Fixed Assets are 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 expenditure represents an asset or an expense can have a material effect on an enterprise’s reported results of operations.
Applicability:
The said AS is applicable to all the enterprises in their entirety except the following items:
- forests, plantations and similar regenerative natural resource wasting assets like minerals, oil, natural gases
- expenditure on real estate development
- livestock
Definition
Fixed Assets is classified as an asset if it is 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.
Valuation of Fixed Asset
Fixed Asset in the financial statement can be valued by two ways:
1. Historical Cost : of Acquired Fixed asset consist of the following:-
Purchase price + import duties and other non-refundable taxes + any directly attributable cost of bringing the asset to its working condition for its intended use. (-) any trade discounts and rebates.
Self constructed Fixed asset consist of all the cost that relate directly to the specific asset, any internal profits included therein are eliminated from the cost of the asset.
Acquisition in exchange of another asset: then its cost is usually determined by reference to the fair market value of the asset acquired or net book value of the asset given up.
Acquisition in exchange for shares/ securities: then it is recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.
2. Revalued Cost:
When fixed assets are revalued, an entire class of assets should be revalued or the selection assets to be revalued should be made on systematic basis otherwise it can lead to unrepresentative amounts being reported in financial statements.
Revaluation of Fixed asset should be restricted to the recoverable amount of the asset.
3. Valuation in Special Cases:
Acquisition on Hire Purchase Term: such assets are recorded at their cash value. They are shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership of the said asset.
Jointly held Assets 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.
Acquisition for Consolidated price: consideration is apportioned to the various assets on a fair basis as determined by competent valuers.
Accounting Treatment
In historical cost financial statements, gains or losses arising on disposal are generally recognised in the P&L A/C.
Treatment for revaluation of Asset:
First Time Revaluation
Upward: An increase in net book value arising on revaluation of fixed assets is normally credited directly to owner’s interests under the head of revaluation reserves and is regarded as not available for distribution.
Downward: Decrease in net book value arising on revaluation of fixed assets is charged to P&L A/C.
First Revaluation (Downward) and subsequent revaluation Upward:
Decrease in net book value is charged to the P&L A/c when downward revaluation was done.
Balance amount should be credited to revaluation reserve.
First Revaluation (Upward) and subsequent revaluation (Downward):
Increase in net book value is credited to owner’s interests under the head of revaluation reserves.
Balance amount is charged to profit and loss account.
After Improvements and Repairs, if the expected future benefit from the fixed assets does not change, the expense incurred is charged to P&L A/C. But expense is capitalized if the expected future benefits changes.
Addition of Capital nature to an existing asset: The cost of an addition or extension to an existing asset which
is of 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.
Disclosure in the Financial Statement
Gross and net book values of fixed assets at the beginning and end of the period showing additions, disposals, acquisitions and other movements.
Expenditure incurred on account of fixed assets in the course of construction or acquisition.
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.
