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Facilitators Guide for Accenture-IGNOU Diploma program


Please read the student material before you go through this material

After studying this Unit, you shall be able to : Identify the key information needs of decision makers regarding fixed assets; determine the acquisition cost of fixed assets; distinguish between account for revenue and capital expenditures; explain a account for non-monetary acquisition, valuation of special fixed assets and disposals of fixed assets; and discuss revaluation of fixed assets.

Meaning Fixed Assets

Fixed assets are grouped into various categories, such as land, building and plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs. Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position.

Identification Of Fixed Assets

Identification of assets whether it is fixed or not, is the first and foremost step in the process of accounting for fixed assets. An enterprise may decide to consider an item as expense which could otherwise have been included as fixed assets, because the amount of the expenditure is not material.

Determining Cost Of Fixed Assets

The cost 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 cost to its working condition for its intended use; and trade discounts and rebates are deducted in arriving at the purchase price. The cost of a fixed asset may undergo changes subsequent to its acquisition on construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors.

Determining Cost Of Fixed Assets-Contd.

Different fixed assets for which expenditures need to be capitalized are:
Land Buildings and improvements other than buildings Self-Constructed Fixed Assets Equipment Cost Interest Cost Plant and Machinery Non-Monetary Consideration Basket purchases Accounting for low cost fixed assets

Accounting For Costs Subsequent To Acquisition Of Fixed Assets

In general, costs incurred to achieve greater future benefits from the asset should be capitalized. For the costs to be capitalized, one of three conditions must be present: (a) the useful life of the asset must be increased, (b) the quantity of service produced from the asset must be increased, or (c) the quality of the units produced must be enhanced. Capitalization may be accomplished by: (a) substituting the cost of the new asset for the cost of the asset replaced, (b) capitalizing the new cost without eliminating the cost of the asset replaced, or (c) debiting the expenditure to accumulated depreciation. When a plant asset is disposed of, the accounting records should be relieved of the cost and accumulated depreciation associated with the asset.

Accounting For Deletion Of Fixed Assets

An item of fixed asset is eliminated from the financial statements 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. If a fixed asset has been revalued then, the difference between net disposed 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.

Ways To Acquire Fixed Assets

Following are the ways to acquire fixed assets: Cash Discounts Deferred Payment Contracts Lump Sum Purchases Issuance of Stock Donated assets (non-reciprocal transfers) Exchanges of property, plant and equipment

Valuation Of Special Types Of Fixed Assets And Fixed Assets In Special Cases
Goodwill, in general, is recorded in the books only when some consideration in money or moneys worth has been paid for it. Goodwill is written off over a period. 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 capitalized. Patents are normally written off over their legal term of validity or over their working life, whichever is shorter. Know-how in general is recorded in the books only when some consideration in money or moneys worth has been paid for it.

Valuation 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.

Revaluation Of Fixed Assets

Revaluation of fixed assets is a technique that may be required to accurately describe the true value of the capital goods a business owns. The purpose of a revaluation is to bring into the books the fair market value of fixed assets. This may be helpful in order to decide whether to invest in another business. If a company wants to sell one of its assets, it is revalued in preparation for sales negotiations.

Reasons for Revaluation

To show the true rate of return on capital employed. To conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives. Provision for depreciation based on historic cost will show inflated profits and lead to payment of excessive dividends. To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings. To negotiate fair price for the assets of the company before merger with or acquisition by another company. To enable proper internal reconstruction, and external reconstruction. To issue shares to existing shareholders (rights issue) or for an external issue of shares (public issue of shares). To get fair market value of assets, in case of sale and leaseback transaction. When the company intends to take a loan from banks/financial institutions by mortgaging its fixed assets. Proper revaluation of assets would enable the company to get a higher amount of loan. Sale of an individual asset or group of assets. In financial firms revaluation reserves are required for regulatory reasons.

Methods of Revaluation of Fixed Assets

The common methods used in revaluing assets are: Indexation Current market price (CMP) Appraisal Method Selective Revaluation

Points to be considered before revaluation is undertaken

Before revaluation is undertaken, it is necessary to take into confidence the Production Department (PD), Accounts Department (AD), and the Technical Department (TD) in the company.

Similarly, liaison with external appraisers becomes necessary.

Important Considerations in Revaluation of Fixed Assets

Increase in value of fixed assets because of revaluation of fixed assets is credited to Revaluation Reserve. increase in depreciation arising out of revaluation of fixed assets is debited to Revaluation Reserve. Selection of the suitable method of revaluation is important. When any asset, which is revalued, is sold, the part of loss resulting due to revaluation is debited to the Revaluation Reserve . When assets are revalued, every Balance Sheet shall show the amount of increase / decrease made in respect of each class of assets which shall be shown in place of the original cost. In case of assets revaluation is dependent on the type of asset. Revaluation should not result in the net book value of an asset exceeding its recoverable value Any downward revision in the book values of the assets is immediately written off to the Profit & Loss account. The amount of upward revaluation as is equal to the amount expensed previously is credited to the Profit & Loss a/c.

Residual Value of a Fixed Asset

At the end of the useful life of a fixed asset the business will dispose of it and any amounts received from the disposal will represent its residual value. This, again, may be difficult to estimate in practice. However, an estimate has to be made. If it is unlikely to be a significant amount, a residual value of zero will be assumed.

Accounting Standard-10
Accounting for Fixed Assets The text mentioned below on Accounting Standard-10 (AS10) issued by institute of Chartered Accountants of India on Accounting for fixed Assets Accounting Standard (AS) 10.The text covers following topics: Introduction Definitions Explanation Identification of fixed Assets Components of cost Self-constructed Fixed Assets Non-monetary Consideration

Accounting Standard-10 Contd.

Improvements and Repairs Amount Substituted for Historical Cost Retirements and Disposals Valuation of Fixed Assets in Special Cases Fixed Assets of Special Types Disclosure Accounting Standard

During this period, 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.

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