Accounting vs Insurance
Most of you know by now that ACS Pro offers fixed asset inventory services. However, you may not be sure what the benefit of those services may be for your entity. While the advantages and utility of having a fixed asset inventory completed by ACS Pro vary depending on the needs of each individual client, let’s talk about two of the main purposes why an inventory may be beneficial: Accounting and Insurance.
In simplest terms, an inventory is beneficial for accounting purposes because it provides the reporting basis for an audit. Whether it’s dictated by GASB 34 or other regulations, you want to have your public entity compliant by having an accounting report ready for review by your entity’s auditors in order to pass the audit. The accounting report presents a summary of capitalized fixed assets, their acquisition costs and dates, as well as their depreciable values. Accounting answers the question “How much did I pay for it, and what is its value over time?”
On the other hand, your need for an inventory may not be dictated by accounting factors at all, but rather by a need to have updated insurance values for your entity. Perhaps the numbers behind the Statement of Values from your insurance agent are outdated and no longer reflect the assets currently present. An inventory will update those numbers for you and your insurance provider, ensuring that your entity is adequately insured. Insurance answers the question “How much will it cost to replace it?”
Difference in values:
For accounting purposes, Acquisition Cost, per Accounting Tools, refers to the all-in cost to purchase an asset. These costs include shipping, sales taxes, and customs fees, as well as the costs of site preparation, installation, and testing. When acquiring property, acquisition costs can include surveying, closing fees, and paying off liens. This amount is considered to be the book value of an asset.
For insurance purposes, Cost of Reproduction New, as defined by Law Insider, means the estimated amount required to reproduce the entire property at one time, in like kind and materials, in accordance with current market prices for materials, labor, manufactured equipment, contractor’s overhead and profit, and fees, but without provision for overtime, bonuses for labor, and premiums for materials or equipment. Cost of Reproduction New, as defined, is synonymous with the insurance industry term “Replacement Cost.”
For accounting, the threshold has usually been defined at some point in the past and is normally listed in the Comprehensive Annual Financial Report (CAFR). Otherwise, your auditor is sure to know what your entity’s accounting threshold is. In layman’s terms, the accounting threshold can be equated to the materiality of the asset in question. In other words, if an asset’s acquisition cost is less than the accounting threshold, it is not valuable enough to be accounted for. Over time, the accounting threshold has been getting increasingly higher.
For insurance, the threshold may be defined internally or alongside your insurance provider. It can be the same or lower than the accounting threshold. Rarely is it higher. The concept of materiality can be used here as well, but in terms of the replacement cost needing to be considered valuable enough to be reported. The higher the overall value of insurable assets, the higher the coverage, but also the higher the insurance premium. You may want to include all your computers, but perhaps not all the thumb drives, extra keyboards and mice laying around!
Our field team will take into account the purpose or purposes of the job at hand. Whether it’s for accounting, for insurance, or for both. So, when the team goes into a classroom and the teacher says “Oh, that old piano is worthless!”, the team knows that a new (replacement) piano is relatively expensive and likely to be above the insurance threshold. Similarly, when the old piano was purchased, it’s possible the school paid good money for it, so it could be above the accounting threshold as well.
It’s good to know the differences between accounting and insurance when it refers to fixed assets. However, rest assured ACS Pro can help you with either one of those needs.