Valuation of fixed assets

1. Valuation of Fixed AssetsValuation of Fixed Assets

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

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

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

5. Scope and coverageScope and coverage

Deals with land, building, plant and Deals with land, building, plant and
machinery, vehicles, furniture and machinery, vehicles, furniture and
fittings exceptfittings except

Regenerative natural resources like forests and plantationsRegenerative natural resources like forests and plantations

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 items of The standard however, covers the individual items of
those fixed assets which are used to develop or those fixed assets which are used to develop or
maintain the above mentioned assets and are maintain the above mentioned assets and are
separable from themseparable from them

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

7. Cost of fixed assetsCost of fixed assets

The cost may change subsequent to acquisition The cost may change subsequent to acquisition
or construction on account of exchange or construction on account of exchange
fluctuations, price adjustments, changes in fluctuations, price adjustments, changes in
duties etc.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 above+ allocation + 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.

8. 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 dutyAdd: Sales tax and duty600000600000 55000005500000
Cenvat credit availableCenvat credit available 400000400000
Transport chargesTransport charges 2500025000
Spl. foundation and Spl. foundation and
installationinstallation
7500075000

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

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

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

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

13. Basket Purchase – Sun TV – cost Basket Purchase – Sun TV – cost
of each assetof each asset
DetailsDetails Consolidated Consolidated
priceprice
Market valueMarket value
LandLand 1800000018000000
Building built Building built
thereonthereon
2700000027000000
Furniture and Furniture and
fixturesfixtures
54000005400000
Machines and Machines and
equipmentsequipments
129600000129600000
TotalTotal 150000000150000000 180000000180000000

14. Identification of certain fixed Identification of certain fixed
assetsassets

Individually insignificant items – long term Individually insignificant items – long term
utilityutility

Machinery sparesMachinery spares

Separable component parts – separate Separable component parts – separate
assetsassets

15. Retirements and DisposalRetirements and Disposal

Stated at the lower of their net book value Stated at the lower of their net book value
and NRV and shown separatelyand NRV and shown separately

Eliminated from statements on disposal or Eliminated from statements on disposal or
no further benefit is expectedno further benefit is expected

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

16. 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 assets Expenditure incurred towards fixed assets
in the course of construction or acquisitionin the course of construction or acquisition

Additional disclosures where fixed assets Additional disclosures where fixed assets
are stated at revalued amountsare stated at revalued amounts

Disclosure as per AS-1. Disclosure as per AS-1.

17. 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 arriving gross value of the asset concerned in arriving
at its book value. When the grant equals at its book value. When the grant equals
virtually whole or whole – shown in BS at virtually whole or whole – shown in BS at
nominal valuenominal value

Treated as deferred income in P&L in Treated as deferred income in P&L in
proportion of depreciation on related assets. proportion of depreciation on related assets.
Non-depreciable assets – credited to capital Non-depreciable assets – credited to capital
reserve or charged to income if it requires reserve or charged to income if it requires
fulfillment of certain obligations, over the fulfillment of certain obligations, over the
same period over which the costs of the same same period over which the costs of the same
are charged.are charged.

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

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

20. 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 construction Expenditure for the acquisition or construction
of an asset is being incurredof 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

21. Impact of Borrowing Costs on Fixed asset Impact of Borrowing Costs on Fixed asset
valuationvaluation

Specific borrowings – actual borrowing costs Specific borrowings – actual borrowing costs
incurred less any income on the temporary incurred less any income on the temporary
investment on those borrowings.investment on those borrowings.

General borrowings – apply capitalisation rate to General borrowings – apply capitalisation rate to
the expenditure on that asset.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 and Disclosures – accounting policy adopted and
amount of borrowing costs capitalisedamount of borrowing costs capitalised

22. 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 construction Interest on TL during construction
periodperiod
1800000018000000
TotalTotal 283000000283000000

23. 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

24. 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 through effluxion of time or obsolescence through
technology and market changes.technology and market changes.

25. Scope and coverageScope and coverage

Applies to all depreciable assets except those Applies to all depreciable assets except those
specified in AS-10 as mentioned under its scope specified in AS-10 as mentioned under its scope
and coverage.and coverage.

Depreciable assets are assets whichDepreciable assets are assets which

Are held by the enterprise for use in the production or Are held by the enterprise for use in the production or
supply of goods and service, for rental to others, or supply of goods and service, for rental to others, or
for administrative purposes and not for the purpose of for administrative purposes and not for the purpose of
sale in the ordinary course of businesssale in the ordinary course 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.

26. 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

27. 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 disposalConsideration expected on disposal280000280000
Estimated cost of removal Estimated cost of removal 2000020000
Estimated realisable valueEstimated realisable value 260000260000
Rate of depreciation, annual and accumulated depreciation for all the years as
per SLM, disclosure in the balance sheet, accounting policy

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

29. 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 and WDV – higher provision in the early years and
hence lower profits and lower taxes.hence lower profits and lower taxes.

On cumulative basis the tax liability will be the On cumulative basis the tax liability will be the
same.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

30. 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 more. Full depreciation for the usage of 180 days or more.
For less than 180 days, 50% is providedFor less than 180 days, 50% is provided

Does not allow shift depreciation on plant and Does not allow shift depreciation on plant and
machinerymachinery

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

32. ConsistencyConsistency

A change from one method to another can A change from one method to another can
be done only: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.

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

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

35. DisclosuresDisclosures