functions. Interviews, workshops, or similar steps can be helpful in collecting and prioritizing input, as well as building consensus. Considerations should include:
The nature of your organization and its fixed assets. Do you need a solution that can handle 5,000 assets or a million assets? How many entities, locations, and countries must the solution support? How many users will need to access the system simultaneously?
Tax function enablers
People and organization Process and policy
Technology and systems
Data and information ... supported by four capability enablers
Your most common fixed asset activities. Do you have assets that move in and out of the United States? Do you have internal transfers and sales between partnerships? Asset tracking and calculation requirements. Does your organization have multiple ledgers and depreciation methods — for example, U.S. GAAP, modified accelerated cost recovery system (MACRS) with bonus, adjusted current earnings (ACE), alternative minimum tax (AMT), and/or Earnings & Profit (E&P)? Do you have a standard calendar or a fiscal year, or a combination of both — for example, a parent company with a fiscal year, but REITs that have a calendar year? Are there other considerations, such as component costs, the need to track transfers and disposals accurately, cost segregations, depreciation forecasting, or componentization in anticipation of IFRS?
Reporting. Do your users need greater flexibility to produce custom or ad hoc reports? Do you have more specific reporting needs, for example, printing standard tax forms, enabling reporting by location for property tax and apportionment purposes, or meeting SAS 70 certification requirements? Do you have specific requirements for importing or exporting data between systems?
Data retention. How long must you retain or archive data? How accessible must that data be?
Reconciliation. Do you require the ability to integrate fixed asset systems with your legacy systems and to allow users to import and/or export files with ease? Will your users need to upload or download Microsoft® Office Excel® or flat files or integrate data with project management applications? User controls. Do you have specific control requirements, for example, varied user roles/rights by role or business unit, change controls, audit trails, or reconciliations?
Vendor support capabilities. How much support will your users require? At what hours of the day? Would a server-based or web-server-based solution be better for your needs, and how would each affect your resources? Do you have specific data and system security needs? How often do you anticipate needing to update the system due to tax rule changes?
One system or multiple systems?
Is it better to have a single, integrated system or multiple fixed asset systems for U.S. GAAP and tax book purposes? Outlined in the chart below are advantages and disadvantages to both approaches. You will need to weigh these in light of your organization’s specific needs and capabilities.
An opportunity to update or improve processes Technology updates almost always require changes to related business processes — changes that present significant opportunities for improvements in staff efficiency, training, and communication among departments, in addition to taking advantage of new capabilities that the new system provides. In fact, fixed asset system changes often provide opportunities to correct past process issues, such as maintaining ghost assets on the books. Some observers estimate that as much as 15 percent of gross property, plant, and equipment (PP&E) assets are overstated — resulting in assets on the books for which no one knows the disposition. Implementing or updating a system also
Options Single fixed asset systems Multiple fixed asset systems Pros • Better integrity of the
information.
Increase the degree of process • automation. Better control. • Accounting department •
manages the fixed asset process.
Depreciation table is maintained by •
third-party vendor.
The software has been configured •
to provide all of the necessary information, including provisions for the new bonus depreciation. Limited system maintenance. •
Cons • It may need to be configured to manage bonus depreciation. Possible annual system •
maintenance.
In some cases, you need to •
create custom reports. It still may not manage the •
interface from and to the tax fixed asset system.
Maintain two different fixed •
asset systems.
Reconcile the tax fixed assets •
with the U.S. GAAP fixed assets on a regular basis.
Fixed assets information from •
multiple sources (i.e., Film Divisions, Aluminum Divisions) needs to be imported to the selected fixed assets software.
Control issue. •
IT will need to keep both systems •
provides an opportunity to determine that fixed asset capitalization policies meet current accounting and tax requirements, and that asset descriptions are sufficiently detailed to provide for accurate return filings.
At the same time, it is important to consider other processes that affect tracking and maintenance of fixed assets and to understand how the organization handles these areas. Examples include:
Intercompany transactions. Do these transactions transfer at book value or fair market value? Does your organization retain the identification or character of the assets during such transfers to facilitate adequate handling years down the road?
Dispositions. How does your organization determine functional obsolescence? Are there notification procedures in place, as well as mechanisms for writing off assets in the fixed asset system in a timely manner?
Income tax planning. Consider the organization’s procedures related to:
Cost segregation studies, including tracking class lives •
and repairs.
Segregation of assets for income taxes and for property •
taxes.
Bonus depreciation — accounting for both federal and •
state issues.
Interest capitalization. •
Book versus tax differences, for example, placed-in-•
service dates.
Research and experimentation tax expensed assets. •
Late additions, transfers, and partial dispositions. •
Book versus tax conformity. •
Is your fixed asset system a tool or a burden? Although it sounds obvious, a fixed asset system should support the tax function’s primary reporting responsibilities. Not only should it address typical business needs — internal transfers, purchase accounting, book versus tax differences, tax law changes such as bonus depreciation, and planning — it also should be able to perform some of the “heavy lifting” by helping alleviate off-line spreadsheets or calculations.
If you are not getting the results expected, a good first step may be to take a closer look at your current system. Just because a fixed asset system is not producing the results expected does not mean it needs to be replaced. In fact, it is not uncommon to find that a current system has certain capabilities, but it was not configured to take advantage of these capabilities from the outset.
Process or other changes may also help alleviate system issues, for example, by adopting a prospective approach for integrating the procurement of new assets going forward. In order to have a system that performs as expected, you also should take steps to rectify problem areas, beginning with the most significant or highest value assets. For example, many organizations neglect inventory and do not reconcile data for transactions or other changes. Conducting a physical inventory of assets can help to improve the system’s ability to meet your organization’s needs. You may also want to recreate cost segregation in order to look for lost tax opportunities. Finally, if you are implementing a new system, make sure you are entering “clean” data into that system, including writing off assets that no longer exist. As time-consuming as it may be, establishing a new system with accurate, up-to-date data increases the chance of producing the results you expect.
Finally, implementing a new system or updating an existing system provides the opportunity to re-evaluate the tax function’s role and “ownership.” The tax function has a vested interest in having a fixed asset system that produces the right information, so this is a good opportunity to seek a larger role so that you get the information you need in a timely manner. In fact, organizations with significant investments in fixed assets often find it helpful to have a cross-functional committee or team that works together regularly to discuss issues related to data and reporting, as well as to plan for potential changes, such as a bonus depreciation extension.
Tax executives’ perspectives
Deloitte hosted a Dbriefs webcast to review common tax issues involving fixed asset systems and considerations when replacing or upgrading current systems. More than 1,800 participants shared their own views through responses to polling questions posed during the webcast.
Organizations utilize a variety of options for maintaining fixed asset data, ranging from spreadsheets to a fully integrated general ledger and subledgers. Nearly 33 percent of webcast participants said their organizations utilize a fully integrated approach. One quarter said they use a standalone tax asset system, while another 13 percent use multiple, disparate fixed asset systems, and about
11 percent use Microsoft® Office Excel® spreadsheets. Only a small number — five percent — indicated that they are still challenged to maintain fixed asset data in any format. While tax functions may struggle with a variety of issues related to fixed asset systems, about 40 percent of webcast participants indicated that their current system is adequate for their needs, and four percent reported that their systems exceed expectations. Nearly one quarter, though, said their systems require them to perform many off-line calculations or other activities in order to report accurate tax data. About 13 percent said they do not realize the results they would expect from a fixed asset system.
How do you maintain your fixed assets now?
Unsure/not applicable It’s a challenge
Microsoft® Office Excel® spreadsheets
Multiple disparate fixed asset systems Standalone tax asset system
Fully integrated sub-ledgers and general ledger
12.7 % 10.6 %
4.9 %
13.5 %
32.5 %
25.8 %
How would you assess the use of your current fixed asset system?
Unsure/not applicable
The system we have results in us spending numerous hours annually trying to report good tax numbers
It is a challenge and results in us using many off-line calculations to track items like cost segregations, bonus depreciation, etc. It does not meet the requirements I would expect from a fixed asset system
It is adequate for our needs Love it
12.0 % 10.5 %
20.3%
4.3 %
40.1 %
12.8 %
Source: Deloitte’s Tax Operations Dbriefs webcast, “Fixed asset systems: Why the tax function needs to have a stake in the game,” held on February 18, 2010. Polling results presented herein are solely the thoughts and opinions of survey participants and are not necessarily representative of the total population.
Relatively few participants said their organizations are actively seeking to implement a new fixed asset system. Thirty-seven percent reported they are satisfied with their current system, and another 22 percent indicated their company does not want to make an investment in a new system or tool. Just four percent said they are currently in the market for a new vendor, while another 11 percent said they may be within the next six to 18 months. Only one percent said they are currently considering moving to an outsourcing arrangement.
The degree of tax involvement and oversight in managing fixed asset data varies significantly from organization to organization. Just over half of participants said that the financial accounting function maintains and has oversight for fixed assets. Another 18 percent reported that a fixed asset team enters assets, with oversight from the tax function. Ten percent of participants said their organizations delegate responsibility for tracking and maintaining fixed assets to individual business units. Only two percent reported that the real estate function maintains this responsibility, while a similar number indicated they outsource fixed asset management.
Who in the organization maintains and has oversight of your fixed assets?
Unsure/not applicable
Each individual business unit in our organization tracks its own fixed assets
We outsource our fixed assets
Fixed asset team enters the assets with the tax team providing oversight
Real estate function
Financial accounting — fixed asset manager
18.1 % 1.7 %
9.5 %
16.2 %
52.6 %
1.9 %
Do you expect your company will implement a new fixed asset system in the near future?
Unsure/not applicable
No, we are currently looking to oursource our fixed assets No, we are satisfied with our current system
No, my company does not want to invest in a tool like a new system
Yes, in the next 6 to 18 months we plan to implement a new system
Yes, we are currently in the market looking for a new vendor
37.1 % 1.1 %
25.3 %
3.6 %
11.0 %
21.9 %
Source: Deloitte’s Tax Operations Dbriefs webcast, “Fixed asset systems: Why the tax function needs to have a stake in the game,” held on February 18, 2010.
Additional resources
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