AS 10 - Accounting for Fixed Assets

Purpose: This standard deals with accounting for Fixed Assets

Definitions

• Fixed Asset 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.
• Fair Market Value is the 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.
• 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.

Explanations

• Components of Cost
1. The cost of a fixed asset should consist of its purchase price including import duties and other nonrefundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use. Trade discounts and rebates, if any, are deducted in arriving at the purchase price.
2. The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors.
3. Financing costs attributable to construction or acquisition of fixed assets should be included in the gross book value of the asset to which they relate but it should not be capitalised to the extent that such costs relate to periods after such assets are ready to be put to use.
4. 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.
5. If the time gap between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement.
• Self-Constructed Fixed Assets: The cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the construction activity in general and can be allocated to the specific asset.
• Non-Monetary Consideration: When a fixed asset is acquired in exchange, or, in part exchange for another asset, the cost of the asset acquired should be recorded either at fair market value or at the net book value of the asset given up, adjusted for any balancing payment or receipt of cash or other consideration. For this purpose fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident.
• Improvement and Repairs: Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Revaluation of Fixed Asset

When a fixed asset is revalued in financial statements, an entire class of assets should be revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed.

The revaluation in financial statements of a class of assets should not result in the net book value of that class being greater than the recoverable amount of assets of that class.

When a fixed asset is revalued upwards, any accumulated depreciation existing at the date of the revaluation should not be credited to the profit and loss statement.

An increase in net book value arising on revaluation of fixed assets should be credited directly to owner's interests under the head of revaluation reserve,except that, to the extent that such increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement.

A decrease in net book value arising on revaluation of fixed asset should be charged directly to the profit and loss statement except that to the extent that such a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised,it may be charged directly to revaluation reserve account.

On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss statement except that to the extent that such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised, it may be charged directly to that account.

Fixed Assets acquired on Hire Purchase: Fixed assets acquired on hire purchase terms should be recorded at their cash value, which if not readily available, should be calculated by assuming an appropriate rate of interest. This should be shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership thereof.

Joint Ownership: In the case of fixed assets owned by the enterprise jointly with others, the extent of the enterprise's shares in such assets, and the proportion of the original cost, accumulated depreciation and written down value should be stated in the balance sheet. Alternatively, the pro rata of such jointly owned assets may be grouped together with similar fully owned assets with an appropriate disclosure thereof.

Fixed Assets of Special Types

Goodwill is recorded in the books only when some consideration in money or money's worth has been paid for it and this goodwill should be written off over a period of time.

The direct costs incurred in developing the patents should be capitalised and written off over their legal term of validity or over their working life, whichever is shorter.

Amount paid for know how for the plans, layout and designs of buildings, or design of the machinery should be capitalised under the relevant asset heads, such as, buildings, plant and machinery etc. Where the amount paid for know-how is a composite sum in respect of both the manufacturing process as well as plans, drawings and designs for buildings, plant and machinery etc., the management should apportion such consideration into two parts on a reasonable basis.

Disclosures

1. Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements.
2. Expenditure incurred on account of fixed assets in the course of construction or acquisition.
3. Revalued amount substituted for historical costs of fixed assets, the method adopted to compute the revalued amounts, the nature of indices used, the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amounts.