AS10: Accounting of fixed assets

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. (It is expected to be used for more than one accounting period.)
The cost of fixed asset includes:
• Purchase price
• Import Duties and other non-refundable taxes
• Direct cost incurred to bring the asset to its working condition
• Installation cost
• Professional fees like fees of architects
• General overhead of enterprise when these expenses are specifically attributable to acquisition/preparation of fixed assets
• Any expenses before the commercial production, including cost of test run and experimental production
• Any expenses before the asset is ready for use not put to use
• Loss on deferred payment arising out of foreign currency liability
• Price adjustment, changes in duties and similar factors.

The cost of fixed asset is deducted with:

• Trade discounts and rebates
• Sale proceeds of test run production
• Amount of government grants received/receivable against fixed assets
• Gain on deferred payment arising out of foreign currency liability

Similarly, historical cost of self constructed fixed assets will include:

• All cost which are directly related to the specific asset
• All costs that are attributable to the construction activity should be allocated to fixed assets
• Any internal profit included in the cost should be eliminated.
• Any expenses incurred on asset between date of ready for use and put to use is either charged to P&L A/c or treated as deferred revenue expenditure to be amortised in 3-5 years after commencement of production.

When fixed asset is acquired in 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 assets given up

For this purpose, fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident.

Fixed asset acquired in exchange for shares or other securities should be recorded at FMV of assets given up or asset acquired, whichever is more clearly evident. (i.e the option of recording the asset at net book value of asset given up is closed).

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 distance.

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.

Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realizable value and shown separately. Fixed assets should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Profit/loss on such disposal or writing off is recognized in the profit and loss account.

Revaluation

When the fixed assets are revalued, these assets are shown at revalued price. Revaluation of fixed assets should be restricted to the net recoverable amount of fixed asset.

When a fixed asset is revalued, an entire class of assets should be revalued or selection of assets for revaluation should be made on a systematic basis. That basis must be disclosed.

Accounting treatment of revaluation under different situation:
When revaluation is made upward
Fixed Assets A/c Dr

To Revaluation Reserve

When revaluation is made downward

P&L A/c Dr
To Fixed Assets

When revaluation is made upward subsequent to previous upward revaluation
Fixed Assets A/c Dr

To Revaluation Reserve
When revaluation is made downward subsequent to previous upward revaluation

Revaluation Reserve A/c Dr (To the extent of carrying amount of R.R)
P&L A/c Dr (Balancing Figure)
To Fixed assets

When revaluation is made upward subsequent to previous downward revaluation

Fixed assets A/c Dr
To P&L A/c (To the extent of
previous downward revaluation)
To Revaluation Reserve (Balancing Figure)

When revaluation is made downward subsequent to previous downward revaluation

P& L A/c Dr

To Fixed Assets

Accounting treatment on disposal of Fixed Assets:

On sale of fixed assets
Bank A/c Dr
P & L A/c Dr (If Loss)
To Fixed Assets
To P & L A/c (If Profit)

On sale of fixed assets where upward revaluation has taken place

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 account 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.

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 WDV should be stated in the B/S.
Alternatively, the pro rata cost of such jointly owned assets may be grouped together with similar fully owned assets with an appropriate disclosure thereof.
Only purchased goodwill should be recorded in books.
Disclosure:
• Gross and net book value of fixed assets at the beginning and end of period showing additions and disposals
• Revalued amounts substituted for historical costs of fixed assets, the method adopted to compute the same and whether an external valuer was involved.