Closing the GAAP

Property tax professionals and fixed asset accountants look at the same assets in different ways. Both parties start out looking at the historic, or acquisition, cost of an asset. But the similarity ends there. Fixed asset accountants are interested in book depreciation of an asset over time. Once an asset is acquired, their goal is to accurately depict its net book value, following the holy writ of Generally Accepted Accounting Principles (GAAP). In the pursuit of this goal, they often take an inventory of assets to reasonably verify that the net book value basis is appropriate. Assets with a net book value of zero are of little concern because they don’t affect the company financials. Property tax professionals, on the other hand, are NOT interested in the net book value but are instead interested in the historic cost of an asset, since this is the basis for reporting personal property taxes. Taxing jurisdictions determine the value of an asset by applying valuation factors, based on the acquisition year, to the asset’s historic cost. In many jurisdictions, the valuation floor is 30 – 40% of an asset’s historic cost. This being the case, the value of an asset will never reach zero thus creating a tax liability for years to come. It is, therefore, the goal of the property tax professional to write off “excess” or “ghost” costs on items no longer physically present. Without cooperation, the differing goals of these departments can lead to undesirable results. For example, a company in California had a policy to restrict physical inventories to assets with net book values over $1,000. This overlooked many assets, including several with historical costs in excess of $1 million. The company soon realized that they were paying taxes on dozens of “ghost” assets that were never physically inventoried by the fixed asset department. The tax department had to perform its own fixed asset study to support the non-reporting of all ghost assets under the $1,000 threshold set by the fixed asset accounting department.