The New Companies Act 2013, Bane Or Boon

With clauses on depreciation, useful life and component level tracking added to relevant clauses in Companies Act 2013, companies are in clear need to adopt.  However, there are apprehensions around transparency, additional investments, and difficulties in operationalizing these changes.  Both auditors and Fixed Asset Management solution providers are working to improve customer awareness and   leverage   technology and services to make it easier for organizations to adopt.

Major changes in Depreciation clauses of Companies Act 2013, have made companies manage their fixed asset tracking and management tighter.  Fixed asset management is therefore in need of clear attention, as enough action is needed there.  Mr. Vinoth Kumar, a Chartered Account, who handles many customers explains, “I have been practising for now more than 6 years, and this is the first time that companies have started looking at fixed assets seriously.  The main clauses are around defined asset histories, “useful lives” whose interpretations are changed.  Custom defined “useful lives” have to be disclosed, and it is required to declare the reasons thereof.”

Secondly, a new method of useful life computation called “component approach” is defined.  This involves tracking each component, and therefore, identifying the “useful life” of each component.  This happens to bring in significant amount of compliance, and affects factors like maintenance costs and insurance.

Varadharajan V, former Internal Audit controller and an ex CIO says, “ the changed scenario has put lot of pressure on the existing organizations following simple methods of tracking or switching from simple tracking, having to adopt forced compliance.”  The component level approach has a big impact on the taxes, maintenance costs, and insurance,” he says.  These are the challenges that the enterprises are gearing up to meet.  Vinoth agrees and adds, “This has an impact on smaller businesses where the heavy investment on fixed assets and the profitability are not commensurate.  This erodes relative profitability.”

Varadharajan says, “The customer should see it as an opportunity to leverage the provisions and extract the benefits.  Here is the baseline of the ecosystem- the stakeholders, the management, the finance team, and the auditors should agree on the benefits of tracking assets.  And right here is the role of the advisors, especially the auditors.”

Mr. Nainan Matthew, CEO and Managing Director of Technowave solutions, an established Solutions integrator in the Middle East and have created a Fixed Asset Solution Portfolio, says, “Auditors, we believe are most important players in this arena, who can advise and create awareness on the need for Fixed Asset Tracking and Management.  We have been meeting various auditors who are advising small and medium platforms to create traction.  The biggest difference comes in terms of customer engagement for us.”

The role of auditors in bringing constant improvement in realization of benefits is significant, and in this case, the fixed assets is key.  Says Varadharajan, ”The auditors who constantly interact with the management, and know the need for compliance and the interest of their clients, are in the best position to advise to action – means, set up policies, process, calculate depreciation, audit assets, and then help in filing asset reports as part of the larger company filings.”

He adds, “let us look at it as two pronged objective, Compliance and Efficiency; and therefore increase in profitability.”

Nainan Matthew feels that the key issue right now is the lack of awareness and that is what the biggest challenge in making progress is.  Varadharajan shares that his efforts in bringing together these two-pronged objectives did encounter some resistance due to a lot of focus on transparency and due diligence.  As a result, some major issues were discarded but valuable assets came out through physical audits, he says.

However, most management, operations, finance and audits teams are happy reconciling on paper and excel sheets.  A physical verification is notional, Nainan says.  That is the major source of problems – we never know if the assets are actually existing or functional, especially on the plant and machinery side.  Most customers get a surprise when the first asset verification audit is done physically.

Another major reason for avoidance is that people see it as an overhead,   from operations, training and user adoption perspective.  What is needed is a simple but effective tool is required, and this is where we even take up asset audit / verification as outsourced services, says Nainan.  Outsourcing essentially helps customer only to the level of data custody, asset custody, and asset change approvals, and then depreciation calculations, he says.

The major focus is around “Asset classification and verifying the components in the assets” says Vinoth Kumar.  This is because of two things – “it gets us down to looking at real picture, and also helps us to frame an asset management strategy forward,” he says.  “The effort involved in physical verification is a major put off,” says Varadharajan, and it leads to heavy allocation of resources in complex asset dispensations.  “This is where solutions like ours helps,” says Nainan.  We bring in our resources to do the asset tagging and verification.  Subsequently, we take up any physical audits.  Our experts have done this repeatedly, and can easily do it at a faster pace.”

This alleviates the inconvenience of physical verification, but how does the tracking help?  What if the assets are missing?  Nainan has an answer, “this is where our technology comes in.  With Barcode labels and RFID tags installed on the assets, it becomes easier for the organization to keep track.  A separate tag can be attached to each component that allows a separate tracking of its history.”

The tags or labels can be used on any surface, and are tamper proof.  Therefore, the benefit is that a onetime effort shall pay for a long-term basis, Nainan says- “but the biggest challenge is for customers to realize this.  Here is where the auditors can help again.”

Not many auditors see this as a major effort today –but the situation is changing fast.  Vinoth says that he advises companies to give a first cut report on the fixed assets they have and how they are tracking them.  Some internal auditors like Varadharajan also advise the same thing.  Nainan, while agreeing, feels that there is still a long way to go.

The issue is about asset reconciliation.  Most companies use excel sheets.  A comprehensive database of assets, their tracking codes mapped to their purchase dates, warranty and insurance dates are key for various computations – like income tax depreciation, companies act depreciation, useful life, asset value, put to use and other statuses at a component and an wholesome level.  “This is achieved by simple software like Easy Track.  Easy Track collects data directly from the Barcode or RFID scanners, and stores them in a database.  The rest of the data can easily be entered simply, and the whole system is very comprehensive and user friendly.  Verification becomes easier, as a baseline is available.  Purchase order and invoice details can be scanned and stored.  The customer can choose both on-premise or cloud based options for the infrastructure.  The benefit of a cloud based infrastructure is that there is no need for additional investments.”

The New Companies’ Act 2013 has put the focus on fixed asset management and depreciation.  While there is some interest, the focus and adoption is not taking place as anticipated, despite   availability of technologies.  This challenge is being overcome by increasing awareness, the responsibility of both the auditors and solution providers.