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Thursday 14 April 2011

Fixed Assets

Fixed Assets consist of the Assets used in the Business to earn income for the Business. It normally consists of Land, Building, Plant & Machinery, Furniture and Fittings, Vehicles, Office Equipments etc., classified in different forms to the convenience of the individual company.
TITLE OF ASSET :
First and foremost factor in Fixed Assets is the title of the asset which should be verified. If the title is in not the name of the Company, it has to be brought to the notice of the reader of the accounts that the title is yet to be obtained in the name of the Company. The Title can be verified by adopting various methods. For example in the case of Land the title can be verified by referring to the land document. In the case of Machinery the invoice is to be in the name of the Company which is being audited. In the case of vehicles, the Registration Certificate issued by the Transport authority will be providng the proof of ownership. Hence all these have to be clearly kept in mind when verifying the title to the asset.
LOCATION OF ASSET, DATE OF INSTALLATION & DEPRECIATION :
Once the title is clear, then the situation of the asset and the date from which it is put to use assumes importance. The Fixed Assets Register has to be updated with these details and depreciation has to be calculated for company Law purposes from the date of installation/putting to use as per Schedule XIV of the Companies Act 1956 at the rates specified therein. In the case of sale of a Fixed Asset, Depreciation has to be calculated upto the date of sale and then only the profit or loss on sale of that asset has to be arrived at. In the case of Sale of a Fixed Asset, if the price realised is more than the cost of the asset then the excess has to be treated as Capital Reserve as per accepted accounting practice.


Points For Consideration Under AS-6 Depreciation Accounting (Revised)
• Depreciable amount of an asset is its historical or other amount substituted for historical cost in the financial statements less the estimated residual value.
• Depreciable amount of a depreciable asset should be allocated on systematic basis to each accounting year during the useful life of asset.
• Useful is normally determined by the management taking into consideration the expected physical wear and tear, obsolescence and legal or other limits on the use of the asset. This may be reviewed periodically. Where there is a revision of an estimated useful life of an asset, the unamortized depreciable amount should be charged over the revised remaining useful life of the asset.
• Where the depreciable assets are revalued, the provisions for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out.
• A change in method of depreciation has to be made only if required by statute or for compliance with an accounting standard or for appropriate preparation/presentation of the financial statements. Revision in method of depreciation should be made from date of use also this would be a change in accounting policy and should be quantified and disclosed.
• Where the historical cost undergoes a change due to fluctuation in exchange rate, price adjustment etc. depreciation on the revised unamortized amount should be provided over the balance useful life of the asset.
• Deficiency or surplus in case of disposal, destruction and demolition etc. are to be disclosed separately, if material.
Disclosure Requirements Under AS 6 (Revised)
1. Historical cost or other amount substituted for historical cost, depreciation for the year and accumulated depreciation to be disclosed.
2. Depreciation method used should be disclosed. If rates applied are different from the rates specified in the governing statute then the rates and the useful life should be disclosed.
Points For Consideration Under AS 10- Accounting For Fixed Assets
• Fixed assets are those assets held for producing or providing goods and/or services and not held for sale in the normal course of the business.
• The cost of a fixed asset should comprise its purchase price and any attributable cost to bring the asset to its working condition for the intended use.
• The cost of self-constructed fixed assets should comprise of those costs that relate directly to the specific asset and that are attributable to it.
• In case of assets acquired in exchange or part exchange for another asset, the cost of asset acquired should be either the fair market value or the net book value of the asset given up, adjusted for any balancing payment or receipt of cash or other consideration.
• Revaluation, if any, should be of class of assets and not an individual asset or the selection of the assets for revaluation should be made on a systematic basis.
• Basis of revaluation should be disclosed.
• Revaluation should not result in the net book value of that class being greater the recoverable amount of asset of that class.
• Any increase in the net book value due to revaluation should be credited to Revaluation Reserve while the decrease should be charged to P & L A/c except to the extent of losses which was written off during the previous revaluation. In such cases to the amount of losses earlier written off the profit and loss account can be credited.
• Goodwill should be accounted only when paid for.
• Profit/Loss on disposal should be recognized on disposal to the Profit and Loss statement.
Attributable Cost: Extract From The Guidance On Expenditure Incurred During The Construction Period
The expenditure-other than the direct capital expenditure-which may be incurred for an asset during its construction/pre production can be classified under the following different heads.
1. Preliminary Expenses
2. Formation Expenses
3. Expenses incurred in connection with the issue of shares/debentures
4. Preliminary project expenses, feasibility study, land survey etc.,
5. Financial expenses such as interest, commitment and other charges on loans
6. Indirect & other expenses relating to the construction of the project comprising of items of expenditure which would normally be regarded as of revenue nature, if incurred after the asset commences its commercial production, but which are incurred during the construction stage but not directly or indirectly related to the construction work itself






INDIRECT EXPENDITURE INCIDENTAL AND RELATED TO CONSTRUCTION
A characteristic of this type of expenditure is that, for a running concern it would be in revenue nature. However, because the expenditure is incurred during the construction period and is indirectly related to construction and is incidental thereto, it should be capitalized as part of the construction cost. A few examples to cite,
1. Expenditure on employees who are either assigned to construction work or to supervise over construction work including salaries and other benefits.
2. Expenditure on technical and other consultants
3. General administrative and office expenditure which is indirectly related to or incidental to construction including stationary and printing, rent rates and taxes, postage and telegrams, travel and conveyance etc.,
4. Appropriate insurance charges
DISCLOSURE REQUIREMENTS UNDER AS - 10
1. Gross and net book values at beginning and end of the accounting period showing additions, deletions, acquisitions and other movements, expenditure incurred in course of construction.
2. In case of revaluation, the revalued amount substituted for historical cost, the method adopted for computing revaluation, the nature of indices used, the year of any appraisal made, whether an external valuer was involved.
POINTS FOR CONSIDERATION UNDER AS11 — ¬COUNTING FOR EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (REVISED IN MAR 2003)
• Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money
• Non monetary items are assets and liabilities other than monetary items.



INITIAL RECOGNITION
• Initial recognition- A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transactions.
REPORTING AT SUBSEQUENT BALANCE SHEET DATES
• Non monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction
• Non monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rate that existed when the values were determined.

POINTS FOR CONSIDERATION UNDER AS 12- ACCOUNTING FOR GOVERNMENT GRANTS
The grants towards specific fixed assets should be deducted from its cost. Alternatively, if the grant is against depreciable fixed assets, they should be treated as deferred income and the grant should be transferred to income in proportion to the depreciation charged. Grants received against non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligation is charged to income. The deferred income balance should be disclosed separately in the financial statements
DISCLOSURE REQUIREMENTS UNDER AS12
The nature and extent grants towards non monetary assets given at a concessional rate or free of cost.


POINTS FOR CONSIDERATION UNDER AS16 — BORROWING COSTS
Borrowing costs that are directly attributable to the acquisition, construction or production of any qualifying asset (Asset that takes a substantial period of time to get ready for its intended use or sale) should be capitalized as part of the cost of that asset.
To the extent that the funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing cost eligible for capitalization should be determined by applying a capitalization rate. This rate is weighted average of borrowing costs applicable to borrowings other than specific borrowings of the enterprise.
• Income on temporary investment out of the borrowed funds be deducted from borrowing costs.
• Capitalization of borrowing costs should commence when expenditure for qualifying asset is being incurred.
• Capitalization of borrowing costs should be suspended during periods in which development is interrupted.
• Capitalization should cease when activities to prepare the qualifying asset for its intended use are substantially complete. When construction of asset is completed in parts, and completed part is capable of being used, capitalization should cease when in respect of that part when substantially all the activities for its intended use or sale are complete.
Disclosure Requirements Under AS16
Financial statements should disclose the accounting policy adopted for borrowing cost and also the amount of borrowing costs capitalized during the period
Points For Consideration Under AS19—Leases
Leases are classified into finance lease and operating lease.
If risks and rewards incident to ownership are transferred substantially it is a finance lease otherwise it is an operating lease.
Treatment in case of finance lease in the books of lessee:
1. At the inception, lease should be recognized as an asset and liability at lower of either fair value of the leased asset or the present value of minimum lease payments (calculated on the basis of interest rate implicit in the lease or if not determinable, at lessee’s incremental borrowing rate).
2. Lease payments should be appropriated between finance charge and reduction of outstanding liability so as to produce a constant periodic rate of interest on the balance of the liability.
3. Depreciation on leased asset should be consistent with that for other owned depreciable assets and as per AS 6. If there is uncertainty that ownership will be obtained at the end of lease term, asset should be fully depreciated over the lease term or its useful life, whichever is shorter.
Disclosure requirements
Assets acquired under finance lease, net carrying amount at the balance sheet date, total minimum lease payments at balance sheet date and their present value for specified periods, reconciliation between total minimum lease payments at balance sheet date and their present value, contingent rent recognized as income, total of future minimum sub lease payments expected to be received, general description of significant leasing arrangements.
Treatment in case of operating lease in the books of the lessor
1. Lessors should present an asset given on lease under fixed assets.
2. Lease income should be recognized on a straight line basis or any other systematic basis, if appropriate.
3. Costs including depreciation should be recognized as an expense.
4. Initial direct costs are either deferred over lease term or recognized as expenses.
5. Depreciation should be on same basis as other owned assets and on basis set out in AS6.
Disclosure requirements
Disclosure should be made of carrying amount of the leased assets, accumulated depreciation and impairment loss recognized or reversed for the period, future minimum lease payments in aggregate and for the specified periods, general description of the leasing arrangement and policy for initial costs.

Points For Consideration Under AS &—Intangible Assets
Applies to all enterprises accounting for intangible assets barring the following
1. Intangible assets covered by other standards
2. Financial assets
3. Mineral rights and expenditure on exploration etc.
4. Intangibles arising in insurance sector on contracts with policy holders.
Monetary Asset – money held and assets received in fixed or determinable amounts of money.
Non Monetary Asset – Other than Monetary Asset.
Asset: Asset is a resource
a. controlled by an enterprise as a result of past events and
 from which future economic benefits are expected to flow.
An intangible asset: An identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
Useful life is period of time over which an asset is expected to be used or the number of production units expected to be obtained from the asset.
An intangible asset to be recognized only if future economic benefits will flow and the cost of the asset can be measured reliably.
Internally generated goodwill, brands, mastheads, publishing titles etc. should not be recognized as an asset.
Intangibles cannot be recognized at the research phase.

An intangible asset arising from development are to be recognized if an enterprise can demonstrate its feasibility, ability to sell, generation of future economic benefits, intention and availability of resource for completion and ability to measure the expenditure.

Expenditure on an intangible asset that cannot be treated as cost to be written of as expense and treated as goodwill (capital reserve) in case of an amalgamation (AS 14).

Expenditure, on an intangible asset, once recognized as expense not to be part of cost of an intangible asset at a later date.
Capitalization of intangibles has to at cost.
Subsequent expenditure to be added to cost only if is probable that the expenditure will generate future benefits in excess of the original estimates.

An intangible asset has to be amortized over its useful life in the pattern in which the assets economic benefits are consumed or on a straight line method.
Residual value has to be taken as zero unless a commitment to purchase the asset or an active market exists.
The amortization period and method to be reviewed at each financial year end and any change to be accounted for as per AS5.
Impairment losses are to be recognized.
The recoverable amount of each intangible asset to be estimated at each year end in case of an intangible asset which is not yet available for use and one which is amortized over a period exceeding ten years.
An intangible asset to be derecognized on disposal or when no future economic benefits are expected from its use and gain or loss recognized.
On standard being applicable, adjustment to any intangible asset as required to be made with a corresponding adjustment to the opening revenue reserves.

Disclosure Requirements Under AS26
Each class of intangibles, their useful lives, amortization rate, amount and method, carrying amount (gross and net), any additions, retirements, impairment losses recognized or reversed and any other change should be disclosed
In case of useful life of an intangible asset exceeding ten years, proper disclosure of the reasons for the same should be given.
Research & Development expenditure recognized as expense to be disclosed.
Disclosure Requirements Under Schedule VI
Fixed assets are to be classified under the following heads.
1. Goodwill
2. Land
3. Buildings
4. Leasehold
5. Railway sidings
6. Plant and Machinery
7. Furniture and Fittings
8. Development of property
9. Patents, Trademarks Designs & Other intangibles
10. Livestock
11. Vehicles
Under each head the original cost and the additions thereto and deduction there from during the year and the total depreciation written off or provided up to the end of the year to be stated.
Where sums have been written off on a reduction of capital or revaluation of assets, every balance sheet subsequent to the reduction or revaluation shall show the reduced figures and with the date of the reduction in place of the original cost. Each balance for the first 5 years subsequent to the date of reduction shall show the amount of reduction made. Similarly where sums have been added by writing up the assets, every balance sheet subsequent to such writing up shall show the increased figures with the date of increase in place of the original cost and each balance sheet for the first 5 years subsequent to the date of writing up shall also show the amount of increase made

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