Fixed Assets Accounting Stuck in the Past.
Executive Summary Every corporate tax professional knows the importance of fixed assets accounting, and how, when handled correctly, fixed assets depreciation can be a significant source of corporate tax savings. After all, the average property, plant, and equipment (PP&E) of the top Fortune 5 companies averages in the hundreds of billions of dollars. 1 Yet, this area of accounting is often neglected when it comes to improving efficiency and accuracy. To determine the current state of fixed assets management in large enterprises, Bloomberg BNA sponsored a study in late 216. The objective of the study was to uncover: How companies are managing their fixed assets The challenges they face in fixed assets accounting The practices they ve adopted to address their challenges The extent of manual fixed assets management and its impact on the enterprise Here are a few highlights: Staying up to date on tax law, rules, and regulations is the biggest challenge: Just over half of the respondents (55.4%) cited keeping track of tax law changes as the top challenge. Fixed assets accounting requires significant operational resources: Nearly three-quarters of respondents (71.3%) employ between 6 and 25 dedicated professionals focused on entry and management of fixed assets for accounting and tax purposes. The majority of companies lack a robust fixed assets solution: Only about one-third of companies (37.6%) are using a dedicated fixed assets solution. Manual fixed assets accounting is timeconsuming: On average, nearly half (46.8%) of fixed assets teams spend 4-5 days per month (or nearly one-fourth of their time) on spreadsheet and database maintenance for fixed assets; over a third (34.2%) spend 6-15 days. Spreadsheets and manually managed databases are perceived as risky: Almost two-thirds of respondents (63.3%) are concerned about data entry errors, while nearly half (48.1%) are worried about spreadsheet formula or link errors. Missed tax benefits is a close third (44.3%) concern. As you can see (since the numbers add up to more than 1%), many respondents had multiple concerns about spreadsheets. About the Survey In September 216, the software products group at Bloomberg BNA worked with an independent firm to survey just over 1 finance executives at USbased corporations. Slightly more than half of the respondents (56%) held vice president, controller, or C-suite level positions, with the majority of the remainder being directors or managers. Enterprises represented in the survey were from a wide range of industries including manufacturing, business services, technology, financial services, healthcare, real estate, retail, telecommunications, and transportation. All participants were part of their company s team that manages a minimum of 2, assets, with 3.7% of respondents managing one million assets or more. 3 25 2 15 1 5 How many assets does your company have? 9.9% 21.8% 2, to 74,999 75, to 249,999 25, to 599,999 6, to 999,999 1,, + 25.7% 11.9% 3.7% 1 http://bnas.wpengine.com/215/5/seeking-fixed-assets-seat-at-the-table/ Bloomberg BNA 181 S. Bell Street, Arlington, VA 2222 8.424.2938, 1
Still Complex after All These Years Fixed assets management has always been a complex area within the corporate tax function and our survey shows that the challenges the tax department faces haven t changed much over time, even if solutions exist to help them address the issues. As previously stated, survey respondents chose keeping track of the latest tax laws, rules, and regulations as their top challenge (55.4%). Coming in at a close second (51.5%) was maximizing benefits from depreciation deductions and asset expensing. Capitalizing, tracking, and depreciating assets for GAAP and tax purposes and transferring fixed assets-related information from ERP systems into the fixed assets system were the third- and fourth-ranked challenges, respectively, for the enterprises in the survey. 6 4 What are the biggest challenges in managing fixed assets? 43.6% 55.4% 45.5% 51.5% It Takes How Many People to Manage Those Assets? Given the challenges and complexity of managing fixed assets, corporations can potentially miss out on opportunities for significant tax savings. In an attempt to prevent this, the survey shows that companies are dedicating large teams to the fixed assets effort. Our survey showed that nearly three-quarters of respondents (71.3%) employ between 6 and 25 dedicated professionals focused on the management of fixed assets for accounting and tax purposes. A small percentage (7.9%) employ more than 26 dedicated staff for fixed assets work. In an era where automation has increasingly streamlined accounting processes and eliminated manual efforts, why does it take so many dedicated professionals to manage corporate fixed assets? The answer lies in our next line of questioning: how companies perform fixed assets management. How many professionals in your organization are dedicated to the entry and management of fixed assets for accounting and tax purposes? 5 2 4 39.6% Transferring fixed assets-related information from ERP systems into the fixed assets Keeping track of the latest tax laws, rules and regulations Capitalizing, tracking, and depreciating the assets for GAAP and tax purposes Maximizing benefits from depreciation deductions and asset expensing 3 2 1 31.7% 2.8% 7.9% 1-5 6-1 11-25 26+ Bloomberg BNA 181 S. Bell Street, Arlington, VA 2222 8.424.2938, 2
The Wrong Tools for the Job With the growing importance of fixed assets management, many companies have turned to their enterprise resource planning (ERP) systems and other non-tax focused accounting systems for help. Our survey shows that ERP systems are the most-used technology tool (76.2%) by enterprises for managing and recording fixed assets. However, while these solutions deliver efficiency and accuracy gains for many parts of the accounting process, they lack tax-specific functionality required for end-to-end management of fixed assets for tax purposes. That missing functionality forces companies to supplement the ERP with manual spreadsheets and homegrown databases for calculations, management, reporting, and more. In fact, 54.5% reported using custom database applications and nearly the same amount reported using manual spreadsheets. Only about onethird (37.6%) are using a dedicated fixed assets solution, which can address tax-specific fixed assets management requirements. How do you currently manage and record your fixed assets? 1 75 5 25 53.5% 54.5% Spreadsheets ERP system Third party app 76.2% 37.6% 9.9% Databases (such as Access) Dedicated fixed assets software Other 1% We already know that three quarters of respondents employ as many as 25 professionals to juggle their respective set of fixed assets tools. Now let s look at how having the wrong tools impacts their productivity. Spreadsheet Maintenance Versus Strategic Analysis Our survey results show that on average nearly half (46.8%) of fixed assets teams spend 4 to 5 days per month (or nearly one-fourth of their time) on spreadsheet and database maintenance for fixed assets. More than a third of the respondents (34.2%) report spending 6 to 15 days each month maintaining data. In other words, teams are spending an inordinate amount of time on manual spreadsheet and database management, leaving precious little time for planning, analysis, and strategic guidance of the business. 5 4 3 2 1 On average, how much time in a given month does your team spend on spreadsheet and database maintenance for fixed assets? 15.2% 46.8% 1-3 days 4-5 days 6-15 days 16+ days All the manual work is necessary because companies are using spreadsheets to support complex calculations and tracking. These spreadsheets are not automated and certainly not integrated into an organization s ERP or other systems. While 55.7% of respondents indicate that they use spreadsheets and manual databases for reporting, more than one-third also use them for: Reconciling tax depreciation with general ledger balances Transforming data to import into tax systems Calculating state depreciation Managing tax-only assets 34.2% 3.8% Bloomberg BNA 181 S. Bell Street, Arlington, VA 2222 8.424.2938, 3
Analyzing assets for cost segregation Managing repair expense assets How do you use spreadsheets and manual databases for the management of fixed assets? (top 1 results displayed) 6 4 2 41.8% 41.8% 39.2% 35.4% 34.2% 3.4% Primary tool for fixed assets management Manage repair expense assets Cost segregation assets Manage tax only assets Federal bonus depreciation calculations State depreciation calculations 74B book assets 2.3% Transforming data to import into tax systems Generate reports for fixed assets data 43% 55.7% Reconcile tax depreciation with general ledger balance Spreadsheets Mean Risky Business (and Sleepless Nights for the CFO) 35.4% Analyst firm Aberdeen Group estimates that 93% of organizations attempt to use spreadsheets for planning, budgeting, and forecasting. 2 Spreadsheets and manually managed databases continue to be go-to tools for fixed assets management as well. However, our survey respondents perceive a myriad of risks inherent in using spreadsheets and custom databases. 6 4 2 What risks do you associate with spreadsheets and manually managed databases for fixed assets? 48.1% 26.6% 44.3% 39.2% Spreadsheet formula mistakes or link errors Lack of internal control for tax depreciation Missed tax benefits 63.3% Incorrect tax rule application (risk of audit and IRS penalty) Manual data entry errors 34.2% 34.2% 29.1% 24.1% Material misstatement in financial statements from tax provision Opportunity cost not best use of tax professional s time Lack of tax documentation and audit trail for audit defense Negative cash flow impacts due to inaccurate calculations Missed Opportunities for Tax Savings Considering that the most frequently used approaches (ERP systems and spreadsheets) provide little to no insight into current tax laws, it s not surprising that potential fixed assets savings in the form of immediate or accelerated deductions are often missed. But what does that mean for the bottom line? Depending on asset cost, potential deductions could equate to millions of dollars of tax savings that could be used for other strategic efforts. As an example, new or renovated buildings as well as major building improvements are often put into service at the longest possible service life, when in reality, a shorter life may be allowed, and in some cases, the full deduction taken immediately. 2 Beyond Spreadsheets: Taking Planning, Budgeting and Forecasting to the Next Level, Nick Castellina. Aberdeen Group. January 216. http://v1.aberdeen.com/launch/report/research_report/11749-rr-spreadsheets-epm-budgeting.asp Bloomberg BNA 181 S. Bell Street, Arlington, VA 2222 8.424.2938, 4
Taxable Income (before depreciation deduction) Lost Tax Cash Opportunity Scenario 1 Scenario 2 $2,, $2,, Asset Cost $1,, $1,, Depreciation Period 39 years 5 year First Year Deduction $28,3 $2,, Taxable Income $19,791,7 $18,, Corporate Tax Rate 35% 35% First Year Taxes Due $6,927,1 $6,3, The example above shows over $6, in tax cash savings in the first year as a result of segregating an asset into the shortest qualifying recovery period. After the 5 year period in Scenario 2, the tax cash savings realized is $2.72 million and does not take into account state taxes. In addition to missed opportunities for tax savings, there is the specter of penalties for miscalculations or incorrect application of tax law. As noted previously, more than one-third of respondents felt that the use of spreadsheets for fixed assets management put them at risk of an audit and/or IRS penalty. Manual processes can also delay closing and severely hamper real-time visibility into current and projected tax positions. Tax Teams Need Dedicated Fixed Assets Management Software It s no longer enough to simply throw existing solutions at the fixed assets problem. The volume of tax data produced in today s modern company is too much to handle via manual processes. For tax teams grappling with this issue, the question at hand becomes, How can we ensure that our fixed assets accounting practices are up to par, while minimizing the resources required? accounting and tax compliance systems eliminates redundant and manual data entry, reconciliation, and manipulation. Fixed assets data remains synchronized with the ERP, up-to-date, and accurate. For large enterprise companies, a robust, end-to-end fixed assets management solution provides significant benefits, including: Increased tax cash flow Reduced time and effort to manage fixed assets Faster close Reduced audit risk A holistic view of all fixed assets Greater peace of mind through improved accuracy Conclusion Even today, despite the automation of most accounting processes, fixed assets management is a complex, time-consuming accounting function that typically suffers from an extremely high level of manual effort. Our survey shows that organizations continue to rely on these high-effort, high-risk manual processes to manage fixed assets tax data, calculate federal and state depreciation, reconcile depreciation with the general ledger, manage repair expenses, and report on fixed assets. With the right fixed assets management solution, corporate tax teams can identify the most beneficial tax treatment under current and new regulations and uncover tax savings in the form of accelerated deductions. BNA Fixed Assets from Bloomberg BNA can help your tax team overcome its fixed assets challenges. BNA Fixed Assets, is an easy, efficient, and cost effective way for you to manage the complete fixed assets lifecycle from purchase to retirement. A robust, integrated solution simplifies the process of managing the fixed assets lifecycle, from construction and purchase through retirement. Integration with Bloomberg BNA 181 S. Bell Street, Arlington, VA 2222 8.424.2938, 5
42% Average US Corporate Tax Rate Among Highest in the World With US businesses paying among the highest corporate taxes in the world, currently at 42.1% (with a combined federal and assumed state tax rate of 7.1%), accelerated fixed assets deductions and planning opportunities to preserve tax cash are finally catching the attention and focus of the C-suite. About Bloomberg BNA Fixed Assets BNA Fixed Assets provides you with the ability to document your depreciation and amortization policies (including bonus depreciation) through Asset Type templates, and allows you to automate the enforcement and implementation of these policies when performing data entry for fixed assets. This eliminates potential errors from misclassifying assets, automates the process of entering assets, enforces the use of a company s depreciation and amortization policies, greatly reduces the volume of data required to enter each asset into the system, and, above all, guarantees compliance with GAAP rules and IRS regulations. BNA Fixed Assets provides automatic annual updates of its fixed assets management software. What s more, it speeds the data entry process by allowing you to copy and paste data for multiple assets from an Excel spreadsheet into BNA Fixed Assets, for greater efficiency and accuracy. With BNA Fixed Assets, you ll benefit from having the best solution on the market today to maximize productivity, comply with GAAP rules and IRS regulations, and meet all of your financial and tax reporting requirements. Learn more about BNA Fixed Assets at /fixedassets. About Bloomberg BNA s Software Products Bloomberg BNA software products provide unique insight, actionable information, and smart tools in the areas of corporate tax, fixed assets, individual tax planning, and tax compliance resources. With category-leading software and top-rated technical support, we are the solution of choice for professional firms and corporations of every size. More than 7, customers, including the IRS, depend upon Bloomberg BNA s software products for the highest degree of tax, regulatory, and compliance expertise available in the market. About Bloomberg BNA Bloomberg BNA, a wholly owned subsidiary of Bloomberg, is a leading source of legal, tax, regulatory, and business information for professionals. Our network of more than 2,5 reporters, correspondents, and leading practitioners deliver expert analysis, news, practice tools, and guidance the information that matters most to our customers. Bloomberg BNA s authoritative coverage spans the full range of practice areas, including tax & accounting, labor & employment, intellectual property, banking & securities, employee benefits, health care, privacy & data security, human resources, and environment, health & safety. Though intended to provide accurate and authoritative information, this publication is provided with the understanding that it does not constitute tax, legal, accounting, or other professional advice or service. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Bloomberg BNA. 216 BNA Software, a division of Tax Management Inc. All rights reserved. FA1-WH1-216 1216rc Bloomberg BNA 181 S. Bell Street, Arlington, VA 2222 8.424.2938, 6