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Statements of Accounting Standards
(AS 10)
Accounting
for Fixed Assets
The following
is the text of the Accounting Standard 10 (AS 10) issued by the
Institute of Chartered Accountants of India on 'Accounting for
Fixed Assets'.
In the
initial years, this accounting standard will be recommendatory
in character. During this, this standard is recommended for use
by companies listed on a recognised stock exchange and other large
commercial, industrial and business enterprises in the public
and private sectors.
Introduction
1. Financial
statements disclose certain information relating to fixed assets.
In many enterprises these assets are grouped into various categories,
such as land, buildings, plant and machinery, vehicles, furniture
and fittings, goodwill, patents, trade marks and designs. This
statement deals with accounting for such fixed assets except as
described in paragraphs 2 to 5 below.
2. This
statement does not deal with the specialised aspects of accounting
for fixed assets that arise under a comprehensive system reflecting
the effects of changing prices but applies to financial statements
prepared on historical cost basis.
3. This
statement does not deal with accounting for the following items
to which special considerations apply:
(i) forests,
plantations and similar regenerative natural resources;
(ii) wasting
assets including mineral rights, expenditure on the exploration
for and extraction of minerals, oil, natural gas and similar non-regenerative
resources;
(iii)
expenditure on real estate development; and
(iv) livestock.
Expenditure
on individual items of fixed assets used to develop or maintain
the activities covered in (i) to (iv) above, but separable from
those activities, are to be accounted for in accordance with this
Statement.
4. This
statement does not cover the allocation of the depreciable amount
of fixed assets to future periods since this subject is dealt
with in Accounting Standard 6 on 'Depreciation Accounting'.
5. .This
statement does not deal with the treatment of government grants
and subsidies, and assets under leasing rights. It makes only
a brief reference to the capitalisation of borrowing costs and
to assets acquired in an amalgamation or merger. These subjects
require more extensive consideration than can be given within
this Statement.
Definitions
6. The
following terms are used in this Statement with the meanings specified:
6.1 Fixed
asset is an asset held with the intention of being used for
the purpose of producing or providing goods or services and is
not held for sale in the normal course of business
6.2 Fair
market value is the price that would be agreed to in an open
and unrestricted market between knowledgeable and willing parties
dealing at arm's length who are fully informed and are not under
any compulsion to transact.
6.3 Gross
book value of a fixed asset is its historical cost or other
amount substituted for historical cost in the books of account
of financial statements. When this amount is shown net of accumulated
depreciation, it is termed as net book value.
Explanation
7. Fixed
assets often comprise a significant portion of the total assets
of an enterprise, and therefore are important in the presentation
of financial position. Furthermore, the determination of whether
an expenditure represents an asset or an expense can have a material
effect on an enterprise's reported results of operations.
8. Identification
of Fixed Assets
8.1 The
definition in paragraph 6.1. gives criteria determining whether
items are to be classified as fixed assets. Judgement is required
in applying the criteria to specific circumstances or specific
types of enterprises. It may be appropriate to aggregate individually
insignificant items, and to apply the criteria to the aggregate
value. An enterprise may decide to expense an item which could
otherwise have been included as fixed asset, because the amount
of the expenditure is not material
8.2 Stand-by
equipment and servicing equipment are normally capitalised. Machinery
spares are usually charged to the profit and loss statement as
and when consumed. However, if such spares can be used only in
connection with an item of fixed asset and their use is expected
to be irregular, it may be appropriate to allocate the total cost
on a systematic basis over a period not exceeding the useful life
of the principal item.
8.3 In
certain circumstances, the accounting for an item of fixed asset
may be improved if the total expenditure thereon is allocated
to its component parts, provided they are in practice separable,
and estimates are made of the useful lives of these components.
For example, rather than treat an aircraft and its engines as
one unit, it may be better to treat the engines as a separate
unit if it is likely that their useful life is shorter than that
of the aircraft as a whole.
9. Components of
Cost
9.1 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:
(i) site
preparation;
(ii) initial
delivery and handling costs;
(iii)
installation cost, such as special foundations for plant; and
(iv) 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.
9.2 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 monies
borrowed for construction or acquisition of fixed assets are not
capitalised to the extent that such costs relate to periods after
such assets are ready to be put to use.
9.3 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..
9.4 The
expenditure incurred on start-up and commissioning of the project,
including the expenditure incurred on test runs and experimental
production, is usually capitalised as an indirect element of the
construction cost. However, the expenditure incurred after the
plant has begun commercial production, i.e., production intended
for sale or captive consumption, is not capitalised and is treated
as revenue expenditure even though the contract may stipulate
that the plant will not be finally taken over until after the
satisfactory completion of the guarantee period.
9.5 If
the interval between the date a project is ready to commence commercial
production and the date at which commercial production actually
begins is prolonged, all expenses incurred during this period
are charged to the profit and loss statement. However, the expenditure
incurred during this period is also sometimes treated as deferred
revenue expenditure to be amortised over a period not exceeding
3 to 5 years after the commencement of commercial production
10.Self-constructed
Fixed Assets
10.1 In
arriving at the gross book value of self-constructed fixed assets,
the same principles apply as those described in paragraphs 9.1
to 9.5. Included in the gross book value are costs of construction
that relate directly to the specific asset and costs that are
attributable to the construction activity in general and can be
allocated to the specific asset. Any internal profits are eliminated
in arriving at such costs.
11.Non-monetary Consideration
11.1 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.
11.2 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.
12.Improvements and
Repairs
12.1 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.
12.2 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.
13.Amount Substituted
for Historical Cost
13.1 Sometimes
financial statements that are otherwise prepared on a historical
cost basis include part or all of fixed assets at a valuation
in substitution for historical costs and depreciation is calculated
accordingly. Such financial statements are to be distinguished
from financial statements prepared on a basis intended to reflect
comprehensively the effects of changing prices.
13.2 A
commonly accepted and preferred method of restating fixed assets
is by appraisal, normally undertaken by competent valuers. Other
methods sometimes used are indexation and reference to current
prices which when applied are cross checked periodically by appraisal
method
13.3 The
revalued amounts of fixed assets are presented in financial statements
either by restating both the gross book value and accumulated
depreciation so as to give a net book value equal to the net revalued
amount or by restating the net book value by adding therein the
net increase on account of revaluation. An upward revaluation
does not provide a basis for crediting to the profit and loss
statement for accumulated depreciation existing at the date of
revaluation.
13.4 Different
bases of valuation are sometimes used in the same financial statements
to determine the book value of the separate items within each
of the categories of fixed assets or for the different categories
of fixed assets. In such cases, it is necessary to disclose the
gross book value included on each basis.
13.5 Selective
revaluation of assets can lead to unrepresentative amounts being
reported in financial statements. Accordingly, when revaluations
do not cover all the assets of a given class, it is appropriate
that the selection of assets to be revalued be made on a systematic
basis. For example, an enterprise may revalue a whole class of
assets within a unit.
13.6 It
is not appropriate for the revaluation of a class of assets to
result in the net book value of that class being greater than
the recoverable amount of the assets of that class.
13.7 An
increase in net book value arising on revaluation of fixed assets
is normally credited directly to owner's interests under the heading
of revaluation reserves and is regarded as not available for distribution.
A decrease in net book value arising on revaluation of fixed assets
is charged to profit and loss statement except that, to the extent
that such a decrease is considered to be related to a previous
increase on revaluation that is included in revaluation reserve,
it is sometimes charged against that earlier increase. It sometimes
happens that an increase to be recorded is a reversal of a previous
decrease arising on revaluation which has been charged to profit
and loss statement in which case the increase is credited to profit
and loss statement to the extent that it offsets the previously
recorded decrease.
14. Retirements and
Disposals
14.1 An
item of fixed asset is eliminated from the financial statements
on disposal.
14.2 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 realisable value and are shown separately in the financial
statements. Any expected loss is recognised immediately in the
profit and loss statement
14.3 In
historical cost financial statements, gains or losses arising
on disposal are generally recognised in the profit and loss statement.
14.4 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 utilised, 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
15. Valuation of
Fixed Assets in Special Cases
15.1 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.
15.2 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
15.3 Where
several assets are purchased for a consolidated price, the consideration
is apportioned to the various assets on a fair basis as determined
by competent valuers
16. Fixed Assets
of Special Types
16.1 Goodwill,
in general, is recorded in the books only when some consideration
in money or money's worth has been paid for it. Whenever a business
is acquired for a price (payable either in cash or in shares or
otherwise) which is in excess of the value of the net assets of
the business taken over, the excess is termed as 'goodwill'. Goodwill
arises from business connections, trade name or reputation of
an enterprise or from other intangible benefits enjoyed by an
enterprise
16.2 As
a matter of financial prudence, goodwill is written off over a
period. However, many enterprises do not write off goodwill and
retain it as an asset.
16.3 Patents
are normally acquired in two ways: (i) by purchase, in which case
patents are valued at the purchase cost including incidental expenses,
stamp duty, etc. and (ii) by development within the enterprise,
in which case identifiable costs incurred in developing the patents
are capitalised. Patents are normally written off over their legal
term of validity or over their working life, whichever is shorter
16.4 Know-how
in general is recorded in the books only when some consideration
in money or money's worth has been paid for it. Know-how is generally
of two types:
(i) relating
to manufacturing processes; and
(ii) relating
to plans, designs and drawings of buildings or plant and machinery
16.5 Know-how
related to plans, designs and drawings of buildings or plant and
machinery is capitalised under the relevant asset heads. In such
cases depreciation is calculated on the total cost of those assets,
including the cost of the know-how capitalised. Know-how related
to manufacturing processes is usually expensed in the year in
which it is incurred.
16.6 Where
the amount paid for know-how is a composite sum in respect of
both the types mentioned in paragraph 16.4, such consideration
is apportioned amongst them on a reasonable basis.
16.7 Where
the consideration for the supply of know-how is a series of recurring
annual payments as royalties, technical assistance fees, contribution
to research, etc., such payments are charged to the profit and
loss statement each year.
17. Disclosure
17.1 Certain
specific disclosures on accounting for fixed assets are already
required by Accounting Standard I on 'Disclosure of Accounting
Policies' and Accounting Standard 6 on 'Depreciation Accounting'."
17.2 Further
disclosures that are sometimes made in financial statements include:
(i) gross
and net book values of fixed assets at the beginning and end of
an accounting period showing additions, disposals, acquisitions
and other movements;
(ii) expenditure
incurred on account of fixed assets in the course of construction
or acquisition; and
(iii)
revalued amounts substituted for historical costs of fixed assets,
the method adopted to compute the revalued amounts, the nature
of any indices used, the year of any appraisal made, and whether
an external valuer was involved, in case where fixed assets are
stated at revalued amounts.
Accounting Standard
(The Accounting Standard
comprises paragraphs 18–39 of this Statement. The Standard should
be read in the context of paragraphs 1–17 of this Statement
and of the 'Preface to the Statements of Accounting Standards'.)
18.
The items determined in accordance with the definition in paragraph
6.1 of this Statement should be included under fixed assets in
financial statements
19.
The gross book value of a fixed asset should be either historical
cost or a revaluation computed in accordance with this Standard.
The method of accounting for fixed assets included at historical
cost is set out in paragraphs 20 to 26; the method of accounting
of revalued assets is set out in paragraphs 27 to 32.
20
The cost of a fixed asset should comprise its purchase price and
any attributable cost of bringing the asset to its working condition
for its intended use. 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 should also be included in the
gross book value of the asset to which they relate. However, the
financing costs (including interest) on fixed assets purchased
on a deferred credit basis or on monies borrowed for construction
or acquisition of fixed assets should not be capitalised to the
extent that such costs relate to periods after such assets are
ready to be put to use.
21
The cost of a self-constructed fixed asset should comprise those
costs that relate directly to the specific asset and those that
are attributable to the construction activity in general and can
be allocated to the specific asset
22.
When a fixed asset is acquired in exchange or in part exchange
for another asset, the cost of the asset acquired should be recorded
either at fair market value or at the net book value of the asset
given up, adjusted for any balancing payment or receipt of cash
or other consideration. For these purposes fair market value may
be determined by reference either to the asset given up or to
the asset acquired, whichever is more clearly evident. Fixed asset
acquired in exchange for shares or other securities in the enterprise
should be recorded at its fair market value, or the fair market
value of the securities issued, whichever is more clearly evident.
23.
Subsequent expenditures related to an item of fixed asset should
be added to its book value only if they increase the future benefits
from the existing asset beyond its previously assessed standard
of performance.
24.
Material items retired from active use and held for disposal should
be stated at the lower of their net book value and net realisable
value and shown separately in the financial statements.
25.
Fixed asset should be eliminated from the financial statements
on disposal or when no further benefit is expected from its use
and disposal.
26.
Losses arising from the retirement or gains or losses arising
from disposal of fixed asset which is carried at cost should be
recognised in the profit and loss statement
27.
When a fixed asset is revalued in financial statements, an entire
class of assets should be revalued, or the selection of assets
for revaluation should be made on a systematic basis. This basis
should be disclosed.
28.
The revaluation in financial statements of a class of assets should
not result in the net book value of that class being greater than
the recoverable amount of assets of that class.
29.
When a fixed asset is revalued upwards, any accumulated depreciation
existing at the date of the revaluation should not be credited
to the profit and loss statement
30.
An increase in net book value arising on revaluation of fixed
assets should be credited directly to owners' interests under
the head of revaluation reserve, except that, to the extent that
such increase is related to and not greater than a decrease arising
on revaluation previously recorded as a charge to the profit and
loss statement, it may be credited to the profit and loss statement.
A decrease in net book value arising on revaluation of fixed asset
should be charged directly to the profit and loss statement except
that to the extent that such a decrease is related to an increase
which was previously recorded as a credit to revaluation reserve
and which has not been subsequently reversed or utilised, it may
be charged directly to that account.
31.
The provisions of paragraphs 23, 24 and 25 are also applicable
to fixed assets included in financial statements at a revaluation.
32.
On disposal of a previously revalued item of fixed asset, the
difference between net disposal proceeds and the net book value
should be charged or credited to the profit and loss statement
except that to the extent that such a loss is related to an increase
which was previously recorded as a credit to revaluation reserve
and which has not been subsequently reversed or utilised, it may
be charged directly to that account.
33.
Fixed assets acquired on hire purchase terms should be recorded
at their cash value, which, if not readily available, should be
calculated by assuming an appropriate rate of interest. They should
be shown in the balance sheet with an appropriate narration to
indicate that the enterprise does not have full ownership thereof.
34
In the case of fixed assets owned by the enterprise jointly with
others, the extent of the enterprise's share in such assets, and
the proportion of the original cost, accumulated depreciation
and written down value should be stated in the balance sheet.
Alternatively, the pro rata cost of such jointly owned assets
may be grouped together with similar fully owned assets with an
appropriate disclosure thereof.
35.
Where several fixed assets are purchased for a consolidated price,
the consideration should be apportioned to the various assets
on a fair basis as determined by competent valuers.
36.
Goodwill should be recorded in the books only when some consideration
in money or money's worth has been paid for it. Whenever a business
is acquired for a price (payable in cash or in shares or otherwise)
which is in excess of the value of the net assets of the business
taken over, the excess should be termed as 'goodwill'
37.
The direct costs incurred in developing the patents should be
capitalised and written off over their legal term of validity
or over their working life, whichever is shorter.
38.
Amount paid for know-how for the plans, layout and designs of
buildings and/or design of the machinery should be capitalised
under the relevant asset heads, such as buildings, plants and
machinery, etc. Depreciation should be calculated on the total
cost of those assets, including the cost of the know-how capitalised.
Where the amount paid for know-how is a composite sum in respect
of both the manufacturing process as well as plans, drawings and
designs for buildings, plant and machinery, etc., the management
should apportion such consideration into two parts on a reasonable
basis.
Disclosure
39.
The following information should be disclosed in the financial
statements:
(i)
gross and net book values of fixed assets at the beginning and
end of an accounting period showing additions, disposals, acquisitions
and other movements;
(ii)
expenditure incurred on account of fixed assets in the course
of construction or acquisition; and
(iii)
revalued amounts substituted for historical costs of fixed assets,
the method adopted to compute the revalued amounts, the nature
of indices used, the year of any appraisal made, and whether an
external valuer was involved, in case where fixed assets are stated
at revalued amounts.
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