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Valuation ofTangible

Fixed Assets

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ICAI-(AS-10)- Accounting forfixed assets

Significance of fixed assetsFixed assets excluded from its scope and coverage.Principles and norms of standard accountingtreatments.

IdentificationMeasurementValuationRevaluationRetirementsDisposalsDisclosure requirements

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Fixed Assets

Asset held with the intention of being used forthe purpose of producing or providing goodsor services.

Any expense falling in this criteria is identifiedor recognised as fixed assets.

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Important to note:

Fixed assets occupy a significant portion oftotal assets & thus important in evaluation offinancial position of the company.

An expense to be treated as fixed asset orrevenue expense can have impact onfinancial results.

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Scope and Coverage

As-10 deals with accounting of fixed assets as:Land,Building,Plant & machinery,Furniture & fittingsVehicles

These assets are recorded at the historical costs.

Does not include: leased asset and wasting assets

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Determinants of value of FixedAssets

Cost of fixed asset

Purchase Priceless:

Trade discount & rebatesadd:Import duties and other non refundable taxesDirectly attributable cost of bringing asset in workingcondition

[ site preparation,initial delivery cost,installation cost,foundation for plant,fees of architects & engineers]

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In case of projects:

Expenses attributable specifically toconstruction of the project are added to cost:

Start upCommissioningTest runsExperimental production

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In case of self constructedfixed asset

Cost includes:Expenses incurred that relate directly to fixedasset

General expenses incurred on many assets areallocated in some proportion to each asset.

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Change in cost due toexchange rate fluctuation

Under AS-11 of ICAI: Any fluctuation in foreign exchange rate is not adjustedto the cost of the asset.

It is treated as an income or expense from on or after 1-04-2004

Under schedule iv of the companies act, it will beadjusted to cost of fixed asset.

Both hold correct.

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Fixed asset in exchange ofanother asset

First alternative:

Cost of asset is taken as :

FMV (fair market value) of a asset given.Or

FMV (fair market value) of asset acquired.

Whichever is more clearly evident.

Balancing amount in cash or any other consideration isadjusted to the cost.

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Fixed asset in exchange ofanother asset

Second alternative when assets exchangedare similar.

Cost of asset is taken as:Book value of the asset given up

Adjusted by any balancing receipt or payment ofcash.

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Fixed asset in exchange ofshares or other securities

Cost of asset is taken as:F.M.V of the asset acquired

orF.M.V of the shares issued

Whichever is more evident.

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Jointly owned assets

Means when fixed assets are owned by twodifferent entities.

The extent to which the enterprise hascontributed to the assets original cost,accumulated depreciation & written downvalue, should be recorded in the balancesheet.

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Basket purchase

When many assets are purchased at asingle consolidated price.

In such a case, cost of each asset isrecorded at a value determined fairly by acompetent valuer.

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Revaluation of fixed assets

Appraisal by competent valuers by usingindexation with general or specific prices.

Revaluation stated by both gross value &depreciation.

Revaluation must be made on systematic basis(whole class revalued)

Revaluation must not be greater than recoverableamount.

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Revaluation of fixed assets

When revaluation leads to an increase in netbook value of the asset,

then, the increased amount is carried torevaluation reserve, thus it is added to theowners interest.

When revaluation leads to a decrease in netbook value of the asset,

then, it is charged to profit and loss account.

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Revaluation of fixed assets

At times, increase is recorded as a reversalof previous decrease arising on revaluation.

In such case the increase is charged to profitand loss account, to extent of previous loss tobe offset.

Then the remaining amount if any is creditedto revaluation reserve.

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Retirements & Disposals

Materials held for disposal are stated atlower of net realizable value & net bookvalue.

Fixed assets are removed from financialstatements on disposal.

Loss/ profit on disposal is carried to P & L A/c.

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Disclosures in financialStatements

Gross Book value & net book value atbeginning and end of accounting period.

Showing additions, disposals, acquisitions orother movements.

Expenses on fixed assets during constructionor acquisition.

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Disclosures in financialStatements

In case of revaluation:Revalued amount in place of historical cost.Method adoptedNature of indices usedThe year of any appraisal madeWhether an external valuer was involved.

Disclosures as per AS-1.

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Accounting for governmentgrants

1. Specific grants

Two alternative treatments:Capital approachIncome approach

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Accounting for governmentgrants

Capital approachGrant is shown as deduction from gross value ofasset.

Thus it gets reflected in P & L A/c in form ofreduced depreciation.

When grant is equal to whole amount of theasset, it is shown at nominal value in the balancesheet.

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Accounting for governmentgrants

Income approach:Grant is shown separately in balance sheet asdeferred government grants. (above secured loans).

This deferred govt. grant is written of every year onsystematic basis and shown in P & L as income overthe useful life of asset.

This transfer is made in a proportion in whichdepreciation on relative asset is charged.

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Accounting for governmentgrants

2. non- monetary asset at concessional rate

Recognized at the acquisition cost & not atactual price.E.g.: land given at concessional rate.

If asset is given free of cost, it is recorded ata nominal value.

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Accounting for governmentgrants

3.) general grant for projects

They are treated as promoters contributiontowards the project.

They are recognized as capital reserve &thus become a part of owners equity.

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Accounting for governmentgrants

Recognition of govt. grants

Enterprise would comply with the necessaryconditions.

Grant will be ultimately received.

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Accounting for governmentgrants

DisclosuresNature and extent of govt. grant.

Accounting policy adopted.

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Accounting for borrowing cost

CapitalisationWhen borrowing costs are incurred forgeneral purpose like for working capital, theyare charged to P & L A/c.

But, when borrowing cost are incurred foracquisition & construction of fixed asset, theyare capitalised as part of cost of the asset.

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Accounting for borrowing cost

This is done till the time the asset is gettingready for use.

Once the asset is ready for use, theborrowing cost is charged to P & L A/c.

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Accounting for borrowing cost

Borrowing for projects

When funds are borrowed for projects, theborrowing cost is allocated to the variousassets like land, building etc, in the ratio oftheir basic cost.

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