Companies Act 2013

Fixed asset accounting

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Agenda



LEAD - Fixed Asset Accounting
Overview of fixed asset accounting

Key changes in fixed asset accounting in Companies Act, 2013

Practical issues involved

Questions
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Overview of fixed asset
accounting

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Overview of fixed asset accounting
LEAD - Fixed Asset Accounting
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Definition of fixed asset
Not defined in the Companies Act. But the Accounting standard 10 issued by the ICAI
defined fixed asset as 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.

Identification of fixed assets
Criteria for identification of fixed assets as per IAS 16:
Probable flow of future economic benefits associated with the asset to the entity
Reliable measurement of the asset cost

Measurement and accounting of assets
Measurement of assets should be at the historical cost. Cost includes all costs necessary
to bring the asset to working condition for its intended use

Factors to be considered while accounting fixed assets
Costs
whether revenue/ capital expenditure
Whether measurable
Benefits
Life of the assets
Theoretical life
Intended life
Overview of fixed asset accounting

LEAD - Fixed Asset Accounting
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Depreciation of assets
Measure of wearing out, technology and marketing changes
Impacts the profit and loss accounts of the company

Impairment of assets
Assessment of impairment indicators
If indication exist, the enterprise should estimate the recoverable amount of the asset
Adequate disclosures while financial reporting



Overview of fixed asset accounting

LEAD - Fixed Asset Accounting
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Key changes to fixed asset
accounting
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Key changes
LEAD - Fixed Asset Accounting
Component Accounting (Refer next slide for details)

Change in life of asset impacting the depreciation computations
For class of companies complying with accounting standards issued by ICAI for
financial statements Asset life can vary from the life indicated in the schedule II.
For other companies Asset life cannot exceed the life prescribed under the
schedule

Depreciation incase of assets built on BOT (Build Operate and Transfer) model
Revenue based allocation of depreciation was allowed as per earlier Act. The same
was not allowed in Companies Act, 2013. which was subsequently addressed by way
of amendment to schedule II

Extra shift depreciation
No separate rates were prescribed. But for selected categories, depreciation will be
increased by 50%/ 100% incase of multiple shifts

Residual value
Defined as a maximum of 5%

Transitional provisions
Computation of remaining life of assets
Adjustment against retained earnings
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Component accounting
LEAD - Fixed Asset Accounting
Component accounting is optional as per earlier AS 10. But, the same is now made mandatory as per Companies Act,
2013. Refer below for illustrative component accounting workflow
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Component accounting
LEAD - Fixed Asset Accounting
Key facets
Identification of the material components is judgmental
Determining useful life of the assets prospectively is not merely an accounting exercise
Replacement costs are to be capitalized as separate component. While the same used be
charged off to P&L earlier
There is a conflict between Ind AS 16 and companies Act, 2013 on aspects like major
inspection/ overhaul. No clarity is provided
Disclosure on life of different components belonging to same asset will be critical.





Asset: Computer
Life of the asset: 5 years
Component1:
Monitor
Estimated life:
7 years
Component2:
CPU
Estimated life:
5 years
Component3:
Others
Estimated life:
2 years
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Asset: Building

Components:
Structural design
Staircase
Elevators
Air condition
Heating system
Water system
Electrical system
Major overhaul/ inspections
Illustrations for component accounting
LEAD - Fixed Asset Accounting
Illustration 1
Asset: Ship

Components:
Hull
Keel
Engine
Navigation system
Major overhaul/ inspections
Other fit out assets


Illustration 2
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Depreciation
LEAD - Fixed Asset Accounting
Particulars Companies Act 1956 Accounting standards Companies Act 2013
a. Governed by Schedule XIV AS 6 Schedule II
b. Depreciation rates Minimum depreciation rates
prescribed
Not prescribed Not prescribed. Life of assets
prescribed
c. Special depreciation 100% for assets with cost of less
than INR. 5000
Not prescribed Not prescribed
e. Disclosure a. Depreciation method used
b. Depreciation rates or the
useful lives of the assets for
computing depreciation, if they
are different from the specified
a. The historical cost or
other amount substituted
for historical
cost of each class of
depreciable asset
b. Total depreciation for the
period for each class of
assets
c. The related accumulated
depreciation
a. Depreciation method used
b. the useful lives of the assets for
computing depreciation, if they are
different from the life specified
Comparison with the old Act
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Practical issues
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Whether the life of assets prescribed are to be applied prospectively/ retrospectively?

Should the depreciation be recomputed if the company desires to declare dividend relating
to earlier years in the current year?

Act provides the depreciation rates of the principal asset. The same also mandates for
component accounting. Is a disclosure required if the component has a life different from
the principal asset?

If a company uses a useful life or residual value which is different from Schedule II,
justifications are to be disclosed. Is this proviso applicable if the change is to comply with
the accounting standards?

Whether the amendments regarding BOT assets is only for toll roads? Or the same can be
applied for all the BOT assets?

Practical issues
LEAD - Fixed Asset Accounting
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Questions ?
LEAD - Fixed Asset Accounting
Thank you