Definition of
fixed assets:
It is an
assets held with the intention of being used for the purpose of producing goods
or rendering services and is not held for sale in the normal course of
business.
Standby
equipment and service equipment are normally capitalized.
Machinery
spares are usually charged to profit and loss account as and when consumed.
However if they are used only in connection with fixed assets they should be
capitalized.
Component of
cost:
1)
Gross
book value of fixed assets is its historical cost or amount substituted for
historical cost in the financial statements. Net book value is the amount left
after deducting accumulated depreciation.
2)
Cost
of fixed assets include purchase price (plus) duties and taxes that are non
refundable(plus)cost of bringing the asset into working condition (minus) any
trade discounts and rebates.
3)
The
cost of fixed assets undergo change due to factors like exchange fluctuation,
change in the duties, price adjustments etc.
4)
The
expenditure incurred on start up of the project or on the experimental
production is usually capitalized.
5)
Depreciation
of the other assets used to construct the main assets should also be included
in its cost.
Non monetary assets:
When fixed assets are acquired in exchange of other
assets, the fair market value of the assets given up or book value of the asset
given up, whichever is low, is considered and recorded in the financial
statements(plus/minus any cash given or taken).
Suppose, WDV/book value of the machine =50000, on the
same hand, Net Realizable Value of that machine= 80000. This machine is
exchanged with other asset costing 110000 along with cash 10000. Here FMV of
old machine =110000-10000=100000 thus book value is lower than FMV so the cost
of new asset will be 50000. If the FMV were 40000, the loss of 10000 would be
charge to the profit and loss account and the cost of new asset would be 40000.
If the shares are given in exchange of assets, the above
work will be done with shares and assets.
Improvements and repairs:
If the expenditure on improvements and repairs; increase
the efficiency of the existing assets to give extra future benefits, it will be
included in the gross book value of the assets.
Revaluation of fixed assets:
If there is a revaluation in fixed assets, it should be
adjusted with net book value directly and depreciation will be changed
accordingly.
Suppose, the historical cost of fixed asset = Rs 100,000
as gross book value, estimated life 10 years, residual value zero, accumulated
depreciation (straight line) after 4 years= 40,000, and net book value= 60,000.
Now the value of fixed asset is increased by 10000. In this case, remaining
life=6, NBV=70000, depreciation= 70000/6=11666. So we can either write directly
the value of NBV 70000. This increase in the NBV of 10000 is directly credited
to the revaluation reserve account and if there were a decrease in the NBV
because of revaluation it would be charge to profit and loss account, but if
the decrease of revaluation is because of increment of the same asset made
earlier it will be adjusted from revaluation reserve.
If this asset is
sold later, the loss on sale of this asset will be adjusted to the revaluation
reserve account and if the amount still remains in the revaluation reserve
account after adjusting losses, the balance amount will be transferred to
general reserve, here is the example..
Suppose the above asset is sold at Rs 65000, The net loss
is 5000 (70000-65000) now this amount will be adjusted with revaluation reserve balance that is 10000, after
adjusting loss we got still 5000 in revaluation reserve account this amount
will be transferred to general reserve account.
Disposal --
On the normal disposal of fixed assets the
loss or profit will be debited or credited to profit and loss account
respectively.
JOINT OWNERSHIP--
Where any asset is held jointly by an
enterprise, the extent of share in such asset and the proportionate cost,
depreciation and net book value is recorded in the balance sheet. If this
jointly owned asset is grouped together with fully owned assets, they are to be
separately indicated in the fixed assets register.
Goodwill--
Goodwill is recorded in the book only when the
consideration in the money has been paid by the enterprises. As a matter of
prudence it should be write off over a period of years but many enterprises
retain it as asset.
Patent--
They are acquired in two ways either by purchasing
or by developing. When patents are purchased, the purchase price, incidental
expenses and stamp duty, etc are recorded in the balance sheet and when patent
is developed; the development cost are recorded and capitalized. Patents are
normally written off over their legal life or useful life whichever is lower.
Know-how—
Know- how is recorded only when some
consideration in the money or money’s worth has been paid by the enterprise.
Know how is of two types 1) relating to the manufacturing process and 2)
relating to the plans, designs, on the building, plants and equipments etc.
Know- how relating to the manufacturing process is
charged as an expensed during the year in which it is incurred. Know how
relating to plans, design of building, plant and equipments, are capitalized
under the relevant assets heads.
Assets retired:
When fixed assets are retire from active use and held for
disposal they will be recorded in the financial statements, lower of NRV and
book value.
The revaluation reserve relating to that asset will be
transferred to general reserve. Expected loss will be recorded immediately
after adjusting with revaluation reserve.
Self- constructed assets ---
It should not include any
internal profits. Suppose a company constructed an asset for 100,000 rupess,
the lowest estimate given by the other contractor is 150,000. The company can’t
write its constructed assets at 150,000 rupess because if they did so that
would be the inclusion internal profit.
Assets acquired under hire purchase: such assets are
recorded in the balance sheet at its cash price but stating full ownership
doesn’t exists.
Disclosure—
1).Gross and net book value of assets in the beginning
and at the end of the year showing addition, disposals , acquisition, etc
during the year
2) Expenditure incurred on fixed assets in the course of
construction and acquisition.
3) Revalued amount substituted for historical costs of
fixed assets.
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