AS 10 : Accounting for Fixed Assets

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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

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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 ?

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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

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Definitions

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• 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

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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

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Standard Does Not Deal With

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• The allocation of the depreciable amount of fixed assets to future periods – it is dealt with by AS 6

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• The treatment of government grants and subsidies, ( As 12) and

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• Assets under leasing rights ( AS 19)

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Stand-by Equipment & Servicing Equipment

They are usually capitalised

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Machinery Spare Parts

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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

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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

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Important

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These costs are to be capitalised

only up to a certain point

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Costs Never Capitalised

Administration and

Other General Overheads

Unless they are specifically attributable to construction or part of the cost of

Fixed Assets

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Capitalization

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When to Stop Capitalizing?

When to Start

Depreciating Assets?

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Working Condition

• Stop Capitalisation

• Start Depreciating

When the asset is in working condition for its intended use.

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Delay in Commencement of Actual Production

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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

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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

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Initial Recognition of Assets is Measured at Cost.

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• 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?

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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.

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Acquisition for Non Monetary Assets

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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.

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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.

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Acquisition of Assets in exchange of Shares or other Securities

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 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

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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

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Measurement After Recognition

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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

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How Revalued Amount is determined?

Either by an appraisal by Competent Valuer or

Indexation or

Reference to Current Price

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How Revaluation is affected ?

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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.

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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.

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Revaluation Solution - Alternate 1

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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

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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

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Revaluation - Increase in Net Book Value

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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

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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

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Revaluation Model

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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.

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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?

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What is Recoverable Amount ?

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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.

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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.

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Assets Retired from Active Use

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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.

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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 !

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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

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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

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Accounting for Components

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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

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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

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Thank You

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References

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Related subjects : Other financial fixed assets