Ghost assets can haunt companies for years
Companies don’t need to be haunted by ghost assets. And yes, ghost assets are very real and can have a scary impact on the bottom line.
What is a ghost asset, you ask? Well, it’s a fixed asset in a general ledger that cannot be accounted for because it is physically missing or otherwise rendered unusable. This may not sound like a big deal, but it really is for companies of all sizes, because when they are haunted by ghost assets, they still pay taxes on those assets – something no company wants to do.
Historically, we find it happens often for equipment, property, vehicles and real estate. Just think: if a company is no longer using a large piece of machinery in a certain city or state — but the accounting team doesn’t know that — the company continues to pay property tax and income tax potentially on that piece of equipment. And it then causes incorrect reporting.
The most common scenarios that leads to ghost assets is when the field doesn’t report that an asset is lost, stolen, broken, damaged, replaced or sold without the correct paper trail to accounting. The field doesn’t mean to create these ghosts, but they do, unintentionally, and the costs can be huge.
Think it can’t happen? Think again. A study by Gartner showed approximately 30 percent of organizations don’t know what fixed assets they own, where the fixed assets are, and who is using these assets. But you can scare away all those nasty ghosts if you augment your general ledger with the right fixed asset accounting processes and systems.
Impacts of ghost assets
The same Gartner study found that the average company will have anywhere from 15-30 percent of ghost assets in their inventory. When you take into consideration the value of fixed assets used by utility, oil and gas, transportation, and manufacturing companies, ghost assets can represent a significant chunk of the balance sheet. So, when they are not accounted for properly on the balance sheet, it can have negative ramifications across the business, especially when it comes to income and property taxes. A company can overpay on income and property taxes for assets that aren’t actually owned anymore.
In addition to overpaying taxes, ghost assets can financially impact the business through decreased productivity. An asset that only exists on paper or in the wrong location, and is not available for use or cannot be maintained properly will lead to additional expense from down time and potentially have to be purchased again.
How to scare away ghost assets
These four steps can help companies better manage their ghost assets:
- Create a process that specifically tackles ghost assets. Companies should start with a physical inventory of all large fixed assets to determine what is gone, and then implement a tracking solution through automated processes. Regularly educating the field is a key component in this process.
- There are solutions that can help manage ghost assets and remove the manual process, which is prone to error and tracking problems. The reliance on outdated systems or spreadsheets could be one reason why the problem started.
- Companies should track fixed assets from purchase to retirement on the accounting side of the organization.
- In addition, fixed asset financial systems can automatically run depreciation studies to forecast asset lives and remove assets once they have reached the end of life stage. These systems can also integrate with other financial systems to reduce errors across the organization.
- When tracking tax liability, automated solutions that can act as a data gathering and preparation systems will minimize errors, optimize tax strategies, reduce audit risk and help maintain compliance.
Ghost assets don’t stand a chance when asset data and tracking are brought to light. By eliminating ghost assets, companies can reduce associated tax costs, improve projections, and mitigate risks based on more accurate and complete reporting.