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7/30/2019 S9,10 Fixed Asset
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AS 10 Fixed Assets
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Session Agenda
Definition of fixed asset
Identification of fixed asset
Component of cost Special cases of valuation
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1. Fixed asset
It 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.
Gross block/Net block
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2. Identification of Fixed Assets
i. Stand-by and servicing equipment
ii. Spare parts
iii. Component cost
i. Stand-by equipment and servicing equipment
are normally treated as fixed asset.
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Contd.
ii. 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 withan 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.
Example: Rig standpipe purchased for oil rig by ONGC
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Contd.
In certain circumstances, the accounting for an itemof fixed asset may be improved if the total
expenditure there on is allocated to its component
parts, provided they are in practice separable, and
estimates are made of the useful lives of these
components.
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Contd.
For example, rather than treating 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 awhole.
Boeing 787-9 price $218 Mn. (Rs. 981 crore)
Engine: Rolls-Royce Trent 1000
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Contd.
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.
Pls. refer to AS 10 document uploaded on FAM
Folder page no. 4 para 8.1.
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3. Components of Cost
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Components of Cost
Purchase price
Import duty/or any other duty
Transportation charges
Installation charges
Consultation /Inspection Charges
Modification ChargesHandling Cost
Cost of Ordering
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Components of Cost
The cost of an item of fixed asset comprises its:
i. purchase price
ii. import duties and other non-refundable taxes
iii. any directly attributable cost of bringing the asset to itsworking condition for its intended use (Example
installation charges, transportation charges etc)
iv. any trade discounts and rebates are deducted in arriving
at the purchase price.
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Contd.
Administration and other general overhead expenses
are usually excluded.
However, in some circumstances, such expenses asare 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.
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Contd.
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
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4. Special Cases for valuation
i. Self-constructed Fixed Assets
ii. Non-monetary Consideration
iii. Improvements and Repairs
iv. Joint Ownership
v. Several assets are purchased for a consolidated price
vi. Goodwill
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i. Self-constructed Fixed Assets
In arriving at the gross book value of self-constructed fixed assets, the same principlesapply as those described earlier.
Included in the gross book value are costs ofconstruction that relate directly to the specific
asset and costs that are attributable to theconstruction activity in general and can beallocated to the specific asset.
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Class exercise # 1
ABC Ltd. is constructing a fixed asset. Following are
the expenses incurred on the construction:
Materials Rs. 10,00,000
Direct Expenses Rs. 2,50,000
Total Direct Labor Rs. 5,00,000 (1/10th for this work)
Total admn. Exp. Rs. 8,00,000 (5% for this work)
Depreciation Rs. 10,000
(On assets used for this work)
Calculate the cost of asset.
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Contd.
Particulars Amount (Rs.)
Materials 10,00,000
Direct Expenses 2,50,000
Total Direct Labor 50,000
Total admn. Exp. 40,000
Depreciation 10,000
Cost of the Asset 13,50,000
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ii. Non-monetary Consideration
When a fixed asset is acquired in exchange for another asset,
its cost is usually determined by reference to the fair marketvalue 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 thenet 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.
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Contd.
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 moreclearly evident.
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iii. Improvements and Repairs
Frequently, it is difficult to determine whethersubsequent expenditure related to fixed asset representsimprovements that ought to be added to the gross bookvalue or repairs that ought to be charged to the profitand loss statement.
Only expenditure that increases the future benefits fromthe existing asset beyond its previously assessedstandard of performance is included in the gross book
value, e.g., an increase in capacity.
Pls. visit fixed asset schedule of jet airways
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Contd.
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.
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iv. Joint Ownership
Where an enterprise owns fixed assets jointly with others, 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, thepro rata cost ofsuch 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.
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Class exercise # 2
A machine costing Rs. 10,00,000 is jointlyowned by ABC Ltd. and XYZ Ltd. in the ratio of70% and 30% respectively.
Value in the book of ABC:
70% of 10,00,000 = 7,00,000
Value in the book of XYZ:
30% of 10,00,000 = 3,00,000
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v. Several assets are purchased for a
consolidated price
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.
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vi. Goodwill
Goodwill, in general, is recorded in the books only when some
consideration in money or moneys worth has been paid for it.
Whenever a business is acquired for a price (payable either in cashor 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.
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Class exercise # 3
Company A with an Asset of Rs. 500 crore and
liability of Rs. 200 crore (Excluding Capital) was
aquired by Company B.
Company B paid Rs. 350 crores to the owners of
Company A.
Calculate the amount of Goodwill.
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Class exercise # 4
X Ltd. purchased Rs. 5 lacs worth of land for afactory side. Company demolished an oldbuilding on the property and sold the material
for Rs. 10,000. Company incurred additionalcost and realized salvaged proceeds asfollows:
Legal fees for purchase contract Rs. 25,000
Title guarantee insurance Rs. 10,000
Cost of demolition of building Rs. 30,000
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Contd.
Particulars Amount (Rs.)
Cost of Land 5,00,000
Legal Fees 25,000
Title Insurance 10,000
Cost of Demolition (50,000 10,000) 40,000
Cost of the Asset 5,75,000