S9,10 Fixed Asset

7/30/2019 S9,10 Fixed Asset

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AS 10 Fixed Assets


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Session Agenda

Definition of fixed asset

Identification of fixed asset

Component of cost Special cases of valuation


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1. Fixed asset

It is an 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.

Gross block/Net block


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2. Identification of Fixed Assets

i. Stand-by and servicing equipment

ii. Spare parts

iii. Component cost

i. Stand-by equipment and servicing equipment

are normally treated as fixed asset.


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Contd.

ii. Machinery spares are usually charged to the profit and loss

statement as and when consumed.

However, if such spares can be used only in connection withan item of fixed asset and their use is expected to be irregular,

it may be appropriate to allocate the total cost on a systematic

basis over a period not exceeding the useful life of the

principal item.

Example: Rig standpipe purchased for oil rig by ONGC


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Contd.

In certain circumstances, the accounting for an itemof fixed asset may be improved if the total

expenditure there on is allocated to its component

parts, provided they are in practice separable, and

estimates are made of the useful lives of these

components.


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Contd.

For example, rather than treating an aircraft and its

engines as one unit, it may be better to treat the

engines as a separate unit if it is likely that their

useful life is shorter than that of the aircraft as awhole.

Boeing 787-9 price $218 Mn. (Rs. 981 crore)

Engine: Rolls-Royce Trent 1000


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Contd.

An enterprise may decide to expense an item

which could otherwise have been included as

fixed asset, because the amount of the

expenditure is not material.

Pls. refer to AS 10 document uploaded on FAM

Folder page no. 4 para 8.1.


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3. Components of Cost


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Components of Cost

Purchase price

Import duty/or any other duty

Transportation charges

Installation charges

Consultation /Inspection Charges

Modification ChargesHandling Cost

Cost of Ordering


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Components of Cost

The cost of an item of fixed asset comprises its:

i. purchase price

ii. import duties and other non-refundable taxes

iii. any directly attributable cost of bringing the asset to itsworking condition for its intended use (Example

installation charges, transportation charges etc)

iv. any trade discounts and rebates are deducted in arriving

at the purchase price.


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Contd.

Administration and other general overhead expenses

are usually excluded.

However, in some circumstances, such expenses asare specifically attributable to construction of a

project or to the acquisition of a fixed asset or

bringing it to its working condition, may be included

as part of the cost of the construction project or as a

part of the cost of the fixed asset.


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Contd.

The expenditure incurred on start-up and commissioning of

the project, including the expenditure incurred on test runs

and experimental production, is usually capitalised as an

indirect element of the construction cost.

However, the expenditure incurred after the plant has begun

commercial production, i.e., production intended for sale or

captive consumption, is not capitalised and is treated as

revenue expenditure


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4. Special Cases for valuation

i. Self-constructed Fixed Assets

ii. Non-monetary Consideration

iii. Improvements and Repairs

iv. Joint Ownership

v. Several assets are purchased for a consolidated price

vi. Goodwill


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i. Self-constructed Fixed Assets

In arriving at the gross book value of self-constructed fixed assets, the same principlesapply as those described earlier.

Included in the gross book value are costs ofconstruction that relate directly to the specific

asset and costs that are attributable to theconstruction activity in general and can beallocated to the specific asset.


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Class exercise # 1

ABC Ltd. is constructing a fixed asset. Following are

the expenses incurred on the construction:

Materials Rs. 10,00,000

Direct Expenses Rs. 2,50,000

Total Direct Labor Rs. 5,00,000 (1/10th for this work)

Total admn. Exp. Rs. 8,00,000 (5% for this work)

Depreciation Rs. 10,000

(On assets used for this work)

Calculate the cost of asset.


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Contd.

Particulars Amount (Rs.)

Materials 10,00,000

Direct Expenses 2,50,000

Total Direct Labor 50,000

Total admn. Exp. 40,000

Depreciation 10,000

Cost of the Asset 13,50,000


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ii. Non-monetary Consideration

When a fixed asset is acquired in exchange for another asset,

its cost is usually determined by reference to the fair marketvalue of the consideration given.

It may be appropriate to consider also the fair market value of

the asset acquired if this is more clearly evident.

An alternative accounting treatment that is sometimes used

for an exchange of assets, particularly when the assets

exchanged are similar, is to record the asset acquired at thenet book value of the asset given up; in each case an

adjustment is made for any balancing receipt or payment of

cash or other consideration.


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Contd.

When a fixed asset is acquired in exchange for shares

or other securities in the enterprise, it is usually

recorded at its fair market value, or the fair market

value of the securities issued, whichever is moreclearly evident.


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iii. Improvements and Repairs

Frequently, it is difficult to determine whethersubsequent expenditure related to fixed asset representsimprovements that ought to be added to the gross bookvalue or repairs that ought to be charged to the profitand loss statement.

Only expenditure that increases the future benefits fromthe existing asset beyond its previously assessedstandard of performance is included in the gross book

value, e.g., an increase in capacity.

Pls. visit fixed asset schedule of jet airways


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Contd.

The cost of an addition or extension to an existing

asset which is of a capital nature and which becomes

an integral part of the existing asset is usually added

to its gross book value.

Any addition or extension, which has a separate

identity and is capable of being used after the

existing asset is disposed of, is accounted for

separately.


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iv. Joint Ownership

Where an enterprise owns fixed assets jointly with others, the

extent of its share in such assets, and the proportion in the

original cost, accumulated depreciation and written down

value are stated in the balance sheet.

Alternatively, thepro rata cost ofsuch jointly owned assets is

grouped together with similar fully owned assets.

Details of such jointly owned assets are indicated separately

in the fixed assets register.


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Class exercise # 2

A machine costing Rs. 10,00,000 is jointlyowned by ABC Ltd. and XYZ Ltd. in the ratio of70% and 30% respectively.

Value in the book of ABC:

70% of 10,00,000 = 7,00,000

Value in the book of XYZ:

30% of 10,00,000 = 3,00,000


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v. Several assets are purchased for a

consolidated price

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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vi. Goodwill

Goodwill, in general, is recorded in the books only when some

consideration in money or moneys worth has been paid for it.

Whenever a business is acquired for a price (payable either in cashor in shares or otherwise) which is in excess of the value of the net

assets of the business taken over, the excess is termed as goodwill.

Goodwill arises from business connections, trade name or

reputation of an enterprise or from other intangible benefits

enjoyed by an enterprise.


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Class exercise # 3

Company A with an Asset of Rs. 500 crore and

liability of Rs. 200 crore (Excluding Capital) was

aquired by Company B.

Company B paid Rs. 350 crores to the owners of

Company A.

Calculate the amount of Goodwill.


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Class exercise # 4

X Ltd. purchased Rs. 5 lacs worth of land for afactory side. Company demolished an oldbuilding on the property and sold the material

for Rs. 10,000. Company incurred additionalcost and realized salvaged proceeds asfollows:

Legal fees for purchase contract Rs. 25,000

Title guarantee insurance Rs. 10,000

Cost of demolition of building Rs. 30,000


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Contd.

Particulars Amount (Rs.)

Cost of Land 5,00,000

Legal Fees 25,000

Title Insurance 10,000

Cost of Demolition (50,000 10,000) 40,000

Cost of the Asset 5,75,000

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S9,10 Fixed Asset

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