Property, plant and equipment: rollforward, additions, disposals and depreciation

• Build and tie a fixed asset rollforward to the trial balance
• Vouch additions for existence, rights and correct capitalization
• Test disposals and repairs expense for completeness of retirements and missed capital items
• Evaluate depreciation with recalculation or a substantive analytic

The rollforward is the spine

Fixed asset work starts from a rollforward: opening cost and accumulated depreciation, additions, disposals, transfers, depreciation expense, and closing balances. Agree the opening balances to last year's audited figures and the closing balances to the trial balance and the fixed asset subledger. Every other procedure tests one column. The fixed asset rollforward template and rollforward calculator give a layout.

The risks in this account sit in the activity, not the opening balance. For most private companies the opening balance was audited last year, so the work concentrates on what moved.

Additions

Additions carry three questions: did the asset exist and does the entity own it, was it correctly capitalized, and at the right amount?

• Select additions above a threshold plus a sample of the rest.
• Vouch to vendor invoices, contracts, closing statements for real estate, and evidence of payment.
• Check that the item meets the entity's capitalization policy and that the cost includes only amounts that belong in the asset: purchase price, freight, installation, and capitalized interest where ASC 835-20 applies.
• Inspect significant additions physically, or obtain other evidence they are in service, such as photos on a site visit or utility records for a new facility.
• Check the in-service date, because it drives depreciation.

Construction in progress needs its own look: costs accumulated, whether any project is complete and should be transferred and depreciated, and whether abandoned projects are still carried as assets.

Disposals and the search for unrecorded retirements

Disposals are tested for occurrence (agree to sale documents and cash) and for the gain or loss calculation. Completeness of disposals is the harder side. Ask about assets sold, scrapped or traded in. Review miscellaneous income for sale proceeds. Compare insurance schedules and property tax listings with the subledger. Look for additions that replace existing assets, which usually mean the old asset was retired.

Repairs and maintenance

Scan repairs and maintenance expense for large items. A $90,000 roof replacement in repairs expense is a capitalization question, and the client's practice either way should match its policy and GAAP. Reviewing this account is the main test for completeness of additions.

Depreciation

Two approaches work:

1. Recalculation of depreciation for a sample of assets, or for the whole register with audit software, using cost, life, method and in-service date.
2. Substantive analytic: expected depreciation equals average depreciable cost by asset class divided by useful life, adjusted for partial-year additions and disposals. Under AU-C 520 the expectation must be precise enough to detect a material misstatement, and differences above your threshold must be investigated.

Also check that useful lives are reasonable against how long assets actually last. Fully depreciated assets still in heavy use suggest lives were too short.

Impairment

ASC 360 requires a recoverability test for long-lived assets held and used only when events or changes in circumstances indicate the carrying amount may not be recoverable. Your procedure is to look for those indicators: a significant drop in market price, a significant adverse change in how the asset is used or in its physical condition, cost overruns, operating or cash flow losses. If indicators exist, test management's undiscounted cash flow analysis. See the ASC 360 recoverability example.

Common file findings

• Rollforward not agreed to the trial balance or prior year.
• Additions vouched to invoices with no check of capitalization policy or in-service date.
• No procedure on completeness of disposals.
• Depreciation "reviewed" with no expectation or threshold.

Depreciation analytic at Northgate Machine Works, LLC