Accounting for Fixed Assets

Ashutosh Dash

Identifying a Fixed Asset

Identification of Fixed Assets

Which of the followings is not a Fixed Asset? Calculator

a) b) c)

Typewriter
Computer

d)

Cash Register

What are Fixed Assets?

Fixed asset is an asset held For the purpose of production Providing goods or services

Not for sale

Value must be Material

Identification of Fixed Assets

Which of the followings are capitalized?

a)

Machine Spares

b)
c)

Stand-by Equipments
Consumable Oils Servicing Equipments

d)

Identification of Assets??

Which of the following component parts should be treated as two different assets?
a)

1st and 2nd Floor of a house

b)
c)

Air craft and its engine

Land and Building None of the above

d)

Fixed Assets How to Identify??

Identification of Fixed Assets

Reporting of Fixed Assets

How is the cost presented in FS?

In Horizontal Form
(a)

Gross Value on Asset Side Accumulated Depreciation on Liability Side (Contra)

(b)

Gross Book Value

Gross Book Value of Fixed Assets should be

a)
b) c)

Historical Cost or Fair Value

Historical Cost or Revalued Amount Fair Value or Revalued Amount Historical Cost or Fair Value or Revalued Amount

d)

How to calculate Cost of FA?

Cost Components

What are the components of cost of an Asset??

a)
b) c)

Purchase Price and Freight

Purchase price and duties/taxes CIF Directly attributable cost of bringing the asset to its working condition

d)

Point to ponder over..

What happens to cost incurred during the interval between The date a project is ready to commence commercial production And The date at which commercial production actually begins

Cost of Self Constructed Assets

a) b) c) d)

e)

HUL is constructing a new production facility Expected compleion date 1/8/09 Till July 2009 HUL has spent 12 crores for Material 3 Crores Architects 5 crores to labourers Interest payable 10% on a 20 crores construction loan Administrative Expenses 5000K

Self constructed assets

Cost of Self Constructed Assets Direct Cost of Construction + Financing Cost of Construction

Assets in Exchange of Assets

Cost determined by reference to the fair market value of the consideration given

Appropriate to consider the fair market value of the asset acquired if this is more clearly evident

Receipt or payment of cash conidered

Assets in Exchange of Shares

Usually recorded at Fair market value of Asset Given up or Fair market value of the securities issued whichever is more clearly evident.

Assets on Hire Purchase

Assets are Shown at Cash Value If CV not available: Calculated using an appropriate interest rate

Does Cost undergo Change?

May change on account of

a)

Exchange fluctuations, Price adjustments, Changes in duties or

b)

c)

d)

Similar other factors

Improvement and Repairs

YES
Does subsequent expenditure on asset represent a component of the cost? If increases the future benefits from the existing asset

NO
If it does not

Can the cost be substituted???

A commonly accepted substitution is the revalued amount of fixed asset Done by either
a) b)

A competent Valuer Use of index

Requires change in both Gross BV & Accumulated Depreciation

Revaluation of Fixed Assets

Revaluation of FA

The gain on revaluation of fixed assets will be accounted in Profit and Loss Account

a)

b)
c)

Realisation Account
Revaluation Reserve Account

d)

Reserve and Surplus Account

Revaluation of FA

Loss arising out of revaluation of assets will be accounted in Profit and Loss Account

a)

b)
c)

Realisation Account
Revaluation Reserve Account

d)

Reserve and Surplus Account

Revaluation The Accounting

Accounting treatment of revaluation

Treatment of Revaluation

Bal & Co purchase a plant for Rs 17 lakhs on 1.1.2000, whose estimated scrap value would be Rs 1 lakh after its estimated life of eight years. On 31st December 2004 the plant has been revalued at 7, 50,000. Again in 2005 December the plant is revalued at Rs 6, 80,000. What would be the accounting treatment for the revaluation?

Accounting Treatment

What would have been the accounting treatment if the revalued figure on 31st December 2005 would have been (i) Rs 7,00,000 (ii) Rs 5,80,000. (Assume no depreciation)

Accounting Treatment

Additional Depreciation arising revaluation would be charged to Profit Loss Account

out of

a)

b)
c)

Revaluation Reserve account

Reserve and Surplus Account Accumulated Depreciation Account

d)

Retirement & Disposal

Pati & Co purchase a plant for Rs 17 lakhs on 1.1.2001, whose estimated scrap value would be Rs 1 lakh after its estimated life of eight years. On 31st December 2005 the plant has been assessed useless. On that date the plant was disposed for Rs 4, 82,800. Show the accounting treatment for the disposal of the asset.

Disposal of Fixed Assets

Retirement & Disposal of FA:

Situation Treatment Items retired from active Stated at the lower of net use and held for disposal book value and net realizable value separately in the financial statements Disposal of fixed Assets Eliminated from the financial statements

Gains or losses arising Recognized in the profit from retirement or and loss statement disposal of asset

Retirement & Disposal

Sharma Industries Ltd. acquired a plant on 1.1.2001 for Rs. 100 lacs. The company charges straight line depreciation on the basis of estimated useful life of the asset at 10 years and scrap value at the end 5%. At the beginning of the 2005 year the asset was revalued at +25 % of the BV and the revaluation profit were transferred to Revaluation Reserve. The excess depreciation arising out of revaluation was adjusted by taking transfer from revaluation reserve. While charging depreciation after revaluation, estimated remaining useful life was assumed to be 9 years and scrap realization was expected to be 10% of the revalued figure. On 1.1.2008 year the company found the asset useless accordingly, decided to retire it. On the date of retirement the estimated realizable value of the asset is Rs. 12, 50,000. Ascertain the loss on retirement of the asset.

What are Disclosed???

Historical cost of a class of assets Accumulated Depreciation for the class Depreciation Methods & Rates Change in Method od Depreciation

Classification of Fixed Assets

Thank You