In brief: Physical inventory of fixed assets is a legal obligation under Article 5 of Moroccan Accounting Law 9-88. It involves scope definition, blind counting, accounting file enrichment, and reconciliation to identify and handle discrepancies.
With over 15 years of experience conducting fixed asset inventories for companies across multiple sectors, Upsilon Consulting’s chartered accountants provide authoritative guidance on inventory methodology and accounting adjustments.
Physical Inventory of Fixed Assets
Often associated with the year-end period, fixed asset inventory work constitutes a legal obligation. Indeed, it is an exercise that requires a certain degree of precision and rigor.
Why Conduct a Physical Inventory of Fixed Assets?
Indeed, Article 5 of Accounting Law 9-88 stipulates that:
“The value of the active and passive elements of the company must be subject to an inventory at least once per fiscal year.”
This encompasses all of the company’s assets, in accordance with the accounting rules in force in Morocco. Consequently, the annual physical inventory also covers fixed assets. Thus, depending on the company’s activity and organization, the inventory can prove particularly complex.
Beyond simply meeting a legal obligation, the physical inventory of fixed assets represents an annual opportunity to update and improve internal procedures. It helps optimize accounting and analytical management and even logistical processes.
To achieve this, it is necessary to follow a rigorous methodology for conducting the physical inventory of fixed assets.
How Does a Physical Inventory of Fixed Assets Proceed?
Scope Definition and Framework of the Fixed Asset Physical Inventory Operation
First, the inventory requires preparatory work. Indeed, a document must be prepared that provides:
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First, the context of the inventory;
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Then, the inventory procedures:
Scope
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Schedule
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Labeling method
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…
This document is called: “Inventory Instructions.” It serves as both a mission order and a work plan.
The organizing team must communicate it to all relevant parties and must be able to:
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First, specify the intervention procedures:
Reference date for the work,
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Schedule,
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Meeting frequency
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Second, schedule movement stops for movable assets. Indeed, blocking points and a blocking scale must be planned (total blocking, by site, by building, etc.). This aims to avoid counting the same fixed assets multiple times.
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Third, coordinate with the company to define an operating procedure and a schedule for the counting team’s visits.
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Fourth, introduce the team in charge of the operation as well as the experts for each category of fixed assets.
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Fifth, implement a coding system. This system must allow the entire fixed asset base to be precisely registered.
Counting - Physical Census of Fixed Assets
The objective of this second phase is to establish a comprehensive file of all fixed assets.
In this regard, it is recommended, as Best Practices suggest, to proceed by Blind Count. This involves inventorying fixed assets mechanically without access to:
- On one hand, electronic files,
- On the other hand, asset quantities and other information sources concerning them.
To successfully carry out this phase, the team in charge of the inventory must follow the following approach:
- First, obtain the site plans to be inventoried and establish a location map. In reality, all fixed assets are not necessarily grouped in the same location. Therefore, the precise designation of the locations where the inventory will take place allows the entire operation to gain in precision and completeness.
- Then, determine and identify not only the fixed assets that do not belong to the company. These include, for example, fixed assets belonging to third parties, or under leasing agreements, etc.
- Also, record as much information as possible for each fixed asset and document it clearly.
- Furthermore, report the wear condition of fixed assets to anticipate the accounting adjustments that will be necessary subsequently.
- Finally, label the inventoried fixed assets chronologically and without duplicates.
Enrichment of the Fixed Asset Accounting File
The enrichment of the accounting file consists of adding as much information as possible to the accounting file. Indeed, all available internal data should be collected and added to the accounting file. Example: Often in accounting, a color is not mentioned. However, this information is relevant during reconciliation.
This work must be carried out according to a work program adapted to each category of fixed assets. The accounting file then undergoes horizontal and vertical enrichment.
- Horizontal: Separate an accounting line into as many components as there are individual fixed asset items. Example: For a line “meeting room furniture purchase,” it must be broken down into as many lines as there are identifiable items.
- Vertical: Add information that will facilitate reconciliation (color, brand, identification number, etc.)
Reconciliation of the Accounting File with the Physical Inventory Results
The next phase consists of reconciling the two files. The team will use the pair [Label Number / Fixed Asset Number] to carry out the reconciliation.
However, it is necessary to address discrepancies between the two files before launching the reconciliation.
Additionally, the company must isolate the fixed assets that were not subject to inventory. These must receive specific treatment.
Handling Discrepancies
Handling Gross Discrepancies
The reconciliation phase allows discrepancies to be identified and recorded. Indeed, it consists of comparing the accounting file with the physical inventory file.
This phase involves addressing inventory discrepancies in order to reduce them as much as possible.
Several cases will arise during this phase. The fixed asset may be:
- Existing but absent from the accounting records
- Present in the accounting records but non-existent in the physical inventory
- Acquired free of charge
- Recorded twice
In this regard, it is necessary to establish management rules for handling discrepancies. Furthermore, a materiality threshold should be adopted for better project efficiency.
From there, a committee should be formed consisting of:
- On one hand, the inventory teams.
- Key management personnel authorized to make decisions.
The steering committee will be responsible for:
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Providing valid explanations to update the reconciliation;
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Making decisions based on management rules, including:
Recounting when necessary;
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Making write-off decisions;
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..
This approach will lead to a significant reduction in gross discrepancies.
Handling Net Discrepancies
The net discrepancies, derived from the previous step, will in turn be subject to reprocessing. However, this time the treatment consists of translating the discrepancies identified by the inventory into accounting entries. In this regard, two types of entries must be distinguished:
Entries Related to Inventory Discrepancies
Entries recording the disposal of fixed assets not found during the physical inventory. They must take into account all fields required by the accounting entry system.
Entries Related to Fixed Asset Depreciation
These primarily consist of entries for:
- First, provisioning and exceptional depreciation of fixed assets. A free revaluation of fixed assets may also be considered in certain cases. These entries mainly concern fixed assets whose wear exceeds that reflected by the depreciation schedule.
- Then, updating the provision for depreciation of fixed assets.
If you have a fixed asset physical inventory project, Contact Upsilon Consulting for a personalized quote.
Frequently Asked Questions
Is a physical inventory of fixed assets mandatory in Morocco?
Yes, Article 5 of Accounting Law 9-88 requires that all assets and liabilities of a company, including fixed assets, be subject to an inventory at least once per fiscal year. This is a legal obligation for all Moroccan businesses.
What is the blind count method in fixed asset inventory?
The blind count method involves physically inventorying fixed assets without access to electronic files, asset quantities, or other information sources. This approach ensures an independent and unbiased count that can then be reconciled against accounting records to identify discrepancies.
How should discrepancies between accounting records and physical inventory be handled?
Discrepancies are first analyzed by a steering committee that provides explanations and makes decisions based on predefined management rules. Gross discrepancies are reduced through recounts and write-off decisions, while net discrepancies are translated into accounting entries for asset disposals and depreciation adjustments.
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