valuation of fixed assets

Valuation of Fixed AssetsValuation of Fixed Assets

Fixed AssetsFixed Assets

They lead to the generation of They lead to the generation of operational revenue, which speaks of operational revenue, which speaks of their crucial importance. Hence the their crucial importance. Hence the need for proper valuationneed for proper valuation

AS - 10AS - 10

Meaning and significance of fixed Meaning and significance of fixed assetsassets

Scope and coverageScope and coverage Principles and norms of standard Principles and norms of standard

accounting treatmentaccounting treatment Disclosure reqirementsDisclosure reqirements

Meaning and significanceMeaning and significance

Fixed assets represents assets held Fixed assets represents assets held with the intention of being used for with the intention of being used for the purpose of producing or the purpose of producing or providing goods or services and are providing goods or services and are not held for sale in the normal course not held for sale in the normal course of business.of business.

Significant portion of total assetsSignificant portion of total assets Effect on reported results - Expense Effect on reported results - Expense

as fixed asset or revenue expenseas fixed asset or revenue expense

Scope and coverageScope and coverage Deals with land, building, plant Deals with land, building, plant

and machinery, vehicles, and machinery, vehicles, furniture and fittings exceptfurniture and fittings except Regenerative natural resources like forests and Regenerative natural resources like forests and

plantationsplantations Expenditure on the exploration and extraction of non-Expenditure on the exploration and extraction of non-

regenerative sources like minerals, oil and natural gas.regenerative sources like minerals, oil and natural gas. mineral rightsmineral rights Expenditure on real estate developmentExpenditure on real estate development LivestockLivestock Leased assetsLeased assets

The standard however, covers the individual The standard however, covers the individual items of those fixed assets which are used to items of those fixed assets which are used to develop or maintain the above mentioned develop or maintain the above mentioned assets and are separable from themassets and are separable from them

Principles and NormsPrinciples and Norms

Determinants of value of Fixed Determinants of value of Fixed AssetsAssets The cost comprises purchase price net The cost comprises purchase price net

of discounts and rebates but inclusive of of discounts and rebates but inclusive of duties and other non-refundable taxes duties and other non-refundable taxes and any directly attributable cost of and any directly attributable cost of bringing the asset to its working bringing the asset to its working conditioncondition

Cost of fixed assetsCost of fixed assets The cost may change subsequent to acquisition or The cost may change subsequent to acquisition or

construction on account of exchange fluctuations, construction on account of exchange fluctuations, price adjustments, changes in duties etc.price adjustments, changes in duties etc.

Administrative and other general overhead Administrative and other general overhead expenses, as are specifically attributable are expenses, as are specifically attributable are includedincluded

Cost of self constructed fixed asset – direct cost + Cost of self constructed fixed asset – direct cost + allocation + other considerations as aboveallocation + other considerations as above

Fixed assets acquired in exchange – fair market Fixed assets acquired in exchange – fair market value or at net book valuevalue or at net book value

In exchange for securities – fair market value.In exchange for securities – fair market value. Any subsequent expenditure that increases the Any subsequent expenditure that increases the

future benefits beyond its previously assessed future benefits beyond its previously assessed benefits. benefits.

Amit Industries – cost of fixed assetsAmit Industries – cost of fixed assets

DetailsDetails RsRs RsRs

Invoice Price:Invoice Price:

List PriceList Price 50000005000000

Less: Trade discountLess: Trade discount 100000100000

BalanceBalance 49000004900000

Add: Sales tax and Add: Sales tax and dutyduty

600000600000 55000005500000

Cenvat credit availableCenvat credit available 400000400000

Transport chargesTransport charges 2500025000

Spl. foundation and Spl. foundation and installationinstallation

7500075000

Revaluation of fixed assetsRevaluation of fixed assets Required to accurately describe the true Required to accurately describe the true

value of fixed assetsvalue of fixed assets ReasonsReasons

To show true rate of return on CETo show true rate of return on CE Conserve adequate funds – depreciation – Conserve adequate funds – depreciation –

historical cost – inflated profits – excessive historical cost – inflated profits – excessive dividenddividend

To show fair market value of assetsTo show fair market value of assets Negotiate fair price during merger or Negotiate fair price during merger or

acquisitionacquisition Enable proper reconstructionEnable proper reconstruction To issue shares / procure loan / saleTo issue shares / procure loan / sale

Methods of revaluationMethods of revaluation

IndexationIndexation Current Market Price (CMP)Current Market Price (CMP) Appraisal method Appraisal method

Principles on revaluationPrinciples on revaluation Revalued amounts are restated in the financial Revalued amounts are restated in the financial

statements by both gross block value and statements by both gross block value and accumulated depreciationaccumulated depreciation

When revalued, an entire class of assets should When revalued, an entire class of assets should be revalued, or on a systematic basis (whole class be revalued, or on a systematic basis (whole class of assets in a plant)of assets in a plant)

Should not result in the net book value greater Should not result in the net book value greater than recoverable amount of assets.than recoverable amount of assets.

Increase in net book value on revaluation is Increase in net book value on revaluation is credited to owner’s interests under the heading credited to owner’s interests under the heading “revaluation reserves” and are not available for “revaluation reserves” and are not available for distribution. At times reversal of previous distribution. At times reversal of previous recorded decrease in P&L accountrecorded decrease in P&L account

Decrease is charged to P&L unless it reverses a Decrease is charged to P&L unless it reverses a corresponding reserve related to a previous corresponding reserve related to a previous increase on revaluationincrease on revaluation

Valuation in special casesValuation in special cases Jointly owned fixed assets – the Jointly owned fixed assets – the

extent of the enterprise’s share in extent of the enterprise’s share in such assets, and the proportion of such assets, and the proportion of original cost, accumulated original cost, accumulated depreciation and written down value depreciation and written down value should be stated in the BSshould be stated in the BS

Basket Purchase – apportioned on a Basket Purchase – apportioned on a fair basis as determined by a fair basis as determined by a competent valuer.competent valuer.

Basket Purchase – Sun TV – cost Basket Purchase – Sun TV – cost of each assetof each asset

DetailsDetails Consolidated Consolidated priceprice

Market Market valuevalue

LandLand 1800000018000000

Building built Building built thereonthereon

2700000027000000

Furniture and Furniture and fixturesfixtures

54000005400000

Machines and Machines and equipmentsequipments

129600000129600000

TotalTotal 150000000150000000 180000000180000000

Identification of certain fixed Identification of certain fixed assetsassets

Individually insignificant items – long Individually insignificant items – long term utilityterm utility

Machinery sparesMachinery spares Separable component parts – Separable component parts –

separate assetsseparate assets

Retirements and DisposalRetirements and Disposal Stated at the lower of their net book Stated at the lower of their net book

value and NRV and shown separatelyvalue and NRV and shown separately Eliminated from statements on Eliminated from statements on

disposal or no further benefit is disposal or no further benefit is expectedexpected

Any loss / gain is charged / credited to Any loss / gain is charged / credited to P&LP&L

Loss / gain of revalued assets – P&L or Loss / gain of revalued assets – P&L or reversed with revaluation reservereversed with revaluation reserve

Amount in revaluation reserve after Amount in revaluation reserve after disposal / retirement – general reservedisposal / retirement – general reserve

DisclosuresDisclosures Gross and net book values at the Gross and net book values at the

beginning and at the end of the beginning and at the end of the accounting period showings additions, accounting period showings additions, disposals, acquisitions and other disposals, acquisitions and other movementsmovements

Expenditure incurred towards fixed Expenditure incurred towards fixed assets in the course of construction or assets in the course of construction or acquisitionacquisition

Additional disclosures where fixed Additional disclosures where fixed assets are stated at revalued amountsassets are stated at revalued amounts

Disclosure as per AS-1. Disclosure as per AS-1.

Impact of Government Grants on Fixed asset Impact of Government Grants on Fixed asset valuationvaluation

AS-12 – Accounting for Government GrantsAS-12 – Accounting for Government Grants TreatmentsTreatments

The grant is shown as a deduction from the The grant is shown as a deduction from the gross value of the asset concerned in gross value of the asset concerned in arriving at its book value. When the grant arriving at its book value. When the grant equals virtually whole or whole – shown in equals virtually whole or whole – shown in BS at nominal valueBS at nominal value

Treated as deferred income in P&L in Treated as deferred income in P&L in proportion of depreciation on related proportion of depreciation on related assets. Non-depreciable assets – credited to assets. Non-depreciable assets – credited to capital reserve or charged to income if it capital reserve or charged to income if it requires fulfillment of certain obligations, requires fulfillment of certain obligations, over the same period over which the costs over the same period over which the costs of the same are charged.of the same are charged.

Impact of Government GrantsImpact of Government Grants Non-monetary assets at a Non-monetary assets at a

concessional rate – acquisition cost – concessional rate – acquisition cost – free of cost – nominal value.free of cost – nominal value.

DisclosuresDisclosures Nature and extent of grants including Nature and extent of grants including

grants of non-monetary assets given at grants of non-monetary assets given at concessional rate or free of cost, andconcessional rate or free of cost, and

The accounting policy adopted.The accounting policy adopted.

AS 16 – Borrowing CostsAS 16 – Borrowing Costs Borrowing costs are interest and other costs, Borrowing costs are interest and other costs,

like upfront fee, incurred by an enterprise in like upfront fee, incurred by an enterprise in connection with the borrowing of funds connection with the borrowing of funds either for specific fixed assets or for projects either for specific fixed assets or for projects or for general purposes.or for general purposes.

The amount of borrowing costs capitalised The amount of borrowing costs capitalised (directly attributable) during a particular (directly attributable) during a particular period should not exceed the amount of period should not exceed the amount of borrowing costs incurred during that periodborrowing costs incurred during that period

Impact of Borrowing Costs on Fixed asset Impact of Borrowing Costs on Fixed asset valuationvaluation


Conditions for capitalisationConditions for capitalisation Expenditure for the acquisition or Expenditure for the acquisition or

construction of an asset is being incurredconstruction of an asset is being incurred Borrowing costs are being incurredBorrowing costs are being incurred Activities that are necessary to prepare the Activities that are necessary to prepare the

asset for its intended use are in progressasset for its intended use are in progress

Borrowing costs are capitalised only up to the Borrowing costs are capitalised only up to the point the asset is ready for its intended use point the asset is ready for its intended use


Specific borrowings – actual borrowing Specific borrowings – actual borrowing costs incurred less any income on the costs incurred less any income on the temporary investment on those temporary investment on those borrowings.borrowings.

General borrowings – apply capitalisation General borrowings – apply capitalisation rate to the expenditure on that asset.rate to the expenditure on that asset.

Capitalisation rate – weighted average of Capitalisation rate – weighted average of borrowing cost applicable to the general borrowing cost applicable to the general borrowings that are outstanding during the borrowings that are outstanding during the periodperiod

Disclosures – accounting policy adopted Disclosures – accounting policy adopted and amount of borrowing costs capitalisedand amount of borrowing costs capitalised

Cost of fixed assets of a project under Cost of fixed assets of a project under constructionconstruction

Shiva Udyog Ltd has established a new project. Details of the fixed assets and the expenditure incurred during the construction of the project are given below. Determine the cost of each asset at the time of completion of the the project, ready for commercial production.

DetailsDetails Amount (Rs)Amount (Rs)

LandLand 1250000012500000

BuildingsBuildings 2500000025000000

Plant and MachineryPlant and Machinery 207500000207500000

Misc. Fixed assetsMisc. Fixed assets 50000005000000

Pre-operative expensesPre-operative expenses 1500000015000000

Interest on TL during Interest on TL during construction periodconstruction period

1800000018000000

TotalTotal 283000000283000000

Depreciation on Fixed AssetsDepreciation on Fixed Assets

AS – 6: Depreciation AccountingAS – 6: Depreciation Accounting Meaning and SignificanceMeaning and Significance Scope and coverageScope and coverage Principles and NormsPrinciples and Norms Disclosure RequirementsDisclosure Requirements

Meaning and SignificanceMeaning and Significance

A measure of the wearing out, A measure of the wearing out, consumption or loss of value of a consumption or loss of value of a depreciable asset arising from use, depreciable asset arising from use, effluxion of time or obsolescence effluxion of time or obsolescence through technology and market through technology and market changes.changes.

Scope and coverageScope and coverage

Applies to all depreciable assets except Applies to all depreciable assets except those specified in AS-10 as mentioned those specified in AS-10 as mentioned under its scope and coverage.under its scope and coverage.

Depreciable assets are assets whichDepreciable assets are assets which Are held by the enterprise for use in the Are held by the enterprise for use in the

production or supply of goods and service, for production or supply of goods and service, for rental to others, or for administrative purposes rental to others, or for administrative purposes and not for the purpose of sale in the ordinary and not for the purpose of sale in the ordinary course of businesscourse of business

Are expected to be used for more than one Are expected to be used for more than one accounting periodaccounting period

Have limited useful life. Have limited useful life.

Principles and NormsPrinciples and Norms

Determinants of DepreciaitonDeterminants of Depreciaiton Historical cost or revalued amountHistorical cost or revalued amount Expected useful lifeExpected useful life Estimated residual value Estimated residual value

Methods of DepreciationMethods of Depreciation SLMSLM WDVWDV

SLM – Amit IndustriesSLM – Amit Industries

DetailsDetails Amount Amount (Rs.)(Rs.)

Cost of the MachineCost of the Machine 52000005200000

Expected useful lifeExpected useful life 5 yrs5 yrs

Consideration expected on Consideration expected on disposaldisposal

280000280000

Estimated cost of removal Estimated cost of removal 2000020000

Estimated realisable valueEstimated realisable value 260000260000Rate of depreciation, annual and accumulated depreciation for all the years as per SLM, disclosure in the balance sheet, accounting policy

WDVWDV

Accelerated methodAccelerated method Helps to even out the total charges Helps to even out the total charges

as expense for the use of the asset as expense for the use of the asset every year.every year.

Amit IndustriesAmit Industries

Impact of SLM and WDV on profitsImpact of SLM and WDV on profits

Total depreciation is sameTotal depreciation is same SLM uniform. WDV decliningSLM uniform. WDV declining WDV – higher provision in the early years WDV – higher provision in the early years

and hence lower profits and lower taxes.and hence lower profits and lower taxes. On cumulative basis the tax liability will be On cumulative basis the tax liability will be

the same.the same. WDVWDV

Gain on account of TVMGain on account of TVM Gain in case the rates of tax declines in futureGain in case the rates of tax declines in future Better cash flows during initial years Better cash flows during initial years

Statutory requirements and Statutory requirements and compliancecompliance

Companies Act 1956 (Sec 205 and 350 – Companies Act 1956 (Sec 205 and 350 – schedule XIV to companies act)schedule XIV to companies act)

Income Tax Act (Section 32, Rule 5)Income Tax Act (Section 32, Rule 5) Only WDV is recognisedOnly WDV is recognised Block of assetsBlock of assets Full depreciation for the usage of 180 days or Full depreciation for the usage of 180 days or

more. For less than 180 days, 50% is providedmore. For less than 180 days, 50% is provided Does not allow shift depreciation on plant and Does not allow shift depreciation on plant and

machinerymachinery

Rates of depreciation as per IT ActRates of depreciation as per IT Act Incentive to Industry, MAT and deferred Incentive to Industry, MAT and deferred

TaxTax IT act depreciation is much higher (except IT act depreciation is much higher (except

triple shift under WDV of companies act)triple shift under WDV of companies act) In the early years, the company will enjoy tax In the early years, the company will enjoy tax

advantageadvantage MATMAT Total depreciation is same. Over the useful life Total depreciation is same. Over the useful life

of the machine, the company will be paying of the machine, the company will be paying the same amount of tax presuming there is no the same amount of tax presuming there is no change in the tax rates. Tax advantage of early change in the tax rates. Tax advantage of early years will give way to a higher tax liability in years will give way to a higher tax liability in later years. (deferring tax liability)later years. (deferring tax liability)

ConsistencyConsistency

A change from one method to another A change from one method to another can be done only:can be done only: When the statute governing the enterprise When the statute governing the enterprise

requires the adoption of the new method, orrequires the adoption of the new method, or To Comply with the requirements of an AS, orTo Comply with the requirements of an AS, or When a change is considered to result in a When a change is considered to result in a

more appropriate preparation or presentation more appropriate preparation or presentation of the financial statements of the enterprise.of the financial statements of the enterprise.

Depreciation charge in special Depreciation charge in special casescases

Exchange FluctuationsExchange Fluctuations Subsequent expenditure – along with Subsequent expenditure – along with

the existing asset or independentlythe existing asset or independently Revision of useful life Revision of useful life

Revaluation of fixed asset and Revaluation of fixed asset and depreciation depreciation

Amit Industries. In the beginning of Amit Industries. In the beginning of the fourth year a valuer appraises the the fourth year a valuer appraises the machine to be worth 65 lakhs with an machine to be worth 65 lakhs with an estimated residual value of 3.25 estimated residual value of 3.25 lakhs. How will the change in the valu lakhs. How will the change in the valu eof the machine, the changed eof the machine, the changed depreciation and revaluation reserve depreciation and revaluation reserve be disclosed in the balance sheet be disclosed in the balance sheet from the fourth year onwards?from the fourth year onwards?

DisclosuresDisclosures

valuation of fixed assets

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