Fixed Asset Management: What are the Tax Dynamics?

The year 2022 Forbes World Billionaires’ list names Alice Walton, an American heiress to the fortune of Walmart as the second richest woman and eighteenth in the world with a networth of $65.3 billion. She is credited with this timeless expression, “one of the great responsibilities that I have is to manage my assets wisely, so they create value.”

From my point of view, her expression has a bearing on her networth and status in the world. The trajectory of her networth from $46 billion in the year 2018, $44.4billion in (2019), $54.4billion in (2020), $61.8 billion in (2021) to $65.3 billion in 2022 further gives credence to the fact that she manages her assets so wisely that they create more value. Based on that, I can strongly say that there is direct relationship between the net worth of a business, the skills as well as the systems deployed to manage those set of assets.

Talking about assets, in business accounting there are two main types of assets, current and non-current assets. Current assets are those assets that are expected to be converted into cash within a year, for example receivables, inventories, and term-investments such as fixed deposits. Non-current assets on the other hand are further broken into fixed assets and intangible assets.

Based on the foregoing, I am using today’s article to highlight the need for business leaders to give more attention to their assets, in this case fixed assets, whilst considering the tax dynamics of such assets. As we have always known from the basics, fixed assets are those physical or tangible items which a company owns and uses in its business operations to provide services or goods to its customers and help drive income. These assets, which are often equipment or property, provide the owner with long-term financial benefits. Apart from a company’s buildings, vehicles, furniture, or land which we can see, businesses also have goodwill, brand recognition, copyrights, patents, trademarks, or trade names as part of their intangible assets. Indeed, assets by their composition must be properly managed to drive income for a business.

Managing Fixed Assets

As businesses grow, they gradually become saddled with challenges regarding the acquisition, quantity, tracking the location, conditions, maintenance and even depreciation status of their fixed assets. There are situations where some companies lose or cannot trace their physical assets due to theft or poor record-keeping. To overcome the challenges invariably give birth to what we call fixed asset management. By fixed asset management, I mean the accounting process of putting modern systems in place to eliminate those challenges which undermine companies’ efforts aimed at creating value for their owners.

According to the ISO 55000 international standard, asset management should maximize value for money by enhancing the quality and useful life of the equipment and securing the best return on investment for a company. The emergence of modern software applications has created a paradigm shift from the tedious and highly ineffective manual systems many companies use to account for their fixed assets in many multiple locations.

Indeed, businesses now have the opportunity to leverage on modern software solutions to make the entire process of managing their fixed assets easier to handle. That is, from the time of the assets’ acquisition through use and disposal, modern software solutions can easily do the tracking or monitoring throughout the assets’ useful lives with the benefits thereof.

A modern fixed asset management system helps to enhance assets’ operational efficiency since you are able to track them in their multiple locations. Again, it helps businesses in making strategic decisions regarding the disposal or acquisition of new assets. Another fact is that effective fixed asset management serves as a catalyst which drives companies to reduce or optimise their maintenance costs, because, properly accounting for them provides you with timely schedules for regular maintenance. Thus, regular maintenance prolongs their useful lives and the accounting for depreciation of those assets.

Depreciation & Capital Allowance of Fixed Assets

Before I delve into understanding depreciation and capital allowance, we must first know that both are the same in principle but differ in practice. It is worth noting that depreciation is based on a company policy’s and its rates may differ from one company to another, whilst capital allowance is by law or regulation for tax purposes and cuts across companies in the same industry. See tables 1 below

Assets (CLASS)	Amount Gh¢	Accounting Policy-Depreciation Rates	Capital Allowance Rates
Computers	42,300	25%	40%
Motor Vehicle, Plant & Machinery	366,300	20%	30%
Furniture & Fittings	29,310	25%	20%
Office Equipment	25,500	20%	20%
Total Cost of Assets	463,410

Table 1: Depreciation Rates vs Capital Allowance Rates

Assuming a company has this class of assets with its internal depreciation policy rates and Capital Allowance rates in table 1 above. Though company uses its internal depreciation rates for its assets, the capital allowance rates override the company’s rates (for tax purposes) and form the basis for profit on which determining the correct amount of tax which the company will be required to pay to the tax authorities.

Capital Allowance

The Income Tax Act, 2015 (Act 896) as amended in section 14, schedule 3 provides for capital allowance in respect of “depreciable assets” (class of assets and their respective rates of depreciation). “Capital Allowance is “granted in respect of a depreciable asset owned and used by a person during a year of assessment in the production of the income of that person from a business.”

Depreciation

It is an established fact and common knowledge that fixed assets experience wear and tear over a period of time thereby causing their working capacity and effectiveness to decline as well. As the value of the assets decreases over time, you are required to account for them as an accountant in your company’s books of accounts. This principle of accounting gives businesses the leverage of replacing these fixed assets. Indeed, it is imperative to note that accounting for depreciation of fixed assets is deeply influenced by a company’s internal policy, standard practices of the industry in which the company operates and the enabling legislation in force.

Nonetheless, factors such as the cost of the asset, its estimated salvage value (value at the end of its useful life) or obsolescence (where it is outmoded and cannot be used again) still influence the rates for calculating the depreciation for each line item of fixed assets.

Interestingly, the depth of skills you deploy to navigate the underpinning factors and come to the “correct amount” of tax your business should pay to the tax authorities within the realm of effective fixed asset management is what distinguishes you as a diligent and value-driven accountant.

Points to Note.Point 1. You double-down your losses if you understate the cost of your fixed assets or omit them      due to poor fixed asset management. This is because, all things being equal, the assets in question may help you increase your profit (per their actual capacity) and by extension increase your taxes. Also, an understated cost of fixed assets may mean an understated capital allowance which would lead to a higher profit therefore incurring a higher tax. Point 2. You stand to optimize your profit with an effective fixed management system. The cost of your fixed assets may be correctly recorded, fully utilized, and tracked, as well as maintained to generate the needed revenue whilst benefiting from recouping the full cost of the assets through depreciation and enjoying tax reliefs via capital allowance. Point 3. The third point is illegal, unprofessional and does not make business sense. Not worth disclosing.

What is worth revealing is that effective fixed asset management helps a company to avoid paying more than the expected amount of tax since the fixed asset management process leads to proper recording, tracing, and realizing full value of your assets through utilization and capital allowance provision. Also the management process helps the business to know with certainty the influential factors to determine the values of its depreciable assets to follow through.  The ability to relate your internal depreciation policy rates to the prevailing legislation through expert advice helps you to avoid paying more than the required amount of taxes, thereby creating more value for your company or business.

BERNARD BEMPONG  

Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing

Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.

Our Office is located at Lagos Avenue, East Legon, Accra.

Contact: +233 302 528 977

                +233 244 566 092

 Website: www.jsmorlu.com.gh