AS 10 : Accounting for Fixed Assets

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1 AS 10 : Accounting for Fixed Assets IPCC Paper 1: Accounting Chapter 1 Unit 2 Fixed Assets - AS 10 Related ASI is 2 CA. Yagnesh Desai 1

2 Applicability 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? 2 AS 6 Depreciation

3 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 3

4 Definitions Fixed asset 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. Fair Market Value 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 4 Gross Book 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.

5 Scoped Out Not applicable to Forests, Plantations and similar regenerative natural resources Wasting Assets including Mineral rights, Expenditure on the Exploration for and Extraction of Minerals, Oil, Natural Gas and similar non-regenerative resources Expenditure on Real Estate Development; and Livestock 5

6 Standard Does Not Deal With 1 2 The allocation of the depreciable amount of fixed assets to future periods it is dealt with by AS 6 The treatment of government grants and subsidies, ( As 12) and 3 Assets under leasing rights ( AS 19) 6

7 Stand-by Equipment & Servicing Equipment They are usually capitalised 7

8 Machinery Spare Parts Expensed Out Capitalised Carried as Inventory & expensed out as consumed Major Exclusive Parts Major Spares and Standby equipment are also capitalised. Spares which can be exclusively used only in connection with particular equipment are capitalised 8

9 Elements of Cost Purchase Price, Import Duty, Non refundable Taxes - net off Discount & Rebates Directly Attributable Costs Employee Cost Cost of site preparation Initial Delivery & Handling Installation & Assembly Cost Cost of testing Professional fees

10 Important These costs are to be capitalised only up to a certain point 10

11 Costs Never Capitalised Administration and Other General Overheads Unless they are specifically attributable to construction or part of the cost of Fixed Assets 11

12 Capitalization When to Stop Capitalizing? When to Start Depreciating Assets? 12

13 Working Condition When the asset is in working condition for its intended use. Stop Capitalisation Start Depreciating 13

14 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

15 What about Self Constructed Assets? Same principle as applicable to Assets purchased or acquired Like Direct Cost of Construction and Directly attributable cost of construction and can specifically allocated to the asset. What about Internal Profits Care should be exercised to eliminate Internal Profit 15

16 Initial Recognition of Assets is Measured at Cost. Why? Because normally assets are acquired by cash or in exchange of monetary assets. Exchanged Assets? But what if the assets is acquired by way on exchange of Non monetary assets or combination of non monetary assets and monetary assets 16

17 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. 17

18 Acquisition for Non Monetary Assets 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. 18

19 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. 19

20 Acquisition of Assets in exchange of Shares or other Securities 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 20

21 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 21

22 Measurement After Recognition Cost Model Revaluation Model Model selected should be applied to the entire category of Assets Cost Revalued Amount 22 Accumulated Depreciation Any Accumulated Impairment Accumulated Depreciation Any Subsequent Accumulated Impairment

23 How Revalued Amount is determined? Either by an appraisal by Competent Valuer or Indexation or Reference to Current Price 23

24 How Revaluation is affected? 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. 24

25 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. 25 Depreciation is provided on the Revalued Amount!!!!

26 Revaluation Solution - Alternate 1 By Proportionately restating, Gross Value, Accumulated Depreciation so as to give the Increased Net Value 26 Description Before Valuation After Valuation Gross Block 100, ,000 Accumulated Depreciation 25,000 50,000 Net Block 75, ,000

27 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. 27 Description Before Valuation After Valuation Gross Block 100,000 1,50,000 Accumulated Depreciation 25,000 Net Block 75, ,000

28 Revaluation - Increase in Net Book Value Assets Accounts Dr. Increase To Revaluation Reserve Cr Earlier Decrease in Revaluation Reserve Yes Profit Or Loss No Revaluation Reserve Assets Accounts Dr. To Profit or Loss Account Cr 28

29 Decrease arising on Revaluation Decrease Dr Profit Or Loss Accounts Cr Assets Account 29 Earlier Increase in Revaluation Reserve Yes Adjust against Revaluation Reserve No Profit or Loss Accounts Dr. Revaluation Reserve A/c Cr. Assets Recognised in Revaluation Reserve Account to the tune of credit Balance in RR Else in Profit or Loss Account.

30 Revaluation Model 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. 30

31 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? 31

32 What is Recoverable Amount? 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. 32

33 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. 33

34 Assets Retired from Active Use 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. 34

35 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! 35

36 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

37 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 37

38 Accounting for Components 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 38

39 Component Accounting Example: Air Craft Description Useful Life Landing Gear Dep. Rate Rate at which should have been Dep. Impact 5 10% 20% Under Depreciated Frame 20 10% 5% Over Depreciated Engine 10 10% 10% Adequately Depreciated 39

40 40 Thank You

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