ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who directly or indirectly

contributed in the development of this work and who influenced my thinking, behavior,

and acts during the course of study.

I express my sincere gratitude to Dr.J.G.Kori worthy Principal for providing me

an opportunity to undergo summer training.

I am thankful to Mr.Pravin More our H.O.D for his support, cooperation, and

motivation provided to me during the training for constant inspiration, presence and

blessings.

I also extend my sincere appreciation to Mr. Sunil K Garg VP (Accounts) who

provided his/her valuable suggestions and precious time in accomplishing my project

report.

Lastly, I would like to thank the almighty and my parents for their moral support

and my friends with whom I shared my day-to-day experience and received lots of

suggestions that improved my quality of work.

(SARAVANAN)
ABSTRACT

The project “Financial Savings Through Fixed Assets Management ” is defined

as the selling of the assets which are Idle or which are not in the production use. It refers

to removing of the assets from the Fixed Asset Register which are not in use or which are

costing high on repairs and maintenance cost. It mainly focuses on financial saving

through discarding the obsolete and used assets.

Purpose of the project:

• To review the assets which can be physically disposed off in the fiscal year 2010 -

11.

• To study the accounting of Fixed Assets as per AS- 10, Accounting of the

Depreciation on Fixed Assets AS- 6 and the accounting of Impairment losses as

per AS-28.

• To check whether the method of depreciation for the FIXED ASSETS is

appropriate as per the Companies Act,1956.

• To review the Fixed Asset Register and to check for any errors in the register .

• To provide the information regarding the procedure of disposal of particular fixed

assets and give information about the different methods through which disposal

can be done.
OBJECTIVES OF THE STUDY:

• To discard or remove those Fixed Assets from the Fixed Asset Register, which are

not in active use or which are idle.

• To discarding or removing those Fixed Assets from the Fixed Asset Register,

which are stated at the lower of their net book value.

• To check whether the method and the rates of depreciation for the Fixed Assets is

appropriate

• To ensure Fixed Assets availability where and when needed.

• To track fixed assets for the purposes of financial accounting, preventive

maintenance, and theft deterrence.

SCOPE OF THE STUDY:

• The study of “Financial Savings through Fixed Assets Management ” will help to

know which fixed assets are not in active use or idle or which are stated at the

lower of their net book value.

• Also it helps to know the accounting of the fixed asset in case of

acquisition,retirement or replacement of the Fixed Assets.

• It also provides the information regarding the payments of the long-lived fixed

assets.

• The project has also reviewed the procedure for disposal or replacement of Fixed

Assets.

• This project report may help the company to make further planning and strategy.
INTRODUCTION TO THE PROJECT

The project topic “FINANCIAL SAVINGS THROUGH FIXED ASSETS

MANAGEMENT ” clearly mentions the deduction in the expenditure costs, which are in

connection with those fixed assets, which are not used in the operational process. Thus

disposal of such assets which are idle or not used in the production process can save

money as they can deduct the expenditures such as Repairs and Maintenance to these

assets, Depreciation on these assets, Interest charges in case the assets are acquired

by borrowed capital, etc.

The project on “Financial Savings through Fixed Asset Management ” mainly

focuses on discarding or removing of those Fixed Assets, which are not used in the

current operational process or which are idle. The project also concentrates on those

assets, which are high on the maintenance cost. It mainly focuses on identification and

then disposal of the assets which are idle or which are frequently under repairs eventually

increasing the operating cost for production. It also provides information about

the procedure of disposal or transfer of fixed assets.

PURPOSE OF THE PROJECT

The project “Financial Savings Through Fixed Assets Management ” is defined

as the selling of the assets which are Idle or which are not in the production use. It refers

to removing of the assets from the Fixed Asset Register which are not in use or which are
costing high on repairs and maintenance cost. It mainly focuses on financial saving

through discarding the obsolete and used assets.

Purpose of the project:

• To review the assets which can be physically disposed off in the fiscal year 2010 -

11.

• To study the accounting of Fixed Assets as per AS- 10, Accounting of the

Depreciation on Fixed Assets AS- 6 and the accounting of Impairment losses as

per AS-28.

• To check whether the method of depreciation for the FIXED ASSETS is

appropriate as per the Companies Act,1956.

• To review the Fixed Asset Register and to check for any errors in the register .

• To provide the information regarding the procedure of disposal of particular fixed

assets and give information about the different methods through which disposal

can be done.
SCOPE OF THE PROJECT:

The survey on the Project Topic “Financial savings through fixed asset

management” is done by investigating about the different Fixed Assets in MATE

(Motherson Automotive Technologies & Engineering) at Sriperumbadur.

The study of “Fixed Asset Management ” will help to know which fixed assets are

is not in active use or idle or which are stated at the lower of their net book value. Also it

helps to know which assets are having more repairs and maintenance costs and Disposal

of such Fixed Assets.

This project report may help the company to make further planning and strategy.

SALIENT CONTRIBUTION OF THE PROJECT:

The salient contribution of the project on “Financial savings through fixed asset

management” to the company is as follows:

• It will provide the knowledge regarding the current scenario of the company as

well as provides a competitor analysis of the fixed assets of the company.

• It will provide information to the management of the company to make strategies

and planning regarding the disposal of the fixed assets.

• It will help the management to get idea about those Fixed Assets that are obsolete

or kept idle.

• It will also provide information regarding those fixed assets, which are costing

heavy on the maintenance.

• This project will help the Management to know the procedure to disposal or

transfer of any Fixed Asset. It includes the proper Fixed Asset Disposal Request

form.
FIXED ASSETS AND ACOUNTING OF FIXED ASSETS

FIXED ASSETS (DEFINITION AND CLASSIFICATION):

Fixed Assets refer to physical or tangible things of value a company owns such

as facilities, equipment, and land. The term "Fixed Assets" reflects the traditional notion

that these kinds of Fixed Assets are fixed and do not require much consideration after

they are purchased.

Companies rely on their Fixed Assets, to generate profits. Modern equipment in

good repair, is essential for high productivity and efficiency, and hence for earning

profits. Fixed Assets analysis involves calculating the earnings potential, use, and useful

life of Fixed Assets.

In addition, Fixed Assets analysis determines if Fixed Assets are sufficiently

maintained to ensure current and future earning power as well as the relative profitability

contributed by Fixed Assets and Fixed Assets acquisitions. These Fixed Assets are used

to derive production capacity.

Therefore, they are also known as earning Fixed Assets. Fixed Assets are

purchased for continued and long-term use in earning profit in a business. They are

written off against profits over their anticipated life by charging an annual amount

calculated so as to eliminate the original cost less scrap, over that period. Therefore, the
business needs to make long-term investment in Fixed Assets.

Company management and stockholders expect that Fixed Assets justify their existence

by producing "returns" and so use income statement and balance sheet entries to measure

the efficiency and productivity of the company's Fixed Assets in this way, Fixed Assets

that sit idle or are otherwise unproductive are candidates for elimination. The fixed

Assets are classified as follows:

I. Property, Plant And Equipment - PP&E:

A company ’s Fixed Assets that is vital to business operations but cannot be

easily liquidated. The value of property, plant and equipment is typically depreciated

over the estimated life of the Fixed Assets, because even the longest-term Fixed Assets

become obsolete or useless after a period of time. Depending on the nature of a

company's business, the total value of PP&E can range from very low to extremely high

compare to total Fixed Assets.

Accounting standard 10 deals with the accounting treatment of PP&E.

This item is listed separately in most financial statements because PP&E is treated

differently in accounting statements. This is because improvements, replacements and

betterments can pose accounting issues depending on how the costs are recorded.
II. Land:

Property or real estate, not including buildings or equipment that does not occur

naturally. Depending on the title, land ownership may also give the holder the rights to all

natural resources on the land. These may include water, plants, human and animal life,

fossils, soil, minerals, electromagnetic features, geographical location, and geophysical

occurrences.

In the traditional school of economics, land is considered a factor of production,

along with labor and capital. Selling land results in a capital gain or loss. As opposed to

almost any other Fixed Assets, land is not a depreciable. Fixed Assets under IRS tax

laws. The cost of land includes all expenditures that relate to its acquisition and

preparation for use.

This amount typically includes purchase price, attorney fees, real estate costs,

document filing fees, and so on. Special assessments levied by a government authority

for sidewalks and streetlights or impact fees will also be included in the capitalized cost

of land, as well as general preparation costs such as grading, soil removal, drainage, and

demolition of existing buildings.

 III. Building:

The cost of buildings can be determined in a number of ways. The allocation of

cost is essential because land represents a non-depreciable FIXED ASSETS, while the

cost of the building is depreciable. Once acquired, the building may need some additional

expenditure to make the building ready for its intended use. These are often referred to as

make-ready costs and are included in the cost of the building.

IV. Furniture and Fixtures

Typically, a company that maintains more than 1,100 stores with an indoor

lumberyard and warehouse merchandise displays must invest heavily in furniture,

fixtures, and equipment. Narrow-aisle forklift trucks, rental vehicles, customer shopping

carts and flatbeds, and movable ladder systems are examples of a company’s investment

in equipment.

Probably the most significant investment in fixtures by a retail company is evident

as customers walk between the product aisles. The heavy-gauge, steel storage systems

throughout the store constitute an enormous investment in fixtures. This racking system

not only has to be strong, but much of it has to be designed to be safe for consumers.
Components of Cost

The cost of an item of fixed asset comprises its purchase price, including import

duties and other non-refundable taxes or levies and any directly attributable cost of

bringing the asset to its working condition for its intended use; any trade discounts and

rebates are deducted in arriving at the purchase price.

Examples of directly attributable costs are:

• Site preparation;

• Initial delivery and handling costs;

• Installation cost, such as special foundations for plant; and

• Professional fees, for example fees of architects and engineers.

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.

Financing costs relating to deferred credits or to borrowed funds attributable to

construction or acquisition of fixed assets for the period up to the completion of

construction or acquisition of fixed assets are also sometimes included in the gross book

value of the asset to which they relate.

 However, financing costs (including interest) on fixed assets purchased on a

deferred credit basis or on money borrowed for construction or acquisition of fixed assets

are not capitalized to the extent that such costs relate to periods after such assets are ready

to be put to use.

Administration and other general overhead expenses are usually excluded from

the cost of fixed assets because they do not relate to a specific fixed asset. However, in

some circumstances, such expenses as are 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.

The expenditure incurred on start-up and commissioning of the project, including

the expenditure incurred on test runs and experimental production, is usually capitalized

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 capitalized and is treated as revenue expenditure even though the

contract may stipulate that the plant will not be finally taken over until after the

satisfactory completion of the guarantee period.

If the interval between the date of a project on which it 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. However, the expenditure incurred during this period is also sometimes treated

as deferred revenue expenditure to be amortized over a period not exceeding 3 to 5 years

after the commencement of commercial production

Non-monetary Consideration

When a fixed asset is acquired in exchange for another asset, its cost is usually

determined by reference to the fair market value 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 the net 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.

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 more clearly evident.

Improvements and Repairs

Frequently, it is difficult to determine whether subsequent expenditure related to

fixed asset represents improvements that ought to be added to the gross book value or
repairs that ought to be charged to the profit and loss statement. Only expenditure that

increases the future benefits from the existing asset beyond its previously assessed

standard of performance is included in the gross book value, e.g., an increase in capacity.

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.

Retirements and Disposals

An item of fixed asset is eliminated from the Fixed Asset Register on disposal.

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 realizable value and are shown

separately in the financial statements. Any expected loss is recognized immediately in the

profit and loss statement.

In historical cost financial statements, gains or losses arising on disposal are

generally recognized in the profit and loss statement. On disposal of a previously

revalued item of fixed asset, the difference between net disposal proceeds and the net

book value is normally charged or credited to the profit and loss statement except that, to

the extent 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 utilized, it is
charged directly to that account. The amount standing in revaluation reserve following

the retirement or disposal of an asset, which relates to that asset may be transferred to

general reserve

Valuation of Fixed Assets in Special Cases

In the case of fixed assets acquired on hire purchase terms, although legal

ownership does not vest in the enterprise, such assets are recorded at their cash value,

which if not readily available, is calculated by assuming an appropriate rate of interest.

They are shown in the balance sheet with an appropriate narration to indicate that the

enterprise does not have full ownership thereof.

Where an enterprise owns fixed assets jointly with others (otherwise than as a

partner in a firm), 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, the pro rata cost of such 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 .

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 valuer.

Fixed Assets Register

Fixed Asset Register (FAR) is an accounting method used for major resources of a

business.

Fixed Assets are assets such as land, machines, office equipments, buildings, patents,

trademarks, copyrights, etc. held for the purpose of production of goods or rendering of

services and are not held for the purpose of sale in the ordinary course of business.

Fixed assets constitute a major chunk of

the total assets in the case of all

manufacturing entities. Even in the case of

service entities such as hotels, banks,

financial institutions, insurers, mobile /

telephone service providers etc. it has

become imperative to invest heavily in

furnishing, equipment, and technology to

attract, and retain customers.Just as it is

important for a person investing on the NASDAQ to know those investments, so it is

important for a business entity to have a list of its fixed assets. A Fixed Asset Register is

that list of assets.

Objectives in maintaining a Fixed Asset Register (FAR):

A FAR must be kept in order to be in compliance with legislation governing

corporations, companies, etc. It allows a company to keep track of details of each fixed

asset, ensuring control and preventing misappropriation of assets. It also keeps track of

the correct value of assets, which allows for computation of depreciation and for tax and

insurance purposes. The FAR generates accurate, complete, and customized reports that

suit the needs of management.

A FAR also allows a company to keep track of fixed assets that are not under

simple, direct control of the company. This means owned and leased assets, assets under

construction, and imported assets. The FAR can also be used to aid in capital budgeting

and to keep track of amount provided for Asset Retirement Obligation (ARO) in respect

of each asset.

Making entries in the FAR:

Not all assets are capitalized. Keeping in view the concept of materiality, a

company may have a policy to capitalize only those assets which cost more than a

specified amount. The companies are required to expense all equipment whose value is

below a threshold limit. Similarly, fixed assets which have a useful life of less than one

year are not capitalized.

 In some companies, improvements or alterations made to an asset are capitalized

separately in the FAR. This is not correct. If such mistakes are made, it is highly probable

that the auditors while undertaking physical verification of assets will notice

irreconcilable differences. Where improvements or alterations made to an existing asset

justifying capitalization, such additions should be made to the cost of the original asset.

THE FORMAT OF FAR ENTRIES:

The format / details to be provided in a FAR generally depends upon the following

factors:

a) Nature of assets.

• If moveable assets constitute a significant portion of total fixed assets, details will

be necessary on their movement from one department / cost center / people to

another.

• Cost of assets: Greater control and security is required for costly equipment.

b) Customized Reports on fixed assets required by management.

c) Disclosure norms / regulatory compliances as per statutory laws applicable to the

entity.
d) Extent of owned, and assets taken on lease / hire purchase.

e) Requirements of insurance company.

f) Location of fixed assets:

If fixed assets are located at numerous locations, greater details will have to be

given. In the case of a iron and steel company, the assets are located at different area in

the plant. These operational plants maybe in different cities / countries / continents.

g) Maintenance costs.

Some fixed assets require regular servicing to keep them running in an efficient

and satisfactory manner. It would be necessary to keep a tab on the maintenance costs,

dates of servicing etc. during a stated period.

Maintenance of a FAR in a Multi-National Corporation (MNC) can be onerous and

complex due to different regulatory and compliance requirements in each country and

different currencies.

Generally, an MNC sets up a subsidiary in the country in which it intends to start

operations. Maintenance of FAR is decentralized. The FAR is maintained per the

company’s policy, and regulatory requirements which are country specific.

 If consolidation of holding company and its subsidiaries (whether domestic or

foreign) is required by the law applicable to companies, and relevant Accounting

Standards, the task may become a bit complex. The crucial point is related to selection of

exchange rate for conversion of fixed assets. Most companies either use average annual

rate or year-end exchange rate.

Similarly, for companies having their shares listed on National Stock

Exchanges, the fixed assets are required to be stated in accordance with the requirements

of INDIAN generally accepted accounting principles (INDIAN GAAP).

Identification of a fixed asset:

In a large corporation, the task of identifying and locating a specific fixed asset

can be difficult unless numbering is scientific, systematic, and up-to-date. A common

problem in most companies is the improper maintenance of the FAR. Physical

verification of fixed assets becomes a futile exercise unless the FAR is properly

maintained.

It would be advisable to use a scientific numbering technique to identify fixed

assets. The process of numbering fixed assets is called tagging. An identification number

(combination of alphabets, and numbers) is written on the asset. Engraving the

identification number on the asset is advisable in the case of Plant & Machinery where

there is heavy wear and tear.

A tag verifies the existence of assets and their location, aids in maintenance,

provides a common ground for communication between the Accounts Department and

the end-users and recording the net book value of asset in case of sale / scrapping. It is

not necessary to tag all fixed assets. Land, buildings and vehicles all have independent

systems of tracking in registration papers and survey numbers

DEPRECIATION (DEFINITION AND ITS METHODS):

Except land, all fixed assets have a limited life. During such period, due to

continuous use and/or lapse of time, the value of some assets starts decreasing. Such a

gradual decrement of value of assets is called Depreciation. Hence, depreciation can be

defined as a decline in the value of an asset due to constant use.

Since these assets have limited life, sooner or later they have to be replaced. At

the time of replacement, the business incurs heavy cash outflow, which can create

liquidity problem in that year. In order to avoid such problem, a fixed amount out of

profit is set aside as depreciation account. By the time the fixed asset expires, sufficient

amount of fund will be accumulated in depreciation account, which, then can be used to

buy new asset. Hence, the process of setting aside a fixed amount as expense in

depreciation account is called Depreciation.

I. Characteristics of Depreciation

The following are some of the features of depreciation:

• Depreciation may be physical and functional.

• Depreciation is a gradual/permanent and continuous decrease in the utility value

of a fixed asset and it continues till the end of useful life of an asset.

• Depreciation arises due to the use of assets in productive activities.

• The primary object of depreciation is to allocate expired cost of fixed assets

against a number of accounting periods.

• Depreciation is charged in respect of fixed assets only i.e., building, machinery,

equipment and furniture etc.

• Depreciation is a charge against profit.

• Total depreciation of an asset cannot exceed its depreciable value (cost less scrap

value).
II. Causes of Depreciation

Depreciation is a measure of reduction in the use-value of an asset. It can be physical

deterioration or decrease in the market value. The primary causes of depreciation are as

follows:

• Wear and Tear: Due to constant use, assets get worn or torn out.

• Exhaustion: Exhaustion is the depletion of some assets due to continuous use and

lapse of time. In case of mines and oil wells, the continuous extraction of minerals

or oil, a stage comes when the mine or well gets completely exhausted an nothing

is left.

• Obsolescence: Some assets are discarded before they are completely worn out

because of changed conditions. This is the case when an asset becomes usefulness

because of technological advancement, new invention, change in style etc. in that

asset.

• Efflux of time: Certain assets get decreased in their value with the passage of

time. This is true in case of assets like leasehold properties, patents and copyrights

etc.
 • Accidents: Accidents can cause depreciation in the value of the asset.

III. Objectives of making provision for depreciation

Depreciation accounting is a must for every business for attaining the following

objectives:

• To ascertain net profit: Depreciation is the expense for the business. Hence to

ascertain the net profit, it must be included in the total cost of sales.

• To depict the true financial position of the business: The balance sheet depicts

true financial position of a business at a point of time. To depict the true financial

position of the business the assets should be shown in balance sheet not in its

original cost but at the depreciated cost. That is all fixed assets should be shown at

cost less the amount of depreciation suffered by them till the date of the balance

sheet.

• To ascertain cost of production: Depreciation is an expense. Hence it is necessary

to charge depreciation in the total cost of production to fix true sales price of the

goods and service.

 • Replacement of assets: One of the primary objectives of depreciation is the

provision for the replacement cost on the retirement of original assets.

• To ascertain income tax: If depreciation is not charged, the operation will show

more profit. As a result, the taxable income will be higher. Hence, depreciation is

charged for the correct ascertainment of total taxable income.

• To follow the company act: According to company act, it is compulsory to charge

depreciation on fixed assets.The depreciation rates as per companies act 1956 is

as follows:

Rates of depreciation

Nature of assets Single Shift Double Shift Triple Shift

WDV SLM WDV SLM WDV SLM
1 2 3 4 5 6 7
BUILDINGS (other than factory
I. (a) 5% 1.63% ….. ….. ….. …..
buildings) [NESD]
(b) FACTORY BUILDINGS 10%. 3.34% ….. ….. ….. …..
PURELY TEMPORARY

(c) ERECTIONS such as wooden100% 100% ….. ….. ….. …..

structures
II. PLANT AND MACHINERY
1
[(i) General rate applicable to,—
(a) plant and machinery (not being a13.91% 4.75% 20.87% 7.42% 27.82% 10.34%

ship) other than continuous process plant

for which no special rate has been

prescribed under (ii) below

(b) continuous process plant, 2[* * *]

for which no special rate has been15.33% 5.28% ….. ….. ….. …..

prescribed under (ii) below [NESD]

(ii) Special rates
A.1.Cinematograph films – Machinery

used in the production and exhibition of

cinematograph films [NESD]

(a) Recording equipment, reproducing

equipment, developing machines,

printing machines, editing machines,20% 7.07% ….. ….. ….. …..

synchronisers and studio lights except

bulbs
(b) Projecting equipment of film

exhibiting concerns
2. Cycles [NESD]
3
[3. Electrical machinery, X-ray and

electro-therapeutic apparatus and

accessories thereto, medical, diagnostic

20% 7.07% ….. ….. ….. …..
equipments, namely, cat-scan,

ultrasound machines, ECG monitors, etc.

[NESD]
4. Juice boiling pans (karhais) [NESD] 20% 7.07% ….. ….. ….. …..
5. Motor-cars, motor-cycles, scooters
25.89% 9.5% ….. ….. ….. …..
and other mopeds [NESD]
6. Electrically operated vehicles20% 7.07% ….. ….. ….. …..
including battery powered or fuel cell

powered vehicles [NESD]

7. Sugarcane crushers (indigenous
20% 7.07% ….. ….. ….. …..
kolhus and belans) [NESD]
8. Glass manufacturing concerns except

direct fire glass melting furnaces –

20% 7.07% 30% 11.31% 40% 16.21%
Recuperative and regenerative glass

melting furnaces
9. Machinery used in the manufacture of
15.62% 5.38% 23.42% 8.46% 31.23% 11.87%]
electronic goods and components
B. 1. 4[Aeroplanes, aero engines,

simulators, visual system and quick16.2% 5.6%]

engine change equipment [NESD]

2. Concrete pipes manufacture— 30% 11.31% ….. ….. ….. …..

Moulds [NESD]
3. Drum containers manufacture—

Moulds [NESD]
4. Earth-moving machinery employed in

heavy construction works, such as dams,

tunnels, canals, etc. [NESD]

5. Glass manufacturing concerns except

direct fire glass melting furnaces—

Moulds [NESD]
6. Moulds in iron foundries [NESD]
7. Mineral oil concerns—Field

operations (above ground)—Portable

boilers, drilling tools, well-head tanks,

rigs, etc. [NESD]
8. Mines and quarries—Portable

underground machinery and earth-

moving machinery used in open cast

mining [NESD]
9. Motor buses and motor lorries other

than those used in a business of running

them on hire [NESD]

9A. Motor tractors, harvesting combines

[NESD]
10. Patterns, dies and templates [NESD]
11. Ropeway structures—Ropeways,

ropes and trestle sheaves and connected

parts [NESD]
12. Shoe and other leather goods fabrics

—Wooden lasts used in the manufacture30% 11.31% 45% 18.96% 60% 29.05%

of shoes
C. 1. 5[** ** **]
2. Motor buses, motor lorries and motor

taxis used in a business of running them

on hire [NESD] 40% 16.21% ….. ….. ….. …..

3. Rubber and plastic goods factories—

Moulds [NESD]
4. Data processing machines including

computers [NESD]
40% 16.21% ….. ….. ….. …..
5. Gas cylinders including valves and

regulators [NESD]
D. 1. Artificial silk manufacturing100% 100% ….. ….. ….. …..
machinery with wooden parts
2. Cinematograph films—Bulbs of

studio lights
3. Flour mills—Rollers
4. Glass manufacturing concerns—

Direct fire glass melting furnaces

4A. Flot Glass Melting Furnaces
27% 10% ….. ….. ….. …..
(NESD)
5. Iron and Steel industries—Rolling 100% 100% ….. ….. ….. …..

mill rolls
6. Match factories—Wooden match

frames
7. Mineral oil concerns—(a) Plant used

in field operations (below ground)—

Distribution – returnable packages; (b)

Plant used in field operations (below

ground) but not including assets used in

field operations (distribution)—Kerbside

pumps including underground tanks and

fittings
8. Mines and quarries—
(a) Tubs, winding ropes, haulage ropes

and sand stowing pipes

(b) Safety lamps
9. Salt works—Salt pans, reservoirs and

condensers, etc., made of earthy, sandy

or clay material or any other similar

material
10. Sugar works—Rollers
III. FURNITURE AND FITTINGS
6
[1. General Rates [NESD] 18.1% 6.33% ….. ….. ….. …..
2. Rate for furniture and fittings used in

hotels, restaurants and boarding houses;

schools, colleges and other education al

institutions, libraries; welfare centres;

meeting halls, cinema houses; theatres

and circuses; and for furniture and

fittings let out on hire for use on the

occasion of marriages and similar

functions [NESD]
IV. SHIPS
1. Ocean-going ships— 25.88% 9.5% ….. ….. ….. …..
(i) Fishing vessels with wooden hull

[NESD]
(ii) Dredgers, tugs, barges, survey

launches and other similar ships used27.05% 10% ….. ….. ….. …..

mainly for dredging purposes [NESD]

(iii) Other ships [NESD] 19.8% 7% ….. ….. ….. …..
2. Vessels ordinarily operating on inland
14.6% 5% ….. ….. ….. …..
waters—
(i) Speed boats [NESD]
(ii) Other vessels [NESD]
WDV means written down value 20% 7.07% ….. ….. ….. …..
SLM means straight line method 10% 3.34% ….. ….. ….. …..

NOTES to above table:

• “Buildings” include roads, bridges, culverts, wells and tube-wells.

• “Factory buildings” does not include offices, godowns, officers’ and employees’

quarters, roads, bridges, culverts, wells and tube-wells.

• Where, during any financial year, any addition has been made to any asset, or

where any asset has been sold, discarded, demolished or destroyed, the

depreciation on such assets shall be calculated on a pro rata basis from the date of

such addition or, as the case may be, up to the date on which such asset has been

sold, discarded, demolished or destroyed.

• In the case of a seasonal factory or concern, the number of days on which the

factory or concern actually worked during the year or 180 days, whichever is

greater;

• In any other case, the number of days on which the factory or concern actually

worked during the year or 240 days, whichever is greater.

• The extra shift depreciation shall not be charged in respect of any item of

machinery or plant which has been specifically, excepted by inscription of the

letters “NESD” (meaning “no extra shift depreciation”) against it in sub-items

above.
 • ‘Continuous process plant’ means a plant, which is required and designed to

operate 24 hours a day.

IV. Methods of Depreciation

There are a number of different methods of providing depreciation for the assets. The

method of depreciation depends on a number of factors such as type of asset, life, policy

organization etc.

1.) Straight Line Method

This method is also known as Fixed Installment Method, Equal Installment Method,

Original

Cost Method, Simple or Historical Cost Method. Under this method, a fixed proportion of

original cost

of the asset is written-off annually so that by the time asset is worn out; its value in the

books is reduced

to zero or residual value.The amount of depreciation to be charged each year can be

found out as

follows:
 Depreciation expense = (Cost - Estimated residual value)

Estimated useful life

Factors Affecting the Amount of Depreciation

Following are the important factors which should be considered for determining the

amount of depreciation.

1. Cost Of Assets

The cost of asset include the purchase price, less any trade discount plus all the

costs essential to bring the asset to a usable condition.In other word, the total cost of asset

includes from purchase price to the installation.

2. Estimated Scrap Value

Scrap value refers to the value estimated to be realized after the expiry of the

useful working life of the asset. This is also known as residual value or salvage value.

Depreciation should be determined after deducting the estimated scrap value from the

cost of asset.

3. Estimated Useful Life

An asset can not work forever. Every asset has a certain working and useful life.

The longer the working life, the amount of depreciation will be lower and vice verse.

Therefore, the useful life of an asset is generally to be taken in terms of asset's expected

use. This estimated useful life of asset determines the rate or the amount of depreciation.
4. Legal Provisions

The amount of depreciation also depends upon the statutory and legal provisions

prescribing the admissible rate of depreciation on fixed assets.

Diminishing balance method:

This method is also known as Written down Value method, Reducing Balance

method. Under this method, a fixed percentage of depreciation is charged on the reducing

balance of asset (cost - depreciation) till the amount is reduced to scrap value. Since a

constant percentage rate is being applied to the written down value, the amount of

depreciation charged every year decreases over the life of the asset. This method assumes

that an asset should be depreciated more in earlier years of use than later years because

the maximum loss of an asset occurs in the early years of use. The fixed percentage rate,

to be applied to the allocation of net cost as depreciation.

CHAPTER – 5. FIXED ASSET DISPOSAL AT IIL.

With investments of over 13557 crores, Ispat Industries Limited is the seventh largest

Indian private sector company in terms of fixed assets. It aims to consolidate its market

leadership in the national specialty steel market by capitalizing on the proximity of its

manufacturing facilities to major consumers of flat steel products in Maharashtra, while

increasing its presence in international markets by using its convenient port location.The

detailed information of Fixed Assets of MATE PVT INDIA LIMITED as on 31st March

2010 is as follows:
Particulars Gross block Depreciation Net block
As on 31st Addi Sale As on Upto For On Upto As at At at

mar 2009 tion s mar 31st the sales/ 31st 31st mar .

2010 mar.09 year additio mar. 10 mar.10 09

n
Land:
Leasehold 7.7 - - 7.7 0.43 0.09 - 0.52 7.18 7.27
Freehold 125.25 1.71 - 126.96 - - - - 126.96 125.25

(A)
Total land 132.5 1.71 134.6 0.43 0.09 0.52 134.14 132.52
Buildings 531.5 6.68 538.18 111.7 15.5 127.33 410.85 419.73

5
Loco 59.79 59.39 13.78 2.9 16.18 43.21 46.11
Plant & 12097.55 122. 318. 11901. 4228.1 652. 4.73 4875.99 7024.3 7869.3

machinery 41 74 21 7 47 8
Vessels 19.08 5.25 13.83 3.25 1.62 2.35 2.52 11.31 15.83
Electrical 621.22 7.44 2.44 626.22 27.5 1.69 283.14 343.08 363.95

Installation 6
Vehicles 11.91 0.51 0.62 11.85 5.89 0.85 0.41 6.33 5.52 6.06
Computers 41.02 0.97 3.27 38.39 30.17 3.02 3.01 30.30 8.81 1.03
Furniture & 42.45 1.04 7.19 36.31 19.34 2.68 5.81 16.21 20.18 23.02

fixtures
Total 13557.39 140. 337. 13360. 4269.5 706. 18.9 5358.23 8002.4 8887.8

76 52 63 8 74
Previous year 13167.93 620. 230. 13557. 3961.9 728. 20.44 4669.58 8887.81

44 98 39 2 1
Notes to above table:-

(A) Includes Rs. 3.24 crores (Rs 5.05 crores) being the cost of 84.24 acres (111.65

acres) land,which is yet to be registered in the Company's name.

(B) Includes Rs.0.12 crore (Rs.0.12 crore) being cost of shares in Cooperative Housing

Society and Rs.0.04 crores (Rs.0.04 crores) being the cost of certain properties,which are

pending registration in the Company's name.

(C) Land,Buildings, Railway Sidings, Plant & Machinery and Electrical Installations

revalued by approved valuers on 31.03.1991, 31.03.1997, 31.03.2002, have been again

revalued on Replacement Cost basis, based on the balances of respective fixed assets as

on 31st March 2006 and the net increase of Rs. 1018.38 crores was transferred to

Revaluation Reserve.

(D) Includes foreign exchange differences on long term foreign currency monetary items

relating to depreciable fixed assets de-capitalised Rs.310.53 crores (net) (Rs. 519.14

crores (net) capitalized).

The above table give us the information about the various fixed assets status as on 31

st March 2010 at ISPAT INDUSTRIES LIMITED.

The company has made some disposal in the fiscal year 2009-2010 . The retirement made

by the company in the three different unit namely SIP, HSM and BF are as follows:

Sponge Iron Plant ( Business Area 1101):

In the Motherson automotive the Following Retirement were made

PLANT & MACHINERY

Asset No. Description of the Acquisition Depreciation on

asset Amt. Asset

36002822 Dust Suppression 2,08,138.00 1,63,368.09

system & IB
36002824 Dust Suppression 2,07,063.00 1,62,524.32

system & IB
36002826 Dust Suppression 33,167.00 26,032.88

system & IB

36002828 Dust Suppression 2,12,039.00 1,664,29.97

system & IB
36000413 Dust Suppression 6,57,039.00 5,32,152.72

system DSIA &

IB

TOTAL 13,17,446.00 10,50,507.98

 ELECTRICAL INSTALLATION
Asset No. Description of the Acquisition Depreciation on

asset Amount Asset

55001199 1000 KVA 3.3 K.V. 15,611.62 14,878.54

Transformer
55001200 1000 KVA 3.3 K.V. 590.879.87 5,61,335.88

Transformer
55001201 1000 KVA 3.3 K.V. 8,12,765.70 7,72,127.41

Transformer
55001203 1000 KVA 3.3 K.V. 3,19,266.76 3,03,303.42

Transformer
55001205 Cable 3.3 K.V & 19,715.00 18,729.25

Termination
55001206 Cable 3.3 K.V & 47,595.00 45,215.25

Termination
55001207 Cable 3.3 K.V & 1,140.00 1,083.00

Termination
55001208 Cable 3.3 K.V & 62,656.54 59,522.76

Termination
55000828 Battery charger & 1,49,682.12 1,09,018.47

Batteries
55000829 Battery charger & 3,11,220.00 2,26,671.90

Batteries
55000830 Battery charger & 8,925.00 6500.39

Batteries
55000831 Battery charger & 2,82,613.00 2,05,836.48

Batteries
55000973 3.3 KV H.T Switch 20,947.50 15,228.37

board
55000974 3.3 KV H.T Switch 33,14,109.00 24,09,279.62
 board
55000975 3.3 KV H.T Switch 7,97,582.00 5,79,823.46

board
55000976 3.3 KV H.T Switch 1,74,348.00 1,26,746.91

board
TOTAL 69,29,057.11 54,55,301.11

The detail total retirement made from the SIP unit in the financial year 2009-2010

is having an acquisition cost of 82,88,382.11 INR and the total accumulated depreciation

on the same assets is 65,35,165.61 INR

BLAST FURNACE PLANT (Business Area 1111 to 1121):

There was no retirement in the Fixed Assets in Blast Furnace Area.

Ispat Industries Limited uses two different methods for discarding the Fixed Assets Of

the company.

· Disposal by scrapping.

· Disposal by sale through online auction.

Disposal by scrapping:

These methods of disposal are used by IIL generally to scrap the used and obsolete

Equipments. Company sale the scrap of rubber, cooper and alluminium to other

companies where it can be used as a raw material. Whereas the iron and steel metal
equipment scrap are again sent to the blast furnace and remoulded to make steel. The

different equipments which are used and currently unused or obsolete in the three main

area namely SIP, BF and HSM are sent to the central stores and are stored at the scrap

yard. Then the stores departments look after the disposal of these scrap material.

The rates of the above listed material cannot be quoted as it is the confidential data of the

company

Total Scarp in Stock = 31,283,423

Target of the month = 10,000,000

TOTAL SCRAP SALES 31st March 2010= 36,50,125.34

Balance Scrap To Be Sold Worth = 6,349,875

Target Min Stock to be kept only= 2,500,000

The equipment which have become obsolete due to change in the technology are

stated under obsolete criteria. The material which are in obsolete criteria is as follows

The obsolete items are classified into moving items and non-moving items. Moving

items are those which are in current use whereas non moving items are those which

are idle for mor than 6 months from the day they have been acquired.

The total cost of the items which are obsolete under moving items as per every

business area is as follow:

Business Area Total cost Sponge Iron Plant 8,17,391.00

Hot Strip Mill PLant 1,09,11,791.00

Blast Funace Plant 1,39,220.00

Total 1,18,68,402.00

Disposal through sale by Online Auction:

The major Plant and Machinery is not scrapped but it is sold through the online

auction.These disposal method is used to dis[pose off those fixed assets which are

obsolete or which are no longer used in the company due to technical innovation or

new equipments are purchased to replace older ones.

The interested bidders are given an unique identification ID to quote their bid prices

and the maximum feasible prices for any particular Equipment is taken and the asset

is sold.

CHAPTER – 6 SAVINGS THROUGH FIXED ASSETS

MANAGEMENT

Fixed assets management is an accounting process that seeks to track fixed assets for

the purposes of financial accounting, preventive maintenance, and theft deterrence.

Many organizations face a significant challenge to track the location, quantity,

condition, maintenance and depreciation status of their fixed assets. A popular

approach to tracking fixed assets utilizes serial numbered Asset Tags, often with bar
codes for easy and accurate reading. Periodically, the owner of the assets can take

inventory with a mobile barcode reader and then produce a report.

Off-the-shelf software packages for fixed asset management are marketed to

businesses small and large. Some Enterprise Resource Planning systems are available

with fixed assets modules.

Some tracking methods automate the process, such as by using fixed scanners to

read bar codes on railway freight cars or by attaching a radio-frequency identification

(RFID) tag to an asset Asset Lifecycle Management means asset decisions should be

made with cost consideration over the asset life from planning through the disposal..

So the entire practice of acquiring, using, and getting rid of Fixed Assets is known as

“Fixed Assets Life Cycle Management ”.The flow chart of how to minimize the cost

by managing the Fixed Asset

Assets may be abandoned, sold, or exchanged. In any case, it is first necessary to

fully update all depreciation calculations through the date of disposal. Then, and only

then, the asset disposal would be recorded. If the asset is simply being scrapped

(abandoned), the journal entry entails only the elimination of the cost of the asset

from the books, removing the related accumulated depreciation, and recording a loss

to balance the journal entry. This loss reflects the net book value that was not

previously depreciated:

Accumulated Depreciation 75,000

 Loss 25,000

Equipment 100,000

*Abandoned equipment costing $100,000. The equipment was 75% depreciated on

the date of disposal.

The specific activities and goals involved in life cycle management differs among

different kinds of FIXED Assets, but generally FIXED ASSETS life cycle

management makes use of best practice methods for planning, accounting,

deployment, usage, and maintenance, in order to reach these objectives for the

organization's collection of FIXED Assets:

• Ensure FIXED ASSETS availability where and when needed.

• Minimize the risk of FIXED ASSETS failure or breakdown before the end of

FIXED ASSETS economic life.

• Maximize the return (gains) from the FIXED ASSETS.

• Ensure that FIXED Assets are used productively throughout the FIXED

Asset’s economic life, and they are not wasted or idle. This may involve

working with other management to improve or re-design processes that impact

FIXED ASSETS utilization and FIXED ASSETS productivity.

• Sell or otherwise divest the FIXED Assets that are idle or unproductive.

• Set priorities for FIXED Asset’s acquisition and replacement and plan future

expansion or reduction of the FIXED Asset base.

• Reaching these objectives requires good knowledge of:

 • Expected gains or returns from the FIXED ASSETS.

• FIXED Asset’s lifecycle, total cost of ownership, including maintenance costs

and operating costs.

Any major FIXED Asset class based on constantly improving technologies, such as

medical or laboratory equipment.

FIXED Assets subject to changing requirements for fuel efficiency or emissions.

FIXED ASSETS reliability and or/risks to FIXED ASSETS availability

Available choices in FIXED ASSETS leasing vs. buying, and the implications of each

approach in terms of upgrade/replacement flexibility, responsibility for maintenance,

position either on or off the balance sheet, and potential tax liabilities and tax savings.

The FIXED Asset ’s depreciable life and its economic life.

6.1.) HOW FINANCIAL SAVINGS CAN BE DONE THROUGH DISPOSAL OR

REPLACEMENT OF FIXED ASSETS:

The Fixed Asset disposal and replacement should be based on facts and figures. The

judgment, which the Owner- Financial Manager of a company makes, should be the

result of weighing the costs of keeping the old equipment against the cost of its

replacement.
 Sooner or later, you must decide whether you should keep an existing unit of

equipment or dispose it off or replace it with a new unit. As time goes by, equipment

deteriorates and becomes obsolete. Frequent breakdowns occur, defective output

increases, unit labor costs rise, and production schedules cannot be met. At some

point, these occurrences become serious enough to cause you to wonder whether or

not you should replace or dispose the equipment.

To recognize the better alternative you need to know the total cost of each

alternative - keeping the old equipment or buying a replacement. Once these costs are

determined, you can compare them and identify the more economical equipment. The

paragraphs that follow discuss the individual costs, which you must consider when

computing the total cost of the old and new equipment.

i.) Depreciation

One of the costs connected with any type of equipment is depreciation. For cost

comparison purposes, depreciation is simply the amount by which an asset decreases

in value

over some period of time. For example, if you bought a piece of equipment for

$20,000 and sold it for $6,000 after seven years of service, you would say that the

depreciation during the seven-year period was $20,000 minus $6,000, or $14,000.
This $14,000 was one of your costs of owning the equipment for that period. From

this, it follows that when considering equipment replacement, you must calculate the

future depreciation expense that you will experience with both the old and the new

equipment.

In so far as the new equipment is concerned, this calls for knowing certain things

about the equipment. You need to know (1) its first cost, (2) its estimated service life,

and (3) its expected salvage value. The difference between the first cost and the

salvage value will represent the amount by which the equipment will depreciate

during its life - that is, during the time you expect to use it.

You determine the depreciation expense for the old equipment in the same general

way but for one import difference. So to determine the actual future depreciation

expense that will be experienced with the old equipment, you must know (1) its

present market value, (2) its estimated remaining service life, and (3) its expected

salvage value at the end of that life. The difference between the present market

value and the future salvage value represents the amount by which the equipment will

depreciate during its remaining life in your business.

ii.) Interest

In addition to depreciation, every piece of equipment generates an interest

expense. This expense occurs because owning an asset ties up some of your capital. If

you had to borrow this capital you would have to pay for the use of the money. This
"out-of-pocket" cost is one of the costs of owning the equipment. In this case, the

amount involved is no longer available for other investments, which could bring you

a return. This "opportunity cost" is one of the costs of owning the equipment.

To cite an example, suppose that the market value of an asset during a given year is

$10,000.

Suppose also that at the same time, you are getting capital at a cost of 15 percent per

year. On the other hand, suppose that if you converted the asset into cash, you could

invest the money and realize a rate of return of 15 percent per year. In either case, a

decision to own that asset during that year would be costing you 15 percent of

$10,000, or $1,500 in interest.

iii.) Operating Costs

There is a third type of cost - the cost of operation - that is experienced with a piece

of equipment. Typical operating costs are expenditures for labor, materials,

supervision, maintenance, and power.

This cost must be considered because your choice of equipment affects them. You

may find it convenient to estimate these costs on an annual basis. You can get figures

for each unit of equipment by estimating its next-year operating costs as well as the
annual rate at which these costs are likely to increase as wage rates rise and the

equipment deteriorates.

For example, you might say that operating cost for the new equipment are likely to

be $16,000 during the first year of its life. You might also estimate that after the first

year, the operating costs will increase at a rate of $500 a year.

iv.) Revenues

When this is true, revenues can be ignored for the same reason that you can ignore

equal operating costs.

But if revenues are affected by the choice of equipment, they must be considered.

For example, you might estimate that the higher quality of output from the new

equipment will increase annual sales by $1,200. You can handle this difference in

revenues in either of two ways. One way is to show the $1,200 as an additional

annual cost that will be experienced with the old equipment.

The other way is to treat the $1,200 as a negative annual cost and associate it with

the new equipment. The total cost, which you calculate, will be affected by your

choice of method, but the difference between this costs will remain the same.

An Annual Average Cost

In brief, you can make the necessary cost analysis equipment only after you have the

proper data for each the data include market value, remaining service life, future

salvage value, and operating costs. In addition, for both alternatives, the cost of

money must be stated in the form of an interest rate. By using these data, you can

determine the elements of the total costs. These elements consist of depreciation

expense, interest expense, operating costs, and possibly lost revenues. Now, it so

happens that these costs can be expressed in a variety of ways.

However, the simplest way for cost comparison purposes is to describe these cost

elements in terms of an average annual cost. Doing so permits you to calculate and

compare the total average annual costs of the old and new equipment and reach a

decision.

How these costs can be computed is shown in the example that follows.

Look first at some facts about an old piece of equipment. It has a market value of

$7,000. If retained, its service life is expected to be four years, and its salvage value is

expected to be $1,000.

Next-year operating costs are estimated to be $8,000 but will probably increase at an

annual rate of $200. The cost of money is 12 percent per year. With this set of figures,

you can obtain the total average annual cost of the alternative of keeping this

equipment.
Annual Depreciation Expense:

You begin by calculating the equipment ’s average annual depreciation expense. You

do this by determining the total depreciation and dividing that amount by the asset's

four-year life. Your answer is $1,500, which you get as follows:

$7,000 - $1,000

Annual depreciation = ________________ = $1,500

Annual Interest Expense:

Next, you calculate the average annual interest expense. The maximum investment in

the equipment is $7,000, its present market value. But as time goes by, the investment

in the asset decreases because its market value decreases. The minimum investment is

reached at the end of the equipment's life when it has a salvage value of $1,000. The

average investment will be the average of these maximum and minimum values. You

calculate it as follows:

$7,000 + $1,000

Average investment = _________________ = $4,000

2
To determine the average annual interest expense, you multiply the average

investment ($4,000, in this example) by the annual interest rate of 12 percent. Doing

so yields:

Annual Interest = $4,000 x 0.12 = $480

Annual Operating Costs:

You can determine the average annual operating costs by computing the

average of the individual annual operating costs. In this example, they are estimated

to be $8,000, $8,200, $8,400, and $8,600. The average for these figures is $8,300,

which you obtain as follows:

$8,000 + $8,200 + $8,400 + $8,600

Annual operating costs =_________________________________ = $8,300

Total Average Annual Cost:

For the old equipment, the total average annual cost is simply the sum of

the calculated average annual cost for: (1) depreciation, (2) interest, and (3) operating

expenses. This sum is $10,280, as shown below.

Item average annual cost = Depreciation $1,500 + Interest 480 + Operating Costs

8,300 = Total $10,280

These are some of the costs that are attached to the fixed assets such as Plant and

Machinery and if a particular Asset is kept Idle then it may add on these costs without

contributing to the production. So the fixed asset, which are idle or not used in

operational process must be disposed which, can result in financial savings.

6.2) IMPAIRMENT OF THE FIXED ASSETS (AS 28 by ICAI)

Fixed Assets to be held and used:

Businesses recognize impairment when the financial statement-carrying amount of a

long-lived asset or asset group exceeds its fair value and is not recoverable. A

carrying amount is not recoverable if it is greater than the sum of the undiscounted

cash flows expected from the asset ’s use and eventual disposal. FASB defines

impairment loss as the amount by which the carrying value exceeds an asset’s fair

value.

Financial Managers need not check every asset an entity owns in each reporting

period. When circumstances change indicating a carrying amount may not be

recoverable, Financial Manager’s should test the asset for impairment. A test may be

called for when one or more of these events occur:

· A significant decrease in the market price of a long-lived asset.

· A significant change in how a company uses a long-lived asset or in its physical

condition.
· A significant change in legal factors or in the business climate that could affect an

asset ’s value, including an adverse action or assessment by a regulator (such as if the

EPA rules that a company is polluting a stream and must change its manufacturing

process, thereby decreasing the value of its plant or equipment).

· An accumulation of cost significantly greater than the amount originally expected to

acquire or construct a long-lived asset.

· A current-period operating or cash flow loss combined with a history of such losses

or a forecast demonstrating continued losses associated with use of a long-lived asset.

· An expectation the entity will sell or otherwise dispose of a long-lived asset

significantly before the end of its previously estimated useful life.

Testing Fixed Assets for recoverability:

Financial Manager should test an asset for recoverability by comparing its estimated

future undiscounted cash flows with its carrying value. The asset is considered

recoverable when future cash flows exceed the carrying amount. No impairment is

recognized. The asset is not recoverable when future cash flows are less than the

carrying amount. In such cases the company recognizes an impairment loss for the

amount the carrying value exceeds fair value.

The estimated cash flows a Financial Manager uses to test for recoverability must

include only future flows (cash inflows less cash outflows) directly associated with

use and eventual disposal of a given asset. The company should exclude interest

charges it will expense as incurred. Cash flow estimates are based on the entity’s
assumptions about employing the long-lived asset for its remaining useful life. When

an asset group consists of long-lived assets with different remaining useful lives,

determining the group’s life is critical to estimating cash flows. Remaining useful life

is based on the life of the primary asset— the most significant asset from which the

group derives its cash flow generating capacity. The primary asset must be the

principal long-lived tangible asset being depreciated (or intangible asset being

amortized).

Financial Managers should consider these factors when determining which the

primary asset is:

· Whether the entity would have acquired other assets in a group without this asset.

· The investment required to replace the asset.

· The asset ’s remaining useful life relative to other assets in the group.

If the primary asset does not have the longest remaining life of the group, the cash

flows from operating the group still are based on that asset ’s estimated life — on the

assumption the company will dispose of the entire group at the end of the primary

asset ’s life. Future cash flows must be based on the asset group ’s current service

potential (four years for the three assets above) at the date of the

impairment test. Future cash flows should include expenditures to maintain the

current service potential,

including replacing component parts of the long-lived asset and assets other than the

primary one.
Financial Manager should exclude cash flows that increase service potential but

include maintenance costs.

Estimating Fair Value of an Fixed Asset:

Fair value is an asset ’s purchase or sale price in a current transaction between

willing parties. The best evidence of fair value is prices quoted in active markets,

such as the price for a stock listed on a stock market. Financial manager must use this

amount to value assets if it is available. Because market prices are not available for

many long-lived assets such as equipment, fair value estimates must be based on the

best information available, including prices for similar assets. While inanacial

manager can use other valuation techniques, present value is often the best for

estimating fair value.

Disclosing Impairment Losses:

When a company recognizes an impairment loss for an asset group, it must allocate

the loss to the long-lived assets in the group on a pro rata basis using their relative

carrying amounts. There is an exception when the loss allocated to an individual asset

reduces its carrying amount below fair value. If Financial Manager can determine fair
value without undue cost and effort, the asset should be carried at this amount. This

requires an additional allocation of the impairment loss (explained below). The

adjusted carrying value after the allocation becomes the new cost basis for

depreciation (amortization) over the asset’s remaining useful life.

A business must include an impairment loss in the income from continuing

operations before income taxes line on its income statement. (A not-for-profit

organization (NPO) would include the loss in income from continuing operations in

the statement of activities.) When a subtotal such as income from operations is

present, Financial Manger should include the impairment loss in determining that

amount.

Other required information companies must disclose in the notes to the financial

statements includes · A description of the impaired long-lived asset and the facts and

circumstances leading to its impairment.

· If not separately presented on the face of the statement, the amount of the

impairment loss and the caption in the income statement or the statement of activities

that includes the loss.

· The method or methods used to determine fair value.

Fixed Assets Disposed of Other than by Sale:

A company must continue to classify long-lived assets it plans to dispose of by some

method other than by sale as held and used until it actually gets rid of them. Other
disposal methods include abandonment, exchange for a similar productive asset or

distribution to owners in a spin-off.

A company should report long-lived assets to be abandoned or distributed to owners

that consist of a group of assets (and liabilities) that are a “component of an entity ” in

the income statement as discontinued operations. If the assets are not a component,

Financial Manager should report their disposal as part of the company ’s income from

continuing operations.

Statement no. 144 defines a component of an entity as operations and cash flows that

can be clearly distinguished both operationally and for financial reporting purposes

from the rest of the entity.

A component may be a

· Reportable segment or an operating unit,.

· A reporting unit

· A subsidiary or an asset group as “assets to be disposed of together as a group in a

single transaction and liabilities directly associated with those assets that will be

transferred in the transaction.”

A long-lived asset a company will abandon is considered disposed of when the

company stops using it. A temporarily idle asset is not accounted for as abandoned. If

an entity plans to abandon a long-lived asset before its estimated useful life, it will
treat the asset as held and used, test it for impairment and revise depreciation

estimates in accordance with Opinion no. 20.

Continued use of such a long-lived asset demonstrates service potential (the unit

is useable), and hence, fair value would be zero only in unusual circumstances.

During use before abandonment, the company should depreciate the asset so that at

disposal or abandonment, its carrying value equals its salvage value. This amount

should not be less than zero.

A long-lived asset to be distributed to owners or exchanged for a similar

productive asset is considered disposed of when it is distributed or exchanged. When

the asset is classified as held and used, any test for recoverability must be based on

using the asset for its remaining useful life, assuming disposal will not occur. If the

carrying amount exceeds fair value at disposal, the company must recognize an

impairment loss.

Fixed Assets to be sold:

A company must classify a long-lived asset it will sell as held for sale in the period it

meets all of these criteria:

· Management with the authority to approve the action commits to a plan to sell.

· The asset is available for immediate sale in its present condition, subject only to

terms that are usual and customary when selling such assets.

· The company has initiated an active program to locate a buyer.

· The sale is probable and the asset transfer is expected to qualify as a completed sale

within one year (there are some circumstances beyond the entity ’s control that may

extend the time for completion beyond one year).

· The company is actively marketing the asset at a reasonable price in relation to its

current fair value.

If the company meets the above criteria after the balance-sheet date but before it

issues its financial statements, it must continue to classify the asset as held and used.

In the notes to the financial statements, the company must disclose the facts and

circumstances leading to the expected disposal, the likely manner and timing of the

disposal and— if not separately shown on the face of the statement — the carrying

amount(s) of the major classes of assets and liabilities included in the disposal group.

If the company tests the asset for recoverability at the balance-sheet date, it should do

so on a held-and-used basis. Future cash flow estimates used to test for recoverability

must take into account the possible outcomes that existed at the balance-sheet date,

including a future sale. Financial manager should not revise this assessment for a sale

decision made after the balance-sheet date and should collect documentation and

supporting evidence on a timely basis for events near such a date. An impairment

loss is calculated and reported in the same way it is for assets held and used because

this is the asset ’s status at the balance-sheet date.

Companies must adjust the carrying amounts of assets (including goodwill) that are

part of a disposal group classified as held for sale not covered by Statement no. 144 in
accordance with other applicable GAAP before measuring the group ’s fair value. A

long-lived asset held for sale must be measured at the lower of its carrying amount or

fair value less cost to sell— the incremental direct costs the company would not have

incurred if not for the decision to sell.

Examples of such costs include broker commissions, legal and title transfer fees and

closing costs necessary to transfer title. Exclude expected future losses from

operations. Assets classified as held for sale are not depreciated or amortized.

Reporting Discontinued Operations:

An entity must report the results of operating a component it has either disposed of

or classified as held for sale in discontinued operations if it meets both of these

conditions:

The component’s operations and cash flows have been or will be eliminated from the

ongoing operations as a result of the disposal. The entity will not have any significant

continuing involvement in the components operations after the disposal.

CHAPTER – 7 RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

This report is based on primary as well secondary data, however primary data

collection was given more importance since it is overhearing factor in attitude studies.

One of the most important users of research methodology is that it helps in

identifying the problem, collecting, analyzing the required information data and

providing an alternative solution to the problem .It also helps in collecting the vital

information that is required by the top management to assist them for the better

decision making both day to day decision and critical ones.

A.) DATA SOURES:

Research is based on primary data as well as secondary data. The secondary Data

source plays a major role in the Research. Research has been done by primary data

collection, and interacting with various people has collected primary data. The

secondary data has been collected through various journals and websites.

Duration of Study:

The study was carried out for a period of two months, from 3rd Jan to 25th may 2011.

B.) SAMPLING:

Sampling procedure:

The sample was selected of them who are the employees of the Motherson

Automotive LTD. It was also collected through personal visits to persons, by formal
 and informal talks and through filling up the questionnaire prepared. The data has

been analyzed by using mathematical/Statistical tool.

Sample size:

The sample size of my project is limited to 50 people only.

Sample design:

Data has been presented with the help of bar graph, pie charts, line graphs etc.

FIXED ASSET TURNOVER RATIO

The fixed asset turnover ratio measures the company's effectiveness in generating

sales from its investments in plant, property, and equipment. It is especially important for
a manufacturing firm that uses a lot of plant and equipment in its operations to calculate

its fixed asset turnover ratio.

Year Total sales revenue Net average fixed Fixed asset turn

assets over ratio

2006 5010.73 7535.69 0.66
2007 7595.49 9362.38 0.81
2008 8711.00 9514.67 0.91
2009 8537.84 9046.91 0.94
2010 7782.86 8445.10 0.96

Interpretation: If the fixed asset turnover ratio is low as compared to the industry or past

years of data for the firm, it means that sales are low or the investment in plant and

equipment is too much. This may not be a serious problem if the company has just made

an investment in fixed asset to modernize, for example.

 NET FIXED ASSET NET WORTH RATIO

Formula to calculate asset turnover ratio:

Company name Net fixed assets Net worth Net fixed assets to

net worth ratio

Motherson group 45305.58 27714.28 1.63

limited
Balda motherson 8897.46 3933.28 2.26
Motherson unit I 9128.82 4775.68 1.91
Motherson unit II 5803.10 2202.35 2.63
Motherson unit III 18309.16 7803.95 2.3
Motherson unit IV 1784.52 821.80 2.17

Asset turnover ratio definition and explanation:

A low asset turnover ratio means inefficient utilization or obsolescence of fixed assets,

which may be caused by excess capacity or interruptions in the supply of raw materials.

TOTAL ASSET TURNOVER

 The total asset turnover ratio measures the ability of a company to use its assets to

generate sales. The total asset turnover ratio considers all assets including fixed assets,

like plant and equipment, as well as inventory and accounts receivable.

The calculation for the total asset turnover ratio is:

Net Sales/Total Assets = # Times

Interpretation: The lower the total asset turnover ratio, as compared to historical

data for the firm and industry data, the more sluggish the firm's sales. This may indicate a

problem with one or more of the asset categories composing total assets - inventory,

receivables, or fixed assets. The small business owner should analyze the various asset

classes to determine where the problem lies.

There could be a problem with inventory. The firm could be holding obsolete

inventory and not selling inventory fast enough. With regard to accounts receivable, the

firm's collection period could be too long and credit accounts may be on the books too

long. Fixed assets, such as plant and equipment, could be sitting idle instead of being

used to their full capacity. All of these issues could lower the total asset turnover ratio.

Asset Management Ratios

 Asset management ratios are the key to analyzing how effectively and efficiency

your small business is managing its assets to produce sales. Asset management ratios are

also called turnover ratios or efficiency ratios. If you have too much invested in your

company's assets, your operating capital will be too high. If you don't have enough

invested in assets, you will lose sales and that will hurt your profitability, free cash flow,

and stock price.

Inventory Turnover Ratio

The inventory turnover ratio is one of the most important asset management or asset

turnover ratios. If your firm sales physical products, almost no ratio is more important.

Inventory turnover is calculated as follows:

Inventory turnover ratio = Net sales/Inventory = ____X

This means that you divide net sales from the income statement from the inventory figure

on the balance sheet and you get a number that is a number of times. That number

signifies the number of times inventory is sold and restocked each year. If the number is

high, you may be in danger of stockouts. If it is low, watch out for obsolete inventory.

Days' Sales in Inventory

The Days' Sales in Inventory ratio tells the business owner how many days, on average, it

takes to sell inventory. The usual rule is that the lower the DSI is, the better, since it is

better to have inventory sell quickly than to have it sit on your shelves.

If you know your company's inventory turnover ratio, you can quickly calculate the Days'

Sales in Inventory ratio. This quick formula for calculating this ratio is the following:

Days' Sales in Inventory = 365 days/Inventory turnover = ____ Days

If you don't have the inventory turnover ratio, there is another formula you can use to

calculate Days' Sales in Inventory:

Days' Sales in Inventory = Inventory/Cost of Goods Sold X 365 = _____ Days

The value of your inventory will come from your latest balance sheet. The cost of goods

sold is taken from the income statement. This ratio measures the company's financial

performance for both the owners and the managers as it pertains to the turnover of

inventory. Inventory turnover varies from industry to industry. Generally, a lower number

of days' sales in inventory is better than a higher number of days. It will value from

industry to industry.

Average Collection Period

Average collection period is also called Days' Sales Outstanding or Days' Sales in

Receivables. It measures the number of days it takes a company to collect its credit

accounts from its customers. A lower number of days is better because this means that the

company gets its money more quickly. Average collection period varies from industry to
industry, however. It is important that a company compare its average collection period

to other firms in its industry.

Here is the calculation for Average Collection Period:

365 days/Sales/Accounts Receivable = _____ Days

The sales figure comes from the income statement and the accounts receivable comes

from the balance sheet.

Receivables Turnover

Receivables turnover is a ratio that works hand in hand with average collection period to

give the business owner a complete picture of the state of the accounts receivable.

Receivables turnover looks at how fast we collect on our sales or, on average, how many

times each year we clean up or totally collect our accounts receivable. The calculation is

as follows:

Receivables Turnover = Sales/Accounts Receivable = ____ times

Generally, the higher the receivables turnover, the better as it means you are collecting

your credit accounts on a timely basis. If your receivables turnover is low, you need to

take a look at your credit and collections policy and be sure it is on target.

Fixed Asset Turnover

The fixed asset turnover ratio looks at how efficiently the company uses its fixed assets,

like plant and equipment, to generate sales. If you can't use your fixed assets to generate
sales, you are losing money because you have those fixed assets. Property, plant, and

equipment is expensive to buy and maintain. In order to be effective and efficient, those

assets must be used as well as possible to generate sales. The fixed asset turnover ratio is

an important asset management ratio because it helps the business owner measure that

efficiency.

Here is the calculation for fixed asset turnover:

Fixed Asset Turnover = Sales/Net Fixed Assets = _____ times

Usually, the higher the number of times, the better. However, if the ratio is too high, your

equipment is probably breaking down because you are operating over capacity.

Net Working Capital Turnover

The net working capital turnover ratio is an asset management ratio that is a "big picture"

ratio. It measures how hard our working capital is "working" for us. Working capital is

what you have left over after the company pays its short-term debt obligations. Generally,

the higher the value of the ratio, the better. The calculation is as follows:

Net Working Capital Turnover = Sales/Net Working Capital

Total Asset Turnover

The total asset turnover ratio is the asset management ratio that is the summary ratio for

all the other asset management ratios covered in this article. If there is a problem with

inventory, receivables, working capital, or fixed assets, it will show up in the total asset
turnover ratio. The total asset turnover ratio shows how efficiently your assets generate

sales. The higher the total asset turnover ratio, the better and the more efficiently you use

your asset base to generate your sales. Here is the calculation:

Total Asset Turnover = Sales/Total Assets = _____ times

Asset Management Ratios

Asset Management Ratios attempt to measure the firm's success in managing its assets to

generate sales. For example, these ratios can provide insight into the success of the firm's

credit policy and inventory management. These ratios are also known as Activity or

Turnover Ratios.

Receivables Turnover and Days' Receivables

The Receivables Turnover and Days' Receivables Ratios assess the firm's management of

its Accounts Receivables and, thus, its credit policy. In general, the higher the

Receivables Turnover Ratio the better since this implies that the firm is collecting on its

accounts receivables sooner. However, if the ratio is too high then the firm may be

offering too large of a discount for early payment or may have too restrictive credit terms.

The Receivables Turnover Ratio is calculated by dividing Sales by Accounts

Receivables. (Note: since Accounts Receivables arise from Credit Sales it is more

meaningful to use Credit Sales in the numerator if the data is available.)

The Days' Receivables Ratio is calculated by dividing the number of days in a year, 365,

by the Receivables Turnover Ratio. Therefore, the Days' Receivables indicates how long,

on average, it takes for the firm to collect on its sales to customers on credit. This ratio is

also known as the Days' Sales Outstanding (DSO) or Average Collection Period (ACP).

Inventory Turnover and Days' Inventory

The Inventory Turnover and Days' Inventory Ratios measure the firm's management of

its Inventory. In general, a higher Inventory Turnover Ratio is indicative of better

performance since this indicates that the firm's inventories are being sold more quickly.

However, if the ratio is too high then the firm may be losing sales to competitors due to

inventory shortages. The Inventory Turnover Ratio is calculated by dividing Cost of

Goods Sold by Inventory. When comparing one firms's Inventory Turnover ratio with

that of another firm it is important to consider the inventory valuation methid used by the

firms. Some firms use a FIFO (first-in-first-out) method, others use a LIFO (last-in-first-

out) method, while still others use a weighted average method.

The Days' Inventory Ratio is calculated by dividing the number of days in a year, 365, by

the Inventory Turnover Ratio. Therefore, the Days' Inventory indicates how long, on

average, an inventory item sits on the shelf until it is sold.

Example Problems
Use the information below to calculate the Inventory Turnover

and Days' Inventory Ratios.

Cost of Goods Sold: $

Inventory: $

Inventory Turnover:

Days' Inventory:

Seasonal Industries
Many firms, such as department stores, are in seaonal industries in which their assets,

especially current assets, and sales volume vary throughout the year.

This can be of particular concern when comparing the Asset Management Ratios of one

firm with another firm in the same industry. This occurs because, in the calculation of

each of the Asset Management Ratios, a number from the Income Statement is divided

by a number from the Balance Sheet. The Income Statement reports revenues and

expenses over a period of time (usually a year) whereas the Balance Sheet reports the

firms assets and liabilities on a particular date.

Thus, for firms in seasonal industries differences in performance may be detected when

no actual difference exists simply because their Balance Sheets are published on different

dates.

Fixed Assets Turnover

The Fixed Assets Turnover Ratio measures how productively the firm is managing its

Fixed Assets to generate Sales. This ratio is calculated by dividing Sales by Net Fixed

Assets. When comparing Fixed Assets Turnover Ratios of different firms it is important

to keep in mind that the values for Net Fixed Assets reported on the firms' Balance Sheets

are book values which can be very different from market values.

Total Assets Turnover

The Total Assets Turnover Ratio measures how productively the firm is managing all of

its assets to generate Sales. This ratio is calculated by dividing Sales by Total Assets.

Example Problems
Use the information below to calculate the Fixed Assets Turnover

and Total Assets Turnover Ratios.

 Sales: $

Net Fixed Assets: $

Total Assets: $

Fixed Assets Turnover:

Total Assets Turnover:

Debt Management Ratios

Debt Management Ratios attempt to measure the firm's use of Financial Leverage and

ability to avoid financial distress in the long run. These ratios are also known as Long-

Term Solvency Ratios.

Debt is called Financial Leverage because the use of debt can improve returns to

stockholders in good years and increase their losses in bad years. Debt generally

represents a fixed cost of financing to a firm. Thus, if the firm can earn more on assets

which are financed with debt than the cost of servicing the debt then these additional

earnings will flow through to the stockholders. Moreover, our tax law favors debt as a

source of financing since interest expense is tax deductible.

With the use of debt also comes the possibility of financial distress and bankruptcy.The

amount of debt that a firm can utilize is dictated to a great extent by the characteristics of
the firm's industry. Firms which are in industries with volatile sales and cash flows

cannot utilize debt to the same extent as firms in industries with stable sales and cash

flows. Thus, the optimal mix of debt for a firm involves a tradeoff between the benefits of

leverage and possibility of financial distress.

Debt Ratio, Debt-Equity Ratio, and Equity Multiplier

The Debt Ratio, Debt-Equity Ratio, and Equity Multiplier are essentially three ways of

looking at the same thing: the firm's use of debt to finance its assets. The Debt Ratio is

calculated by dividing Total Debt by Total Assets. The Debt-Equity Ratio is calculated

by dividing Total Debt by Total Owners' Equity. The Equity Multiplier is calculated by

dividing Total Assets by Total Owners' Equity.

Example Problems
Use the information below to calculate the Debt Ratio, Debt-Equity Ratio,

and Equity Multiplier.

Total Assets: $
 Total Debt: $

Total Owners' Equity: $

Debt Ratio: %

Debt-Equity Ratio:

Equity Multiplier: