Upload
geraldine-mills
View
214
Download
0
Tags:
Embed Size (px)
Citation preview
04/21/23 1Created by Rajat
To prescribe the accounting treatment for the fixed assets.
The major issues covered are :
* The timing of Recognition of the assets.
* Determination of Carrying Amount in
the financial statements.
04/21/23Created by Rajat 2
Fixed Assets are assets that are held - for use in the production or
supply of goods and services, and
not held for sale in the normal course of business. AND are expected to be used during more than one period.
04/21/23Created by Rajat 3
04/21/23 4Created by Rajat
04/21/23 5Created by Rajat
04/21/23Created by Rajat 6
04/21/23Created by Rajat 7
Day to day expenses is charged to Profit and Loss Account as repair and maintenance.
Expenditure will be Capitalized only if the efficiency of the asset is increased due to such expenditure.
04/21/23Created by Rajat 8
04/21/23Created by Rajat 9
04/21/23Created by Rajat 10
Depreciation :
In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.
Assets which are used during more than one accounting period.
Has a limited useful life. Enterprise holds it for the purpose of
production. For rental to others. For administrative purposes
04/21/23Created by Rajat 11
DEPRECIABLE ASSETS ?
04/21/23Created by Rajat 12
METHOD OF DEPRECIATION
1. Straight-line depreciation2. Reducing-Balance Method3. Activity depreciation4. Sum-of-Years' Digits Method5. Units-of-Production Depreciation Method 6. Units of time depreciation7. Group Depreciation Method8. Composite Depreciation Method
Expected useful life of the Depreciable Asset
Expected Residual value of the Depreciable Asset
Type and Nature of the Depreciable Asset
Nature of the use of the Depreciable Asset
04/21/23Created by Rajat 13
Factors to be considered
The net book value of an asset is reduced by the same amount each period. What this means is that you take the total cost of the asset and divide it by Useful life of the Asset.
04/21/23Created by Rajat 14
For Example- - An Asset is purchased for Rs.27000 - Useful Life of the asset is 4 years - Expected Scrap value at the end is
Rs.3000
04/21/23Created by Rajat 15
Years Opening Book Value
Depreciation
Accumulated Dep.
Closing Book Value
1 27000(Original
cost)
6000 6000 21000
2 21000 6000 12000 15000
3 15000 6000 18000 9000
4 9000 6000 24000 3000 (Scrap Value)
The net book value of an asset is reduced by the same proportion each period. What this means is that at the end of every period you reduce the value by a fixed percentage.
In this method higher depreciation charge is provided in the first year and gradually decreasing charges are provided in subsequent years.
Each period uses the previous period's book value to work out the amount.
04/21/23Created by Rajat 16
For Example- - An Asset is purchased for Rs.1000 - Expected Scrap value at the end is
Rs.100 - Rate of Depreciation is 40%
04/21/23Created by Rajat 17
Years Opening Book Value
Depreciation
Accumulated Dep.
Closing Book Value
1 1000(Original
cost)
400 400 600
2 600 240 640 360
3 360 144 784 216
4 216 86.4 870.4 129.6
5 129.6 29.6(129.6-100)
900 100 (Scrap Value)
Book Value of the asset at the beginning of the year.
Depreciation thereon. Book value at the end of the year. Method of Depreciation. If rates applied are different from the
rates prescribed by the governing statute then the rates and useful life of the asset should also be disclosed.
04/21/23Created by Rajat 18
Disclosure
04/21/23Created by Rajat 19
Scenario After 1/4/2011
With Effect from 1st April, 2011, it is mandatory for every company to adopt IFRS (International Financial Reporting Standards).
Under IFRS, Fixed assets & Depreciation should be accounted for Using the principles in International Accounting Standard (IAS 16) which deals in Property, Plant & Equipment.
Comparative Study Of AS 10 & As 6 with IAS 16
04/21/23Created by Rajat 20
04/21/23Created by Rajat 21
COST
Accounting Standard
IAS 16
COST
There is no guideline for
capitalization of dismantling and site restoration
cost.
Cost includes: Initial estimates of dismantling and removing the item and restoring the site on which it is located.
Components
Not mandatory to capitalize the parts
of a fixed asset.
Each part of asset with significant cost is
depreciated separately.
04/21/23Created by Rajat 22
Accounting Standard IAS 16
Replacement
There is no Requirement of decapitalizing the carrying amount of
replaced part
The carrying amount of those parts that are replaced should be derecognized.
Spares
Spares are usually charged to P&l as &
when Consumed. If such items are irregular &
machine specific, then it may be appropriate to capitalize such item.
Spares are carried as inventory and recognized as
consumed in p&l. If specific to asset then must be capitalized.
Servicing Equipment
s
Servicing equipments are normally capitalized
Servicing equipments are usually carried as
inventory and recognized in profit and loss account as
consumed.
04/21/23Created by Rajat 23
Accounting Standard IAS 16
Revaluation
Revaluation approach adopted is ad-hoc in nature. When revaluation do not cover all the asset of the given class, it is appropriate that the selection of the asset to be revalued be made on systematic basis.
IAS 16 gives option to an entity to choose either cost less depreciation method or revaluation method. If an item of property, plant and equipment is revalued, the entire class to which that asset belongs should be revalued.
There is no such requirement.
Revaluation must be kept up to date so that the carrying amount does not differ materially from the fair value. Where policy of revaluation is adopted, regular revaluation of all PPE should be done.
04/21/23Created by Rajat 24
Accounting Standard IAS 16
Depreciation
All companies need to ensure minimum
depreciation as per rates prescribed in Schedule XIV to the
Companies Act. There is no requirement for
separate depreciation for each significant part
of the asset.
Each part of an item of PPE with a cost that is significant in relation to the total cost of an item will be depreciated separately.
There is no need for annual review of
estimates of useful life and residual value. It
may be reviewed periodically.
The residual value and useful life of an asset is reviewed at least each financial year end and if expectations differ from previous estimates, the
changes will be accounted for as a
change in accounting estimates.
04/21/23Created by Rajat 25
Accounting Standard IAS 16
Methods of
Depreciation
Permitted methods of depreciation are straight line method and written down value method.Depreciation method selected should be applied consistently from period to period. Change is method should be made only in prescribed situation.
Various method can be used like straight line method, diminishing balance method, unit of production method etc.Depreciation method selected should be applied consistently from period to period. Change is method should be made only in prescribed situation.
Change in method is treated as change in
accounting policy and is accounted
retrospectively.
Change in depreciation method is treated as change in accounting
estimates and accounted for prospectively.
04/21/23Created by Rajat 26