1. Valuation of Fixed Assets

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

3. AS - 10
 Meaning and significance of fixed assets
 Scope and coverage
 Principles and norms of standard
accounting treatment
 Disclosure reqirements

4. Meaning and significance
 Fixed assets represents assets held with
the intention of being used for the purpose
of producing or providing goods or
services and are not held for sale in the
normal course of business.
 Significant portion of total assets
 Effect on reported results - Expense as
fixed asset or revenue expense

5. Scope and coverage
 Deals with land, building, plant and
machinery, vehicles, furniture and
fittings except
 Regenerative natural resources like forests and plantations
 Expenditure on the exploration and extraction of non-
regenerative sources like minerals, oil and natural gas.
 mineral rights
 Expenditure on real estate development
 Livestock
 Leased assets
The standard however, covers the individual items of
those fixed assets which are used to develop or
maintain the above mentioned assets and are
separable from them

6. Principles and Norms
 Determinants of value of Fixed Assets
 The cost comprises purchase price net of
discounts and rebates but inclusive of duties
and other non-refundable taxes and any
directly attributable cost of bringing the asset
to its working condition

7. Cost of fixed assets
 The cost may change subsequent to acquisition
or construction on account of exchange
fluctuations, price adjustments, changes in
duties etc.
 Administrative and other general overhead
expenses, as are specifically attributable are
included
 Cost of self constructed fixed asset – direct cost
+ allocation + other considerations as above
 Fixed assets acquired in exchange – fair market
value or at net book value
 In exchange for securities – fair market value.
 Any subsequent expenditure that increases the
future benefits beyond its previously assessed
benefits.

8. Amit Industries – cost of fixed assets
Details Rs Rs
Invoice Price:
List Price 5000000
Less: Trade discount 100000
Balance 4900000
Add: Sales tax and duty 600000 5500000
Cenvat credit available 400000
Transport charges 25000
Spl. foundation and 75000
installation

9. Revaluation of fixed assets
 Required to accurately describe the true value of
fixed assets
 Reasons
 To show true rate of return on CE
 Conserve adequate funds – depreciation – historical
cost – inflated profits – excessive dividend
 To show fair market value of assets
 Negotiate fair price during merger or acquisition
 Enable proper reconstruction
 To issue shares / procure loan / sale

10. Methods of revaluation
 Indexation
 Current Market Price (CMP)
 Appraisal method

11. Principles on revaluation
 Revalued amounts are restated in the financial
statements by both gross block value and accumulated
depreciation
 When revalued, an entire class of assets should be
revalued, or on a systematic basis (whole class of assets
in a plant)
 Should not result in the net book value greater than
recoverable amount of assets.
 Increase in net book value on revaluation is credited to
owner’s interests under the heading “revaluation
reserves” and are not available for distribution. At times
reversal of previous recorded decrease in P&L account
 Decrease is charged to P&L unless it reverses a
corresponding reserve related to a previous increase on
revaluation

12. Valuation in special cases
 Jointly owned fixed assets – the extent of
the enterprise’s share in such assets, and
the proportion of original cost,
accumulated depreciation and written
down value should be stated in the BS
 Basket Purchase – apportioned on a fair
basis as determined by a competent
valuer.

13. Basket Purchase – Sun TV – cost
of each asset
Details Consolidated Market value
price
Land 18000000
Building built 27000000
thereon
Furniture and 5400000
fixtures
Machines and 129600000
equipments
Total 150000000 180000000

14. Identification of certain fixed
assets
 Individually insignificant items – long term
utility
 Machinery spares
 Separable component parts – separate
assets

15. Retirements and Disposal
 Stated at the lower of their net book value
and NRV and shown separately
 Eliminated from statements on disposal or
no further benefit is expected
 Any loss / gain is charged / credited to
P&L
 Loss / gain of revalued assets – P&L or
reversed with revaluation reserve
 Amount in revaluation reserve after
disposal / retirement – general reserve

16. Disclosures
 Gross and net book values at the
beginning and at the end of the
accounting period showings additions,
disposals, acquisitions and other
movements
 Expenditure incurred towards fixed assets
in the course of construction or acquisition
 Additional disclosures where fixed assets
are stated at revalued amounts
 Disclosure as per AS-1.

17. Impact of Government Grants on Fixed asset
valuation
 AS-12 – Accounting for Government Grants
 Treatments
 The grant is shown as a deduction from the
gross value of the asset concerned in arriving
at its book value. When the grant equals
virtually whole or whole – shown in BS at
nominal value
 Treated as deferred income in P&L in
proportion of depreciation on related assets.
Non-depreciable assets – credited to capital
reserve or charged to income if it requires
fulfillment of certain obligations, over the
same period over which the costs of the same
are charged.

18. Impact of Government Grants
 Non-monetary assets at a concessional
rate – acquisition cost – free of cost –
nominal value.
 Disclosures
 Nature and extent of grants including grants
of non-monetary assets given at concessional
rate or free of cost, and
 The accounting policy adopted.

19. Impact of Borrowing Costs on Fixed asset
valuation
 AS 16 – Borrowing Costs
 Borrowing costs are interest and other costs, like
upfront fee, incurred by an enterprise in
connection with the borrowing of funds either for
specific fixed assets or for projects or for general
purposes.
 The amount of borrowing costs capitalised
(directly attributable) during a particular period
should not exceed the amount of borrowing
costs incurred during that period

20. Impact of Borrowing Costs on Fixed asset
valuation
 Conditions for capitalisation
 Expenditure for the acquisition or construction
of an asset is being incurred
 Borrowing costs are being incurred
 Activities that are necessary to prepare the
asset for its intended use are in progress
Borrowing costs are capitalised only up to the
point the asset is ready for its intended use

21. Impact of Borrowing Costs on Fixed asset
valuation
 Specific borrowings – actual borrowing costs
incurred less any income on the temporary
investment on those borrowings.
 General borrowings – apply capitalisation rate to
the expenditure on that asset.
 Capitalisation rate – weighted average of
borrowing cost applicable to the general
borrowings that are outstanding during the
period
 Disclosures – accounting policy adopted and
amount of borrowing costs capitalised

22. Cost of fixed assets of a project under
construction
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.
Details Amount (Rs)
Land 12500000
Buildings 25000000
Plant and Machinery 207500000
Misc. Fixed assets 5000000
Pre-operative expenses 15000000
Interest on TL during construction 18000000
period

23. Depreciation on Fixed Assets
 AS – 6: Depreciation Accounting
 Meaning and Significance
 Scope and coverage
 Principles and Norms
 Disclosure Requirements

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

25. Scope and coverage
 Applies to all depreciable assets except those
specified in AS-10 as mentioned under its scope
and coverage.
 Depreciable assets are assets which
 Are held by the enterprise for use in the production or
supply of goods and service, for rental to others, or
for administrative purposes and not for the purpose of
sale in the ordinary course of business
 Are expected to be used for more than one
accounting period
 Have limited useful life.

26. Principles and Norms
 Determinants of Depreciaiton
 Historical cost or revalued amount
 Expected useful life
 Estimated residual value
 Methods of Depreciation
 SLM
 WDV

27. SLM – Amit Industries
Details Amount
(Rs.)
Cost of the Machine 5200000
Expected useful life 5 yrs
Consideration expected on disposal 280000
Estimated cost of removal 20000
Estimated realisable value 260000
Rate of depreciation, annual and accumulated depreciation for all the years as
per SLM, disclosure in the balance sheet, accounting policy

28. WDV
 Accelerated method
 Helps to even out the total charges as
expense for the use of the asset every
year.
 Amit Industries

29. Impact of SLM and WDV on profits
 Total depreciation is same
 SLM uniform. WDV declining
 WDV – higher provision in the early years and
hence lower profits and lower taxes.
 On cumulative basis the tax liability will be the
same.
 WDV
 Gain on account of TVM
 Gain in case the rates of tax declines in future
 Better cash flows during initial years

30. Statutory requirements and
compliance
 Companies Act 1956 (Sec 205 and 350 –
schedule XIV to companies act)
 Income Tax Act (Section 32, Rule 5)
 Only WDV is recognised
 Block of assets
 Full depreciation for the usage of 180 days or more.
For less than 180 days, 50% is provided
 Does not allow shift depreciation on plant and
machinery

31.  Rates of depreciation as per IT Act
 Incentive to Industry, MAT and deferred Tax
 IT act depreciation is much higher (except triple shift
under WDV of companies act)
 In the early years, the company will enjoy tax
advantage
 MAT
 Total depreciation is same. Over the useful life of the
machine, the company will be paying the same
amount of tax presuming there is no change in the tax
rates. Tax advantage of early years will give way to a
higher tax liability in later years. (deferring tax liability)

32. Consistency
 A change from one method to another can
be done only:
 When the statute governing the enterprise
requires the adoption of the new method, or
 To Comply with the requirements of an AS, or
 When a change is considered to result in a
more appropriate preparation or presentation
of the financial statements of the enterprise.

33. Depreciation charge in special
cases
 Exchange Fluctuations
 Subsequent expenditure – along with the
existing asset or independently
 Revision of useful life

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

35. Disclosures