IPCC Paper 1: Accounting Chapter 1 Unit 2 Fixed Assets - AS 10 Related ASI is 2
CA. Yagnesh Desai
AS 10 : Accounting for Fixed Assets
Applicability
2 AS – 6 Depreciation
This standards was introduced in 1985 It is applicable to corporates as well all non corporate entities.
This standard is inextricably connected
with Another standard ? Guess which ?
Definitions
49.(a) An asset is a resource controlled by the enterprise as a result of past events
from which future economic benefits are expected to flow to the enterprise.
These assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles, furniture and
fittings, computers etc
Definitions
4
• Asset held with the intention of being used for the purpose of producing or providing goods or services and
• Is not held for sale in the normal course of business.
Fixed asset
• Price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm’s length who are fully informed and are not under any compulsion to transact
Fair Market
Value
• Of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or Financial statements. When this amount is shown net of accumulated depreciation, it is termed as net book value.
Gross
Book
Value
Scoped Out – Not applicable to
Forests, Plantations and similar regenerative natural resources
• Mineral rights, Expenditure on the Exploration for and Extraction of Minerals, Oil, Natural Gas and similar non-regenerative resources
Wasting Assets including
Expenditure on Real Estate Development; and Livestock
Standard Does Not Deal With
6
1
• The allocation of the depreciable amount of fixed assets to future periods – it is dealt with by AS 6
2
• The treatment of government grants and subsidies, ( As 12) and
3
• Assets under leasing rights ( AS 19)Stand-by Equipment & Servicing Equipment
They are usually capitalised
Machinery Spare Parts
8
Expensed Out
Carried as Inventory &
expensed out as consumed
Capitalised
Major
Major Spares and Standby equipment are also capitalised.
Exclusive Parts
Spares which can be exclusively used only in connection with particular equipment are capitalised
Elements of Cost
Purchase Price, Import Duty, Non–refundable Taxes - net off Discount & Rebates
• Employee Cost
• Cost of site preparation
• Initial Delivery & Handling
• Installation & Assembly Cost
• Cost of testing
• Professional fees
Directly Attributable Costs
Important
10
These costs are to be capitalised
only up to a certain point
Costs Never Capitalised
Administration and
Other General Overheads
Unless they are specifically attributable to construction or part of the cost of
Fixed Assets
Capitalization
12
When to Stop Capitalizing?
When to Start
Depreciating Assets?
Working Condition
• Stop Capitalisation
• Start Depreciating
When the asset is in working condition for its intended use.
Delay in Commencement of Actual Production
14
Here is a situation:
• When the project is ready for commercial production, but commencement of actual production gets delayed
Expenditure incurred during this phase are Either
• Charged to Profit & Loss Account or
• Deferred over a period of 3-5 years after the commencement of Commercial Production
What about Self Constructed Assets
?
• Like Direct Cost of Construction and Directly attributable cost of construction and can specifically allocated to the asset.
Same principle as applicable to
Assets purchased or acquired……
• Care should be exercised to eliminate Internal Profit
What about Internal Profits
Initial Recognition of Assets is Measured at Cost.
16
• Because normally assets are acquired by cash or in exchange of monetary assets.
Why?
• But what if the assets is acquired by way on exchange of Non monetary
assets or combination of non monetary assets and monetary assets
Exchanged Assets?
Acquisition for Non Monetary Assets
In such cases initial measurement is done at Fair market value of consideration given, means fair value of assets given up
Or the fair Market Value of the asset acquired , if it is more clearly evident or in other words more easily determinable
For example, a software company developed a special software for its vendors for computers.
Acquisition for Non Monetary Assets
18
Since this programme was tailor made and was made for the first time, it is not sure of its Fair Market Value. (FMV) It has acquired computers in exchange of the software programme it
developed.
In this case the FMV of the computers being more evident or so to say more reliably
determined, the computers (& the revenue from software) will be recognised at the FMV of
computers.
Acquisition for Non Monetary
Assets - Assets of similar nature
In such cases the assets acquired
are recorded at the Net Book Value
of the assets given up plus some
adjustments for cash given
/received.
Acquisition of Assets in exchange of Shares or other Securities
20
In Such cases the assets acquired is recorded at
FMV of the assets acquired or
FMV of the Shares or Securities
Whichever is more clearly evident
When several assets are bought for lump sum consideration ?
Where several assets are
purchased for a consolidated price,
the consideration is apportioned to
the various assets on a fair basis as
determined by competent valuers
Measurement After Recognition
22
Cost Model
Cost
Accumulated
Depreciation Any Accumulated
Impairment
Revaluation Model
Revalued Amount
Accumulated
Depreciation Any Subsequent
Accumulated Impairment
Model selected should be
applied to the entire category of Assets
How Revalued Amount is determined?
Either by an appraisal by Competent Valuer or
Indexation or
Reference to Current Price
How Revaluation is affected ?
24
Revaluation
Restate Gross Book Value &
Accumulated Depreciation Proportionately
so that Net Book Value equals Its revalued amount
By restating the net book value by adding therein the
net increase on
account of revaluation.
Revaluation Example
An asset’s Gross Book Value is …… Rs. 1,00,000 Accumulated Deprecation is …………Rs. 25,000 Net Book Value ……… .Rs. 75,000 The asset is now revalued at …………Rs 1,50,000
The two alternate methods are illustrated in next two slides.
Revaluation Solution - Alternate 1
26
By Proportionately restating , Gross Value , Accumulated Depreciation so as to give the Increased Net Value
Description
Before Valuation After
Valuation Gross Block 100,000 200,000 Accumulated
Depreciation 25,000 50,000 Net Block 75,000 150,000
Revaluation Example - Alternate 2
By Restating the Net Book Value to the revised Value , by adding there to the net increase in the Net Book Value.
Description
Before Valuation After
Valuation Gross Block 100,000 1,50,000 Accumulated
Depreciation 25,000
Revaluation - Increase in Net Book Value
28
Earlier Decrease in
Revaluation Reserve Revaluation Reserve
Increase
Yes
No
Profit Or Loss Assets Accounts Dr.
To Profit or Loss Account Cr Assets Accounts Dr.
To Revaluation Reserve Cr
Decrease arising on Revaluation
Earlier Increase in Revaluation
Reserve
Profit or Loss Accounts
Decrease
Yes
No
Adjust against Revaluation
Reserve
Dr Profit Or Loss Accounts
Cr Assets Account
Dr. Revaluation Reserve A/c
Cr. Assets
Revaluation Model
30
To be applied to entire class – No Cherry Pick Model – On Asset by Assets Basis.
If all assets in a category can not be revalued at a time , enterprise should revalue them is a phased manner or systematic manner
Different basis Can be for different category of assets like land, Building, Equipment,
Computer etc.
Revaluation Model
As a result of revaluation , the net Book Value should not exceed Recoverable amount.
What is recoverable Amount?
In which Standard reference to Recoverable amount is made?
What is Recoverable Amount ?
32
It is referred to in AS 28 – Impairment of Assets
Recoverable amount is the higher of an asset’s net selling price and its value in use.
Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an
asset and from its disposal at the end of its useful life.
Assets Retired from Active Use
Items of fixed assets that have been :
• Retired from active use and
• Are held for disposal
Are stated at the lower of their net book value and net realisable value.
Assets Retired from Active Use
34
Such Items of Fixed Assets are shown separately in the financial statements.
Any expected loss is recognised
immediately in he profit and loss statement.
Expected gain , if any , are not recognised.
When an Asset is disposed off.
An Item of Fixed Assets is eliminated from the financial statements on disposal
Accounting treatment of gain or loss on
disposal depends on how an item assets is accounted for?
Cost ? Or Revaluation Model !
Gain or Loss on Disposal
Cost
• Gains or losses are generally
recognised in Profit & Loss Account
Revaluation
• Profit is charged to Profit and Loss Account
• Loss is Generally Charged to Profit &
Loss Account except to the extend of un-utilised Revaluation surplus of that particular item of an assets
Some Special Cases – Hire Purchase
Assets under Hire Purchase
Regardless of Ownership they are treated as an asset at Cash Value, if readily available.
Else by using appropriate interest rates measured at present value of Hire Purchase installments.
Caution: The fact that the enterprise does not have full ownership must be properly disclosed
Accounting for Components
38
Accounting for an item of Fixed Assets can be improved if the total expenditure thereon is allocated to its Component parts, provided :
Parts are in practice separable, and
Estimates are made of the useful lives
of these components
Component Accounting – Example: Air Craft
Description Useful Life
Dep.
Rate
Rate at which
should have been Dep.
Impact
Landing Gear
5 10% 20% Under
Depreciated
Frame 20 10% 5% Over
Depreciated
Engine 10 10% 10% Adequately
40
