15 Key Reasons why Physical Verification of Fixed Assets is Vital for a Company’s Financial Health and Compliance

Fixed assets, such as land, buildings, machinery, and equipment, form a significant part of a company’s assets. These assets are typically acquired for long-term use and are not intended for resale. Therefore, it’s essential for companies to regularly verify their fixed assets to ensure their accuracy and compliance with accounting and legal standards.

Physical verification of fixed assets involves physically inspecting each asset to confirm its existence, location, condition, and ownership. In this article, we’ll discuss 15 key reasons why physical verification of fixed assets is vital for a company’s financial health and compliance, with examples to illustrate each reason.

Reasons why Physical Verification of fixed assets is vital for a Company’s financial Health & Compliance

1. Detects and prevents theft and fraud

Physical verification of fixed assets is a critical control to detect and prevent theft and fraud. By physically inspecting each asset, the company can ensure that it has not been stolen or misused. For example, a company discovered that one of its vehicles was missing during its annual physical verification of fixed assets. Upon further investigation, it was found that the vehicle had been stolen by an employee who had been using it for personal purposes.

2. Ensures accuracy of accounting records

Physical verification of fixed assets is necessary to ensure the accuracy of accounting records. By comparing the physical count of assets with the records in the fixed asset register, the company can identify any discrepancies and correct them. For example, a company discovered that it had overvalued its machinery by Rs. 10 lakhs during its annual physical verification. Upon correcting the records, the company was able to report accurate financial statements.

3. Complies with accounting and legal standards

Physical verification of fixed assets is required by accounting and legal standards, such as the Companies Act, 2013. These standards mandate that companies maintain accurate records of their fixed assets and verify them periodically. Failure to comply with these standards can result in penalties and legal consequences. For example, a company was fined Rs. 5 lakhs by the Registrar of Companies for non-compliance with the Companies Act, 2013, which mandates the physical verification of fixed assets.

4. Provides evidence for insurance claims

Physical verification of fixed assets provides evidence for insurance claims in case of loss or damage. By maintaining accurate records of fixed assets and verifying them periodically, the company can ensure that it has adequate insurance coverage and can provide evidence of ownership and value in case of a claim. For example, a company was able to claim insurance for its stolen machinery because it had maintained accurate records and had verified them periodically.

5. Identifies idle and obsolete assets

Physical verification of fixed assets can help identify idle and obsolete assets that are no longer useful to the company. By identifying these assets, the company can dispose of them and free up valuable space and resources. For example, a company discovered that it had several obsolete computers during its physical verification of fixed assets. Upon disposing of them, the company was able to free up valuable office space and resources.

6. Improves asset management

Physical verification of fixed assets is an essential component of effective asset management. By maintaining accurate records and verifying them periodically, the company can ensure that its assets are used efficiently and effectively. For example, a company was able to identify the underutilization of its machinery during its physical verification. Upon improving the utilization of the machinery, the company was able to reduce its operational costs and increase its profitability.

7. Reduces the risk of errors and omissions

Physical verification of fixed assets reduces the risk of errors and omissions in accounting records. By verifying the accuracy of records periodically, the company can identify any errors or omissions and correct them. For example, a company discovered that it had omitted several assets from its fixed asset register during its physical verification. Upon correcting the records, the company was able to report accurate financial statements.

8. Facilitates accurate financial forecasting

Ensuring a physical verification of fixed assets is crucial to achieving precise financial forecasting. By maintaining accurate records of fixed assets, the company can forecast its future capital expenditures and depreciation expenses. For example, a company was able to accurately forecast its depreciation expenses for the next year based on the physical verification of its fixed assets.

9. Enables informed decision-making

Physical verification of fixed assets enables informed decision-making regarding asset acquisition, maintenance, and disposal. By maintaining accurate records and verifying them periodically, the company can make informed decisions about its fixed assets. For example, a company was able to make an informed decision about whether to repair or replace its machinery based on its physical condition during its physical verification.

10. Ensures compliance with internal policies

Physical verification of fixed assets ensures compliance with internal policies regarding asset acquisition, maintenance, and disposal. By maintaining accurate records and verifying them periodically, the company can ensure that its employees comply with internal policies. For example, a company discovered that an employee had disposed of an asset without following the company’s disposal policy during its physical verification. Upon correcting the non-compliance, the company was able to improve its internal controls.

11. Facilitates mergers and acquisitions

Physical verification of fixed assets is essential for mergers and acquisitions. By maintaining accurate records and verifying them periodically, the company can provide accurate information to potential buyers or partners. For example, a company was able to provide accurate information about its fixed assets during the due diligence process of a merger, which facilitated the transaction.

12. Reduces the risk of legal disputes:

Physical verification of fixed assets reduces the risk of legal disputes regarding asset ownership and value. By maintaining accurate records and verifying them periodically, the company can provide evidence of ownership and value in case of a legal dispute. For example, a company was able to defend itself in a legal dispute regarding the ownership of a building because it had maintained accurate records and had verified them periodically.

13. Improves audit readiness

Physical verification of fixed assets improves audit readiness. By maintaining accurate records and verifying them periodically, the company can provide evidence to auditors regarding the accuracy of its accounting records. For example, a company was able to pass an audit by the Income Tax Department because it had maintained accurate records and had verified them periodically.

14. Provides transparency to stakeholders

Physical verification of fixed assets provides transparency to stakeholders, such as shareholders and investors, regarding the company’s assets. By maintaining accurate records and verifying them periodically, the company can provide transparent information to its stakeholders. For example, a company was able to provide accurate information about its fixed assets to its shareholders during its annual general meeting.

15. Improves overall financial health

Physical verification of fixed assets improves the overall financial health of the company. By maintaining accurate records and verifying them periodically, the company can ensure that its assets are being used efficiently and effectively. This can result in cost savings, increased profitability, and improved cash flow. For example, a company was able to reduce its maintenance costs and increase its profitability by improving the utilization of its machinery during its physical verification.

Conclusion

Physical verification of fixed assets is a vital process for companies to ensure their financial health and compliance with accounting and legal standards. By maintaining accurate records and verifying them periodically, companies can detect and prevent theft and fraud, ensure the accuracy of accounting records, comply with accounting and legal standards, and provide evidence for insurance claims.

Physical verification also helps identify idle and obsolete assets, improves asset management, reduces the risk of errors and omissions, facilitates accurate financial forecasting, enables informed decision-making, ensures compliance with internal policies, facilitates mergers and acquisitions, reduces the risk of legal disputes, improves audit readiness, provides transparency to stakeholders, and improves overall financial health. Therefore, companies should prioritize physical verification of fixed assets to safeguard their assets