When a company sells a fixed asset, such as a piece of equipment, the accounting records need to properly track the sale, otherwise known as disposal, of that asset. These transactions are often crucial for the overall health of the business, especially if a company is attempting to tee itself up for a merger or acquisition. 

 

Once that transaction is complete, proper recording of what occurred is critical. All traces of that asset need to be removed from the balance sheet, in a process known as derecognition.

 

An asset disposal, especially if the asset has been held by the company over a long period of time, most likely will require the recording of a gain or loss on the transaction in the reporting period when the disposal occurs. The difference between the recorded cost of the fixed asset and the amount of accumulated depreciation is recognized as either a gain or a loss. This gain or loss is calculated as the net disposal proceeds, minus the asset’s carrying value. 

 

Companies naturally want to maintain a clean balance sheet. As such, the proper disposal of a fixed asset is essential. The recorded balances of fixed assets and accumulated depreciation need to properly reflect the assets actually owned by the business.

 

The Consequences of Improper Accounting of Asset Disposals

A company might improperly account for the sale of a fixed asset for several reasons:

  • The valuation of the asset, perhaps performed by a third-party company, was incorrect
  • Documentation for the original sale was missing
  • Employee oversight
  • Fraud

Whatever the case, there are consequences, not only for that company but also externally. If the asset is highly sought-after in its industry, then the improper accounting for that asset can significantly alter the price or valuation of that asset for other companies with an interest in similar assets in the future. Further, news of an improper recording of the sale of an asset can tarnish the relationship of that company with the buyer, or even tarnish the reputation of the industry as a whole.

 

How Document Sharing Is Critical in Asset Sale Transactions

Businesses need a tool to support transactions involving asset sales. A virtual data room (VDR) is an enterprise-grade document hosting and security solution that allows all parties involved in a transaction to upload, share, review and comment on key documents. 

 

A VDR supports the needs of buyers and sellers, along with their external accountants, attorneys and advisors, by having all of the necessary documents available in one secure, accessible location. 

 

The more complex the asset, the more complex the documentation. Sales records, accounting ledgers, valuations and other documents necessary for the decision to transfer assets are imperative for all parties to review. 

 

For efficiency and added data protection and privacy, companies can select and prep the documents first before sharing them to a VDR. All parties need to ensure that:

 

The Most Up to Date or Recent Version of a Document Is Uploaded

These could be the entries from the accounting ledger, or even information related to the life cycle of the asset. Information about the previous owner of the asset might be important for the current buyer, and if the previous owner went out of business or merged with a new company, this documentation needs to be supplied.

 

Mandatory Information Is Included in the Document

Companies need to check documents, legal or otherwise, to ensure that they are proper and binding. This often means that the correct signatures and dates are on them. Documents missing this critical information might be invalidated, slowing down the transaction process.

 

The Documents Are in an Accessible Format

As several individuals will be accessing the documents, it’s wise to ensure that the documents are in widely used file formats, such as Word or Acrobat. Perform conversions if they are not.

 

Confidential Information has Been Removed 

Before uploading documents, make sure that sensitive information and account credentials, such as those on bank statements, are removed or properly redacted.

 

The Document Is Truly Necessary for the Transaction to Take Place

Evaluate the need to upload any and all documents related to that asset and its sale. Of course, for large and complex assets, the associated documentation can be vast. However, too many unnecessary documents available for review by the buyer and its outside consultants can slow down the process or worse, add confusion to their evaluation of the asset.

 

Any issues with documentation can mean more than simply delays: There could be security issues as well. 

 

A VDR can Transform Your Asset Sale Process and Records

Once the documents have been assembled, upload them to the VDR. A VDR, such as Caplinked, easily hosts thousands of pages of documents and can be accessed by dozens or even hundreds of people involved in the transaction.

 

Digital rights management capabilities provide encryption and complete control over how a document is used, edited, copied or even printed by each individual who has been granted authorization to the VDR. Caplinked’s FileProtect feature lets companies share documents while retaining the ability to deny access to anything, even after it’s downloaded. 

 

In today’s anytime anywhere environment, documents will most likely be accessed via different devices and via multiple cloud platforms. Caplinked is aware of this nature of work and collaboration, even for sensitive environments, and provides cloud integrations with such platforms as Salesforce, Dropbox, Box, Google Drive and OneDrive.

 

Ready to see how Caplinked can streamline your asset sale process? Start your free trial today.

 

Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.

Sources:

https://www.accountingtools.com/articles/how-do-i-record-the-disposal-of-assets.html 

https://accounting-simplified.com/financial/fixed-assets/accounting-for-disposals/

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