Identification of surplus assets, and the subsequent redeployment or sale, can have a significant tax base impact for a corporation. Recent changes in accounting standards and laws were brought about as a result of a failure of corporate managements to exercise their fiduciary responsibilities involving
Surplus Asset Identification and FIN 47
the proper recording of asset values.
The enactment of Sarbanes-Oxley (“SOX”) legislation requires corporations to properly record assets and enforce balance sheet integrity. SOX implementation has tax implications for a corporation. Proper recording of assets, both in-use and surplus, is necessary to comply with the intent and spirit of these new regulatory requirements and restore investor confidence. Surplus asset identification is the key to an effective reuse or asset sale process.
Redeployment of reusable assets precludes the unnecessary expenditure of operating cash. Without this initial step in the redeployment process, reuse of assets becomes an “ad hoc” occurrence. The sale of surplus assets and their removal from inventory of taxable asset base reduces the tax burden on a corporation. The sale of surplus also serves to mitigate facility retirement costs (that now must be booked at the time of acquisition rather than at some undetermined time in the future!).
The Financial Accounting Standards Board Statement 143, Interpretation 47 (FIN 47), states that corporations must record and book the estimated costs of future facility retirement at the time of acquisition. Because of this requirement, it is in the best interest of corporations to recover the value of the surplus equipment as soon as possible. In doing so, the value of the asset will be optimized and an offset to the liability for facility retirement and cleanup that has already been booked can be realized.
Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 1, 2007
© The Investment Recovery Association