Streamline Your Operations with Cutting-Edge Fixed Asset Management

Fixed Asset Management

In Indian manufacturing, fixed assets such as machinery, vehicles, and buildings are the backbone of efficient production processes. Effective Fixed Asset Management (FAM) is essential to improving the use of these resources, ensuring compliance with Indian regulations, controlling costs, and maintaining profitability. Fixed assets require ongoing management through their lifecycle, from acquisition and usage to maintenance and eventual disposal.

This article offers an extensive guide to fixed asset management for Indian manufacturing companies, addressing the importance of FAM, depreciation methods, asset management software, and key strategies for best performance.

Types of Fixed Assets

Indian manufacturers typically own and manage a diverse range of fixed assets that are critical for their operations. Common types of fixed assets include:

1. Machinery and Equipment: Examples: Assembly lines, CNC machines, and robotic systems. These are essential for production processes and must be maintained to avoid downtime.
2. Buildings and Infrastructure: Examples: Factories, warehouses, and office buildings. These provide the physical space needed for manufacturing operations.
3. Vehicles: Examples: Trucks, forklifts, and delivery vehicles. Key for internal and external logistics, including transportation of goods and raw materials.
4. IT Infrastructure: Examples: Computers, networking hardware, production control systems, and servers. IT systems are critical for monitoring operations, automation, and inventory control.
5. Tools and Fixtures: Examples: Hand tools, dies, Molds, and specialized jigs. These assets play a vital role in daily manufacturing and require close tracking for best use.

Importance of Fixed Asset Management in Indian Manufacturing

1. Cost Control: Proper management of assets ensures that resources are used efficiently, avoiding over-purchasing or under-utilization of machinery.
2. Operational Efficiency: Regular maintenance and best use of assets reduce the risk of unplanned breakdowns, thus keeping high productivity levels.
3. Regulatory Compliance: Indian companies must follow various regulations, including the Income Tax Act and Ind-AS, for financial reporting and tax compliance. FAM ensures correct reporting and adherence to legal standards.
4. Depreciation Management: Depreciation reflects the wear and tear of assets over time. Accurately tracking depreciation helps in proper tax calculations and financial reporting.
5. Risk Mitigation: Managing assets effectively helps mitigate risks related to asset failure, which can lead to production delays, safety hazards, or regulatory penalties.

Depreciation Methods for Indian Manufacturing Companies

Depreciation allows companies to distribute the cost of an asset over its useful life, providing a clearer picture of an asset’s fiscal impact on the company. Indian companies typically follow depreciation rules laid out in the Income Tax Act and Ind-AS. Here are common depreciation methods:

1. Straight-Line Depreciation (SLM)

The Straight-Line Method (SLM) is the simplest form of depreciation, where the asset depreciates evenly over its useful life.

Formula:

Annual?Depreciation?Expense=Cost?of?Asset?Salvage?Value Useful?Life?of?Asset\text {Annual Depreciation Expense} = \frac {\text {Cost of Asset} - \text {Salvage Value}} {\text {Useful Life of Asset}} Annual?Depreciation?Expense=Useful?Life?of?AssetCost?of?Asset?Salvage?Value

Example: A CNC machine is bought for ?25,00,000 with a salvage value of ?2,00,000 and a useful life of 10 years.

Annual?Depreciation=25,00,000?2,00,00010=?2,30,000\text {Annual Depreciation} = \frac {25,00,000 - 2,00,000}{10} = ?2,30,000Annual?Depreciation=1025,00,000?2,00,000=?2,30,000

Thus, the machine depreciates by ?2,30,000 each year for 10 years.

2. Written Down Value (WDV) or Reducing Balance Method

This method, commonly used in India for tax purposes, accelerates depreciation, applying a higher rate in the asset's early years.

Formula:

Depreciation?Expense?for?the?Year=Depreciation?Rate×Book?Value?at?the?beginning?of?the?Year\text {Depreciation Expense for the Year} = \text {Depreciation Rate} \times \text {Book Value at the Beginning of the Year} Depreciation?Expense?for?the?Year=Depreciation?Rate×Book?Value?at?the?Beginning?of?the?Year

Example: A vehicle is bought for ?10,00,000 with a depreciation rate of 20%.

• Year 1:

10,00,000×20%=?2,00,00010,00,000 \times 20\% = ?2,00,00010,00,000×20%=?2,00,000

• Year 2:

8,00,000×20%=?1,60,0008,00,000 \times 20\% = ?1,60,0008,00,000×20%=?1,60,000

3. Units of Production Depreciation

This method is suitable for assets like machinery that produce goods, as it ties depreciation to asset usage rather than time.

Formula:

Depreciation?Expense=(Cost?of?Asset?Salvage?ValueTotal?Estimated?Units?of?Production)×Units?Produced?in?the?Period\text{Depreciation Expense} = \left( \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Total Estimated Units of Production}} \right) \times \text{Units Produced in the Period}Depreciation?Expense=(Total?Estimated?Units?of?ProductionCost?of?Asset?Salvage?Value)×Units?Produced?in?the?Period

Example: A machine costs ?50,00,000 with an estimated production capacity of 1,00,000 units. In the first year, it produces 20,000 units.

Depreciation?Expense= (50,00,000?01,00,000) ×20,000=?10,00,000\text {Depreciation Expense} = \left (\frac {50,00,000 - 0} {1,00,000} \right) \times 20,000 = ?10,00,000Depreciation?Expense= (1,00,00050,00,000?0) ×20,000=?10,00,000

4. Sum-of-the-Years-Digits (SYD) Depreciation

This method accelerates depreciation, like the WDV method, but does so gradually over time.

Formula:

Depreciation?Expense=Remaining?Life?of?AssetSum?of?the?Years?Digits×(Cost?of?Asset?Salvage?Value)\text{Depreciation Expense} = \frac{\text{Remaining Life of Asset}}{\text{Sum of the Years Digits}} \times (\text{Cost of Asset} - \text{Salvage Value})Depreciation?Expense=Sum?of?the?Years?DigitsRemaining?Life?of?Asset×(Cost?of?Asset?Salvage?Value)

Example: A machine costs ?30,00,000, has a useful life of 5 years, and a salvage value of ?2,00,000. The sum of the year's digits is 5+4+3+2+1=155 + 4 + 3 + 2 + 1 = 155+4+3+2+1=15.

• Year 1:

515× (30,00,000?2,00,000) =?9,33,333\frac {5}{15} \times (30,00,000 - 2,00,000) = ?9,33,333155× (30,00,000?2,00,000) =?9,33,333

• Year 2:

415×28,00,000=?7,46,666\frac {4}{15} \times 28,00,000 = ?7,46,666154×28,00,000=?7,46,666

Asset Management Software by Lighthouse Info Systems

Lighthouse Info Systems provides specialized ERP solutions that include robust fixed asset management modules for Indian manufacturing companies. Their software offers a range of functionalities tailored to the needs of the industry, improving asset tracking, depreciation calculations, and maintenance management.

Key Features of Lighthouse ERP Asset Management:

1. Asset Tracking and Tagging RFID, barcode, and QR code integration allow for real-time asset tracking across multiple locations.
2. Automated Depreciation Calculations The system automates depreciation calculations based on methods such as Straight-Line and WDV, ensuring compliance with Ind-AS and Income Tax Act guidelines.
3. Preventive and Predictive Maintenance The software integrates a CMMS to automate maintenance scheduling, reducing downtime and extending asset life.
4. Asset Lifecycle Management From acquisition to disposal, the system tracks the entire asset lifecycle, ensuring compliance with environmental regulations, such as the E-Waste Management Rules, 2016.
5. Multi-Location Management The software combines asset data across various locations, helping companies manage assets at multiple branches or factories.

Key Strategies for Effective Fixed Asset Management

1. Centralized Asset Management Systems Implementing ERP systems like Lighthouse ERP centralizes asset tracking, maintenance, and depreciation management, offering a holistic view of asset performance.
2. Preventive and Predictive Maintenance Scheduling regular maintenance through CMMS ensures that machinery and equipment run efficiently and reduces the risk of costly unplanned repairs.
3. Asset Audits Regular audits ensure that the actual physical presence of assets matches the financial records. This reduces the likelihood of fraud, theft, or asset misplacement.
4. Asset Disposal Planning Timely disposal of underperforming or obsolete assets ensures regulatory compliance and maximizes salvage value. This is especially important in sectors with high technological obsolescence.
5. Employee Training and Engagement Ensuring that staff is trained in using the asset management software and adhering to asset management practices can prolong asset life and reduce errors.

Lighthouse Info Systems offers a comprehensive ERP solution tailored for managing fixed assets in Indian manufacturing companies. Below is an in-depth explanation of each feature,

1. Asset Classification and Tracking

• Asset Master: Purpose: This form is used to manage assets that are already present at the beginning of the fiscal year. Example: If a company has machinery bought in the previous year, details of these machines (such as buy price, location, and installation date) are entered into the Asset Master form. For new machinery bought during the current year, a different form, “Asset Creation from Purchase Bill,” is used to record the details. Details: This includes fields like Asset Name, Purchase Date, Asset Category, Cost, and Location.
• Asset Group Master: Purpose: Categorizes assets into separate groups to simplify management and reporting. Example: An auto parts manufacturer might group assets into categories like "Production Machinery," "Office Equipment," and "Warehouse Tools." This categorization helps in generating reports that aggregate data for each group, helping better financial analysis and decision-making. Details: Includes fields like Group Code, Description, and Associated Accounts.
• Asset Class Master: Purpose: Provides another level of classification for assets, enabling combined reporting. Example: Within the "Production Machinery" group, assets can be further classified into “Lathe Machines,” “Milling Machines,” and “Drilling Machines.” This finer classification helps in detailed reporting and tracking. Details: Includes fields like Class Code, Description, and Standard Asset Life.
• Asset Location Master: Purpose: Tracks the physical location of assets within the company. Example: A manufacturing company might have assets located at different plants or warehouses. For instance, a CNC machine might be located at Plant A, while a warehouse forklift is at Warehouse B. The Asset Location Master helps in tracking these locations. Details: Includes fields like Location Code, Location Name, and Address.

2. Depreciation Management

• Asset Depreciation Rate Master: Purpose: Manages the rates of depreciation for different asset groups. Example: A company might set a depreciation rate of 10% per year for “Office Furniture” and 20% for “Production Machinery.” This rate is used to calculate the annual depreciation expense for each asset group. Details: Includes fields like Asset Group Code, From Date, Depreciation Basis, and Depreciation Rate.
• Asset Depreciation Posting: Purpose: Records depreciation expenses at the end of the accounting period. Example: At the end of the fiscal year, the company calculates and posts depreciation for its assets. For example, if a machine costing ?1,00,000 with a 20% annual depreciation rate has been used for one year, the depreciation expense posted would be ?20,000. Details: Includes fields like Asset ID, Depreciation Amount, and Expense Account.
• Asset Depreciation Calculation (Inc tax): Purpose: Calculates depreciation based on income tax regulations. Example: For tax purposes, the company needs to calculate depreciation using the Income Tax Act’s prescribed methods. For instance, if the tax law requires using the Written Down Value (WDV) method with a 15% depreciation rate, this form will help compute the depreciation accordingly. Details: Includes fields like Asset ID, Depreciation Method, Calculation Method (e.g., WDV, Straight Line), and Tax Rate.

3. Asset Transactions and Maintenance

• Asset Transaction Allocation: Purpose: Allocates financial transactions to specific assets. Example: If a company incurs repair costs of ?10,000 for a piece of machinery, this form allows allocating that cost to the specific asset. This helps in the correct tracking of all costs associated with that asset. Details: Includes fields like Transaction ID, Asset ID, Amount, and Description.
• Asset Status: Purpose: Shows the operational status of assets. Example: An asset can have statuses like “Operational,” “Under Repair,” or “Decommissioned.” If a piece of machinery is currently being repaired, its status would be marked as “Under Repair” in the system. Details: Includes fields like Status Code, Description, and Effective Date.
• Asset Verification Entry: Purpose: Used by auditors to verify asset records. Example: During an audit, the auditor checks the physical presence of assets against records. For instance, if the records show that a company owns a certain type of machine, the auditor verifies its existence and condition. Details: Includes fields like Asset ID, Verification Date, Auditor’s Comments, and Verification Status.

4. Asset Disposal and Allocation

• Asset Allocation Against CWIP Purchase Bill: Purpose: Manages costs associated with assets under construction (Capital Work in Progress - CWIP). Example: If a company is building a new production line, costs like construction and installation are tracked as CWIP until the line is operational. Once completed, these costs are capitalized as a new fixed asset. Details: Includes fields like CWIP ID, Cost Details, and Allocation Date.
• Asset Depreciation Posting against Sold Asset: Purpose: Manages depreciation and accounting entries for assets sold. Example: If a company sells a piece of machinery that had accumulated depreciation of ?50,000, the system records this depreciation, adjusts the asset's book value, and accounts for any gain or loss on the sale. If the sale price is ?80,000 and the book value was ?60,000, the gain would be ?20,000. Details: Includes fields like Asset ID, Sale Price, Accumulated Depreciation, and Gain/Loss on Sale.

5. Reporting and Dashboards

• Asset Master Engine: Purpose: Combines asset data into comprehensive reports. Example: Instead of manually compiling asset data from various sources, the Asset Master Engine generates a combined report showing all assets, their values, locations, and statuses. This report helps in strategic planning and decision-making. Details: Includes customizable report formats, color-coded visualizations, and the ability to filter data by different criteria.
• Dashboards: Asset Depreciation Related Dashboard: Purpose: Offers visual insights into asset depreciation. Example: This dashboard might show charts and graphs depicting the total depreciation expense, depreciation by asset group, and being still useful life of assets. Details: Includes visualizations like bar charts, pie charts, and trend lines for depreciation data. Asset Account Reconciliation Dashboard: Purpose: Aids in reconciling asset accounts. Example: This dashboard helps ensure that the asset ledger matches the physical inventory and other financial records. It highlights discrepancies and provides tools for resolving them. Details: Includes features for comparing ledger balances, finding discrepancies, and generating reconciliation reports.

Key Forms and Their Functions

• Asset Class Master: Defines and manages asset categories for combined reporting. For instance, a company might classify assets into “Heavy Machinery,” “Office Equipment,” and “Vehicles” for detailed financial analysis.
• Asset Master: Keeps records of all fixed assets, including details like purchase cost, installation date, and location. For example, records for a new CNC machine would include its cost, installation date, and the department in which it is located.
• Asset Group Master: Groups assets into categories for better management. For example, “Production Equipment” could include several types of machines used in manufacturing.
• Asset Location Master: Tracks where assets are physically located. For instance, an asset might be located at “Warehouse 1” or “Factory A.”
• Asset Depreciation Rate Master: Sets and updates depreciation rates for asset groups. For example, “Office Furniture” might have a 10% annual depreciation rate.
• Flag Link in Asset Master: Allows users without master rights to update asset details. This feature ensures that asset records can be managed even by users with limited access.
• Asset Balance Master: Updates opening balances for assets. For example, it records the initial gross amount, accumulated depreciation, and residual value of assets at the beginning of the fiscal year.
• Asset Residual Master: Manages residual values of assets. For instance, if an asset’s estimated residual value is ?10,000, this value is recorded here.
• Asset Transaction Allocation: Allocates financial transactions to assets. For example, repair costs for a specific machine are allocated to that machine’s asset record.
• Asset Depreciation Posting: Records depreciation expenses for the accounting period. For example, a ?1,00,000 machine with 20% annual depreciation would have a ?20,000 depreciation expense posted.
• Asset Status: Shows the status of an asset. For instance, an asset might be marked as “Operational” if it is currently in use or “Under Repair” if it is not.
• Asset Creation from Purchase Bill: Creates new fixed assets directly from purchase bills. For instance, details from an invoice for new office furniture are used to create asset records.
• Asset Creation from CWIP Transaction: Manages the transition of assets from Capital Work in Progress to fixed assets. For instance, once construction of a new building is completed, the costs are capitalized as a fixed asset.
• Asset Depreciation Posting (Provisional): Records provisional depreciation entries for assets. For instance, provisional depreciation might be recorded if assets are bought mid-year.
• Asset Depreciation Calculation (Inc tax): Calculates depreciation for tax purposes. For example, it applies tax regulations to compute depreciation for reporting in tax filings.
• Asset Allocation - Revenue to Capital: Allocates costs between revenue and capital accounts. For instance, costs related to upgrading machinery might be allocated to the capital account.
• Asset Status Review: Reviews and updates asset statuses. For example, reviewing and confirming that an asset marked as “Under Repair” is indeed being repaired.
• Asset Status Approval: Approves updated asset statuses. For instance, approving a change from “Operational” to “Decommissioned” after an asset is no longer in use.
• Asset Allocation Against CWIP Purchase Bill: Allocates costs from CWIP to capital assets. For example, once a construction project is completed, its costs are allocated to the capital asset account.
• Asset Depreciation Posting against Sold Asset: Posts depreciation for assets that have been sold. For example, recording the depreciation of a sold vehicle and adjusting the asset’s book value.
• Asset Verification Entry: Used for verifying assets during audits. For instance, an auditor verifies that a recorded machine is present and in working condition.
• Asset Allocation to Capitalize Landed Cost of Material: Allocates the landed costs of materials to stock items. For example, costs associated with importing raw materials are capitalized as part of the inventory cost.

Case Study: Effective Asset Management in an Indian Manufacturing Company

Company Overview: ABC Manufacturing is a mid-sized automotive components manufacturer based in India. The company faced frequent breakdowns, inconsistent depreciation reporting, and unplanned machinery downtimes.

Challenges:

• Inconsistent depreciation calculations, leading to inaccurate financial reporting.
• Lack of a preventive maintenance system, resulting in machine failures and downtime.
• Asset misplacement due to poor tracking practices.

Solution: ABC Manufacturing implemented Lighthouse ERP to automate asset tracking, depreciation, and maintenance. They used WDV depreciation to align with tax rules and integrated a preventive maintenance schedule to reduce equipment downtime.

Results:

• Maintenance costs were reduced by 20%, as machines were serviced based on usage data.
• Equipment downtime was reduced by 25%, improving production efficiency.
• Financial reporting improved, leading to better cash flow management.

For Indian manufacturing companies, fixed asset management is essential for keeping operational efficiency, ensuring compliance with local regulations, and controlling costs. By selecting the right depreciation method and implementing robust asset management software like Lighthouse ERP, businesses can perfect their asset performance, extend the lifespan of their machinery, and improve profitability.