Duration: 60

mins
Slides: 23

LMT SCHOOL OF MANAGEMENT, THAPAR

UNIVERSITY
Masters of Business Administration

Course: Financial Reporting and Analysis

Faculty: Dr. Sonia Garg (Email:
sonia.garg@thapar.edu)

Session 11 and 12: Accounting for Tangible Fixed

Assets

Identification and
Significance
Fixed Assets are
Held with the intention of being used in producing
goods or services
Not held for sale in the normal course of business
Significance
Fixed assets often comprise of a significant portion
of total assets of a firm
The determination of whether an expense is a
fixed asset or revenue expense will have big
impact on firms performance
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Accounting for Tangible Fixed

Assets

AS-10 weblink
Applies to
land, buildings, plant and machinery, vehicles, furniture and
fittings, goodwill, patents, trade marks and designs
Does not apply to
Leased assets
forests, plantations, livestock and similar regenerative natural
resources
wasting assets including mineral rights, expenditure on the
exploration for and extraction of minerals, oil, natural gas and
similar non-regenerative resources
expenditure on real estate development
Government grants
Fixed assets borrowing costs capitalisation
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Accounting for Tangible Fixed

Assets

Determinants of Value of Fixed

Assets

Purchase price
Import duty and other non-refundable taxes
Trade discounts and rebates
Directly attributable costs in bringing the asset
to its satisfactory working condition (site
preparation, delivery and handling costs,
installation costs, professional fees,
administrative and general expenses, costs of
test runs)
Changes due to exchange rate fluctuation, price
adjustments of changes in duty
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Accounting for Tangible Fixed

Assets

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Accounting for Tangible Fixed

Assets

Other Determinants
Self constructed fixed assets: Include costs of construction directly
attributable to the specific asset eliminating internal profits
Non-monetary consideration: Consider fair market value (FMV) of the
consideration and asset acquired; or record asset acquired at net book
value of asset given up and balance adjusted (Be conservative and
objective)
Improvements and Repairs
Repair is revenue expense
Improvements if increase the future benefits of original asset can be
capitalised; Cost of improvement
which becomes an integral part of original asset is added to its gross book value
which has a separate entity and can be used after original asset is disposed is
accounted for separately

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Accounting for Tangible Fixed

Assets

Most
preferred

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Accounting for Tangible Fixed

Assets

Special Cases
Jointly owned fixed assets: State firms share in
such assets, proportion of the original cost,
accumulated depreciation and written down value;
pro rata cost of such assets may be grouped with
other assets with appropriate disclosure
Basket Purchase: when many assets are
purchased for a consolidated price, the
consideration is apportioned to the various assets
on a fair basis as determined by a competent
valuer
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Accounting for Tangible Fixed

Assets

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Accounting for Tangible Fixed

Assets

Certain Specific Fixed assets

Individual insignificant assets may be
aggregated into single asset (e.g. office chairs as
total chairs)
Machinery spares are usually charged to P/L when
consumed. Sometimes a specific spare part, used
infrequently, my be capitalised over the remaining
life of principal item
Component parts, if separable from principal asset
and have different useful life, it may be treated as a
separate asset
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Accounting for Tangible Fixed

Assets

10

Revaluation
Methods
Appraisal by competent valuer (most preferred)
Indexation with general or specific price indices (periodically cross-checked with
the appraisal method

Presented by restating gross book value and accumulated depreciation

Either revalue entire class of assets or select on systematic basis
After revaluation, net book value of asset should not be more than the
net recoverable amount
An increase in net book value due to revaluation
Is credited to owners equity under revaluation reserve not available for
distribution
It may be credited to P/L as gain to the extent it offsets a previous decrease

A decrease in net book value due to revaluation

Is debited to P/L as a loss
It may be debited to revaluation reserve to the extent it offsets a previous
increase

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Accounting for Tangible Fixed

Assets

11

Retirement and Disposal

Material items retired from active use and held for disposal
Stated at lower of NBV and net realisable value shown separately in F/S

On disposal, fixed assets are eliminated from F/S

Retirement/Disposal of fixed assets carried at historical cost
Loss from retirement or loss/gain from disposal is charged to P/L

Retirement/Disposal of fixed assets carried at revalued amount

Loss/gain charged to P/L unless
In case of loss if it reverses corresponding amount in revaluation reserve
Amount standing in revaluation reserve is transferred to general reserve

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Accounting for Tangible Fixed

Assets

12

Items to be disclosed in F/S

Gross book value and net book value at the
beginning and at the end of an accounting period
showing additions, disposals, acquisitions and other
movements
Expenditure towards fixed asset for construction or
acquisition
For Revalued assets
Revalued amount
Method used for revaluation; nature of indices used for
non-appraised revaluation
Year of appraisal
Whether external valuer is involved
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Assets

13

IFRS Converged IND AS 16 v/s AS-10

IND AS 16 requires use of component approach
Each major part is depreciated separately
Cost of replacing such parts is capitalised
Cost of replacing other parts is also capitalised with derecognition of the
replaced parts

IND AS 16 requires an entity to choose either cost/ revaluation

model for a class of assets as a policy requiring periodic
revaluation
Fair value is the amount for which an asset could be exchanged
between knowledgeable willing parties in an arms length
transaction
As per converged IND AS 105, retired fixed assets should be carried
at lower of its carrying amount and fair value less cost to
sell
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Accounting for Tangible Fixed

Assets

14

Impairment of assets
If a fixed asset is lying useless due to the following
reasons
Technological obsolescence or irreparable physical
damage
Significant decline in utility due to arrival of higher
versions
Productivity of fixed asset not being fully exploited
due to low customer off take as a result of
competition or changes in customer preferences
And the management is convinced that the situation is
not going to improve in the foreseeable future, the
fixed asset should be IMPAIRED
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Revaluation, Impairment losses

and Asset Disposal

15

Impairment indicators
External
Decline in market value of asset
Adverse changes in the technological, legal and economic
environment of the market to which the asset is dedicated
Changes in interest rates that materially decrease the
assets recoverable amount
Carrying amount of net assets is more than market
capitalisation
Internal
Evidence of physical damage of asset
Significant changes in usage of asset
Evidence of worse than expected economic performance
of asset
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and Asset Disposal

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AS-28 weblink
AS-28 does not apply to inventories, assets arising from construction
contracts, deferred tax assets or investments
AS-28 applies to assets that are carried at cost as well as at revalued
amounts
If revaluation is done on the basis of market value then, net selling price
= market value cost of disposal
if the disposal costs are negligible, the recoverable amount of the revalued asset is
necessarily close to, or greater than, its revalued amount (fair value). Revalued asset will
not be impaired.
if the disposal costs are not negligible, net selling price of the revalued asset is
necessarily less than its fair value. Therefore, the revalued asset will be impaired.

If revaluation is not done on the basis of market value then, its revalued
amount (fair value) may be greater or lower than its recoverable amount.
Hence, after the revaluation requirements have been applied, an enterprise
applies this Standard to determine whether the asset may be impaired.
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Definitions
Recoverable amount is the higher of an assets net selling price and its value in
use.
Value in use is the present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the end of its useful life.
Net selling price is the amount obtainable from the sale of an asset in an arms
length transaction between knowledgeable, willing parties, less the costs of disposal.
Costs of disposal are incremental costs directly attributable to the disposal of an
asset, excluding finance costs and income tax expense.
An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount
Carrying amount is the amount at which an asset is recognised in the balance
sheet after deducting any accumulated depreciation (amortisation) and accumulated
impairment losses thereon.

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Accounting treatment
Impairment loss
Recognised as an expense in P/L
If asset is revalued, decrease in
revaluation
Reversal of impairment loss
Credited to P/L
Or credited to revaluation reserve as the
case may be
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Items to be disclosed in F/S

Amount of impairment losses recognised in the P/L and
line item in which those impairment losses are included.
Amount of reversals of impairment losses recognised in
the P/L and the line items in which those impairment
losses are reversed.
Amount of impairment losses recognised directly against
revaluation reserve.
Amount of reversals of impairment losses recognised
directly in revaluation reserve.
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and Asset Disposal

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IFRS Converged IND AS 36 v/s AS-28

AS 36 requires annual impairment
testing for an intangible asset with
an indefinite useful life and goodwill
acquired in a business combination
AS 36 prohibits recognition of
reversals of impairment loss for
goodwill

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and Asset Disposal

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