AS-10, Accounting for Fixed Assets
Accounting Standard 10 as issued by ICAI
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.
READ NOTES ON ACCOUNTING STANDARD 10
READ NOTES ON ACCOUNTING STANDARD 10
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
(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.