Wednesday, December 22, 2010

IAS 10

Accounting Standard (AS) 10


(issued 1985)

Accounting for Fixed Assets

Contents

141

INTRODUCTION Paragraphs 1-6

Definitions 6

EXPLANATION 7-17

Identification of Fixed Assets 8

Components of Cost 9

Self-constructed Fixed Assets 10

Non-monetary Consideration 11

Improvements and Repairs 12

Amount Substituted for Historical Cost 13

Retirements and Disposals 14

Valuation of Fixed Assets in Special Cases 15

Fixed Assets of Special Types 16

Disclosure 17

ACCOUNTING STANDARD 18-39

Disclosure 39

The following Accounting Standards Interpretation (ASI) relates to AS 10:

 ASI 2 - Accounting for Machinery Spares

The above Interpretation is published elsewhere in this Compendium.

1324 AS 10 (issued 1985)

Accounting Standard (AS) 10

(issued 1985)

Accounting for FixedAssets

(This Accounting Standard includes paragraphs 18-39 set in bold italic

type and paragraphs 1-17 set in plain type, which have equal authority.

Paragraphs in bold italic type indicate the main principles. This

Accounting Standard should be read in the context of the Preface to the

Statements of Accounting Standards1.)

The following is the text of theAccounting Standard (AS) 10 issued by

the Institute of Chartered Accountants of India on ‘Accounting for Fixed

Assets’.

In the initial years, this accounting standard will be recommendatory in

character. During this period, this standard is recommended for use by

companies listed on a recognised stock exchange and other large commercial,

industrial and business enterprises in the public and private sectors.2

Introduction

1. Financial statements disclose certain information relating to fixed assets.

In many enterprises these assets are grouped into various categories, such

as land, buildings, plant andmachinery,vehicles, furniture and fittings,goodwill,

patents, trade marks and designs. This statement deals with accounting for

such fixed assets except as described in paragraphs 2 to 5 below.3

1Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 It may be noted that this Accounting Standard is now mandatory. Reference may

be made to the section titled ‘Announcements of the Council regarding status of

various documents issued by the Institute of Chartered Accountants of India’

appearing at the beginning of this Compendium for a detailed discussion on the

implications of the mandatory status of an accounting standard.

3 From the date of Accounting Standard (AS) 26, Intangible Assets, becoming

mandatory for the concerned enterprises, the relevant paragraphs of this Standard

that deal with patents and know-how, stand withdrawn and, therefore, the same are

omitted from this standard.

Accounting for Fixed Assets 143

2. This statement does not deal with the specialised aspects of accounting

for fixed assets that arise under a comprehensive systemreflecting the effects

of changing prices but applies to financial statements prepared on historical

cost basis.

3. This statement does not deal with accounting for the following items to

which special considerations apply:

(i) forests, plantations and similar regenerative natural resources;

(ii) wasting assets including mineral rights, expenditure on the

exploration for and extraction of minerals, oil, natural gas and

similar non-regenerative resources;

(iii) expenditure on real estate development; and

(iv) livestock.

Expenditure on individual items of fixed assets used to develop or maintain

the activities covered in (i) to (iv) above, but separable fromthose activities,

are to be accounted for in accordance with this Statement.

4. This statement does not cover the allocation of the depreciable amount

of fixed assets to future periods since this subject is dealt with in Accounting

Standard 6 on ‘Depreciation Accounting’.

5. This statement does not deal with the treatment of government grants

and subsidies, and assets under leasing rights. Itmakes only a brief reference

to the capitalisation of borrowing costs4 and to assets acquired in an

amalgamation ormerger. These subjects requiremore extensive consideration

than can be given within this Statement.

Definitions

6. The following terms are used in this Statement with the meanings

specified:

6.l Fixed asset is an asset held with the intention of being used for the

4 The relevant requirements in this regard are omitted from this Standard pursuant to

AS 16, Borrowing Costs, becoming mandatory in respect of accounting periods

commencing on or after 1.4.2000.

144 AS 10 (issued 1985)

purpose of producing or providing goods or services and is not held for sale

in the normal course of business.

6.2 Fair market value is the price that would be agreed to in an open and

unrestricted market between knowledgeable and willing parties dealing at

arm’s length who are fully informed and are not under any compulsion to

transact.

6.3 Gross book value of a fixed asset is its historical cost or other amount

substituted for historical cost in the books of account or financial statements.

When this amount is shown net of accumulated depreciation, it is termed as

net book value.

Explanation

7. Fixed assets often comprise a significant portion of the total assets of an

enterprise, and therefore are important in the presentation of financial position.

Furthermore, the determination of whether an expenditure represents an

asset or an expense can have a material effect on an enterprise’s reported

results of operations.

8. Identification of Fixed Assets

8.1 The definition in paragraph 6.1 gives criteria for determining whether

items are to be classified as fixed assets. Judgement is required in applying

the criteria to specific circumstances or specific types of enterprises. It may

be appropriate to aggregate individually insignificant items, and to apply the

criteria to the aggregate value. An enterprise may decide to expense an item

which could otherwise have been included as fixed asset, because the amount

of the expenditure is not material.

8.2 Stand-by equipment and servicing equipment are normally capitalised.

Machinery spares are usually charged to the profit and loss statement as and

when consumed. However, if such spares can be used only in connection

with an itemof fixed asset and their use is expected to be irregular, itmay be

appropriate to allocate the total cost on a systematic basis over a period not

exceeding the useful life of the principal item.5

5 See also Accounting Standards Interpretation (ASI) 2 published elsewhere in this

Compendium.

Accounting for Fixed Assets 145

8.3 In certain circumstances, the accounting for an itemof fixed assetmay

beimprovedif thetotalexpenditurethereonisallocatedtoitscomponentparts,

provided they are in practice separable, and estimates are made of the useful

lives of these components. For example, rather than treat an aircraft and its

engines as one unit, it may be better to treat the engines as a separate unit if

it is likely that their useful life is shorter than that of the aircraft as a whole.

9. Components of Cost

9.1 The cost of an itemof fixed asset comprises its purchase price, including

import duties and other non-refundable taxes or levies and any directly

attributable cost of bringing the asset to itsworking condition for its intended

use; any trade discounts and rebates are deducted in arriving at the purchase

price. Examples of directly attributable costs are:

(i) site preparation;

(ii) initial delivery and handling costs;

(iii) installation cost, such as special foundations for plant; and

(iv) professional fees, for example fees of architects and engineers.

The cost of a fixed asset may undergo changes subsequent to its acquisition

or construction on account of exchange fluctuations, price adjustments,

changes in duties or similar factors.

9.2 6[***]

9.3 Administration and other generaloverhead expenses are usuallyexcluded

6 Pursuant to the issuance of Accounting Standard (AS) 16, Borrowing Costs, which

came into effect in respect of accounting periods commencing on or after 1-4-2000,

this paragraph stands withdrawn from the aforesaid date. The erstwhile paragraph

was as under:

“9.2 Financing costs relating to deferred credits or to borrowed funds attributable

to construction or acquisition of fixed assets for the period up to the completion of

construction or acquisition of fixed assets are also sometimes included in the gross

book value of the asset to which they relate. However, financing costs (including

interest) on fixed assets purchased on a deferred credit basis or on monies borrowed

for construction or acquisition of fixed assets are not capitalised to the extent that

such costs relate to periods after such assets are ready to be put to use.”

146 AS 10 (issued 1985)

from the cost of fixed assets because they do not relate to a specific fixed

asset. However, in some circumstances, such expenses as are specifically

attributable to construction of a project or to the acquisition of a fixed asset

or bringing it to its working condition, may be included as part of the cost of

the construction project or as a part of the cost of the fixed asset.

9.4 The expenditure incurred on start-up and commissioning of the project,

including the expenditure incurred on test runs and experimental production,

is usually capitalised as an indirect element of the construction cost.However,

the expenditure incurred after the plant has begun commercial production,

i.e., production intended for sale or captive consumption, is not capitalised

and is treated as revenue expenditure even though the contractmay stipulate

that the plantwill not be finally taken over until after the satisfactory completion

of the guarantee period.

9.5 If the interval between the date a project is ready to commence

commercialproduction and the date atwhich commercialproduction actually

begins is prolonged, all expenses incurred during this period are charged to

the profit and loss statement. However, the expenditure incurred during this

period is also sometimes treated as deferred revenue expenditure to be

amortised over a period not exceeding 3 to 5 years after the commencement

of commercial production.7

10. Self-constructed Fixed Assets

10.1 In arriving at the gross book value of self-constructed fixed assets,

the same principles apply as those described in paragraphs 9.1 to 9.5. Included

in the gross book value are costs of construction that relate directly to the

specific asset and costs that are attributable to the construction activity in

general and can be allocated to the specific asset. Any internal profits are

eliminated in arriving at such costs.

7 It may be noted that this paragraph relates to “all expenses” incurred during the

period. This expenditure would also include borrowing costs incurred during the

said period. Since Accounting Standard (AS) 16, Borrowing Costs, specifically

deals with the treatment of borrowing costs, the treatment provided by AS 16 would

prevail over the provisions in this respect contained in this paragraph as these

provisions are general in nature and apply to “all expenses” (see ‘The Chartered

Accountant’, November 2001, page 699). Accordingly, this paragraph stands

withdrawn insofar as borrowing costs are concerned.

Accounting for Fixed Assets 147

11. Non-monetary Consideration

11.1 When a fixed asset is acquired in exchange for another asset, its

cost is usually determined by reference to the fair market value of the

consideration given. Itmay be appropriate to consider also the fairmarket

value of the asset acquired if this is more clearly evident. An alternative

accounting treatment that is sometimes used for an exchange of assets,

particularly when the assets exchanged are similar, is to record the asset

acquired at the net book value of the asset given up; in each case an

adjustment is made for any balancing receipt or payment of cash or other

consideration.

11.2 When a fixed asset is acquired in exchange for shares or other securities

in the enterprise, it is usually recorded at its fair market value, or the fair

market value of the securities issued, whichever is more clearly evident.

12. Improvements and Repairs

12.1 Frequently, it is difficult to determinewhether subsequent expenditure

related to fixed asset represents improvements that ought to be added to the

gross book value or repairs that ought to be charged to the profit and loss

statement. Only expenditure that increases the future benefits from the

existing asset beyond its previously assessed standard of performance is

included in the gross book value, e.g., an increase in capacity.

12.2 The cost of an addition or extension to an existing asset which is of a

capital nature and which becomes an integral part of the existing asset is

usually added to its gross book value.Any addition or extension,which has a

separate identity and is capable of being used after the existing asset is

disposed of, is accounted for separately.

13. Amount Substituted for Historical Cost

13.1 Sometimes financial statements that are otherwise prepared on a

historical cost basis include part or all of fixed assets at a valuation in

substitution for historical costs and depreciation is calculated accordingly.

Such financial statements are to be distinguished from financial statements

prepared on a basis intended to reflect comprehensivelythe effects of changing

prices.

13.2 A commonly accepted and preferred method of restating fixed assets

148 AS 10 (issued 1985)

is by appraisal, normally undertaken by competent valuers. Other methods

sometimes used are indexation and reference to current prices which when

applied are cross checked periodically by appraisal method.

13.3 The revalued amounts of fixed assets are presented in financial

statements either by restating both the gross book value and accumulated

depreciation so as to give a net book value equal to the net revalued amount

or by restating the net book value by adding therein the net increase on

account of revaluation. An upward revaluation does not provide a basis for

crediting to the profit and loss statement the accumulated depreciation

existing

at the date of revaluation.

13.4 Different bases of valuation are sometimes used in the same financial

statements to determine the book value of the separate items within each of

the categories of fixed assets or for the different categories of fixed assets.

In such cases, it is necessary to disclose the gross book value included on

each basis.

13.5 Selective revaluation of assets can lead to unrepresentative amounts

being reported in financial statements. Accordingly, when revaluations do

not cover all the assets of a given class, it is appropriate that the selection of

assets to be revalued be made on a systematic basis. For example, an

enterprise may revalue a whole class of assets within a unit.

13.6 It is not appropriate for the revaluation of a class of assets to result in

the net book value of that class being greater than the recoverable amount of

the assets of that class.

13.7 An increase in net book value arising on revaluation of fixed assets

is normally credited directly to owner’s interests under the heading of

revaluation reserves and is regarded as not available for distribution.

A decrease in net book value arising on revaluation of fixed assets is

charged

to profit and loss statement except that, to the extent that such a decrease

is considered to be related to a previous increase on revaluation that

is included in revaluation reserve, it is sometimes charged against that

earlier increase. It sometimes happens that an increase to be recorded is a

reversal

of a previous decrease arising on revaluation which has been charged to

profit and loss statement in which case the increase is credited to profit

and loss statement to the extent that it offsets the previously recorded

decrease.

Accounting for Fixed Assets 149

14. Retirements and Disposals

14.1 An item of fixed asset is eliminated from the financial statements on

disposal.

14.2 Items of fixed assets that have been retired from active use and are

held for disposal are stated at the lower of their net book value and net

realisable value and are shown separately in the financial statements. Any

expected loss is recognised immediately in the profit and loss statement.

14.3 In historical cost financial statements, gains or losses arising on disposal

are generally recognised in the profit and loss statement.

14.4 On disposal of a previously revalued itemof fixed asset, the difference

between net disposal proceeds and the net book value is normally charged or

credited to the profit and loss statement except that, to the extent such a loss

is related to an increase which was previously recorded as a credit to

revaluation reserve and which has not been subsequently reversed or utilised,

it is charged directly to that account. The amount standing in revaluation

reserve following the retirement or disposal of an asset which relates to that

asset may be transferred to general reserve.

15. Valuation of Fixed Assets in Special Cases

15.1 In the case of fixed assets acquired on hire purchase terms, although

legal ownership does not vest in the enterprise, such assets are recorded at

their cash value, which, if not readily available, is calculated by assuming an

appropriate rate of interest. They are shown in the balance sheet with an

appropriate narration to indicate that the enterprise does not have full

ownership thereof.8

15.2 Where an enterprise owns fixed assets jointly with others (otherwise

than as a partner in a firm), the extent of its share in such assets, and the

proportion in the original cost, accumulated depreciation and written down

value are stated in the balance sheet. Alternatively, the pro rata cost of

8 Accounting Standard (AS) 19, Leases, has come into effect in respect of assets

leased during accounting periods commencing on or after 1-4-2001. AS 19 also applies

to assets acquired on hire purchase during accounting periods commencing on

or after 1-4-2001. Accordingly, this paragraph is not applicable in respect of

assets acquired on hire purchase during accounting periods commencing on or

after 1-4-

2001 (see ‘The Chartered Accountant’, November 2001, page 699).

150 AS 10 (issued 1985)

such jointly owned assets is grouped togetherwith similar fullyowned assets.

Details of such jointly owned assets are indicated separately in the fixed

assets register.

15.3 Where several assets are purchased for a consolidated price, the

consideration is apportioned to the various assets on a fair basis as

determined by competent valuers.

16. Fixed Assets of Special Types

16.1 Goodwill, in general, is recorded in the books only when some

consideration in money or money’s worth has been paid for it.Whenever a

business is acquired for a price (payable either in cash or in shares or

otherwise) which is in excess of the value of the net assets of the business

taken over, the excess is termed as ‘goodwill’.Goodwill arises frombusiness

connections, trade name or reputation of an enterprise or fromother intangible

benefits enjoyed by an enterprise.

16.2 As amatter of financial prudence, goodwill iswritten off over a period.

However,many enterprises do notwrite off goodwill and retain it as an asset.

16.3 9[***]

16.4 9[***]

9 From the date of Accounting Standard (AS) 26, Intangible Assets, becoming

mandatory for the concerned enterprises, paragraphs 16.3 to 16.7 stand withdrawn

(see AS 26). The erstwhile paragraphs were as under:

"16.3 Patents are normally acquired in two ways: (i) by purchase, in which case

patents are valued at the purchase cost including incidental expenses, stamp duty,

etc. and (ii) by development within the enterprise, in which case identifiable costs

incurred in developing the patents are capitalised. Patents are normally written off

over their legal term of validity or over their working life, whichever is shorter.

16.4 Know-how in general is recorded in the books only when some consideration

in money or money’s worth has been paid for it. Know-how is generally of two

types:

(i) relating to manufacturing processes; and

(ii) relating to plans, designs and drawings of buildings or plant and

machinery.

16.5 Know-how related to plans, designs and drawings of buildings or plant and

machinery is capitalised under the relevant asset heads. In such cases depreciation

is calculated on the total cost of those assets, including the cost of the know-how

Accounting for Fixed Assets 151

16.5 1 0[***]

16.6 1 0[***]

16.7 1 0[***]

17. Disclosure

17.1 Certain specific disclosures on accounting for fixed assets are already

required by Accounting Standard 1 on ‘Disclosure of Accounting Policies’

and Accounting Standard 6 on ‘Depreciation Accounting’.

17.2 Further disclosures that are sometimes made in financial statements

include:

(i) gross and net book values of fixed assets at the beginning and

end of an accounting period showing additions, disposals,

acquisitions and other movements;

(ii) expenditure incurred on account of fixed assets in the course of

construction or acquisition; and

(iii) revalued amounts substituted for historical costs of fixed assets,

the method adopted to compute the revalued amounts, the nature

of any indices used, the year of any appraisal made, and whether

an external valuer was involved, in case where fixed assets are

stated at revalued amounts.

Accounting Standard

18. The items determined in accordance with the definition in

capitalised. Know-how related to manufacturing processes is usually expensed in

the year in which it is incurred.

16.6 Where the amount paid for know-how is a composite sum in respect of both

the types mentioned in paragraph 16.4, such consideration is apportioned amongst

them on a reasonable basis.

16.7 Where the consideration for the supply of know-how is a series of recurring

annual payments as royalties, technical assistance fees, contribution to research,

etc., such payments are charged to the profit and loss statement each year."

10 See footnote 9.

152 AS 10 (issued 1985)

paragraph 6.1 of this Statement should be included under fixed assets

in financial statements.

19. The gross book value of a fixed asset should be either historical

cost or a revaluation computed in accordance with this Standard. The

method of accounting for fixed assets included at historical cost is set

out in paragraphs 20 to 26; the method of accounting of revalued assets

is set out in paragraphs 27 to 32.

20. The cost of a fixed asset should comprise its purchase price and

any attributable cost of bringing the asset to its working condition for its

intended use. 1 1[***]

21. The cost of a self-constructed fixed asset should comprise those

costs that relate directly to the specific asset and those that are

attributable to the construction activity in general and can be allocated

to the specific asset.

22. When a fixed asset is acquired in exchange or in part exchange

for another asset, the cost of the asset acquired should be recorded

either at fair market value or at the net book value of the asset given up,

adjusted for any balancing payment or receipt of cash or other

consideration. For these purposes fair market value may be determined

by reference either to the asset given up or to the asset acquired,

whichever is more clearly evident. Fixed asset acquired in exchange

for shares or other securities in the enterprise should be recorded at its

fair market value, or the fair market value of the securities issued,

whichever is more clearly evident.

11 Pursuant to the issuance of Accounting Standard (AS) 16, Borrowing Costs,

which came into effect in respect of accounting periods commencing on or after 1-

4-2000, a portion of this paragraph stands withdrawn from the aforesaid date. The

erstwhile paragraph was as under:

“20. The cost of a fixed asset should comprise its purchase price and any

attributable cost of bringing the asset to its working condition for its intended use.

Financing costs relating to deferred credits or to borrowed funds attributable to

construction or acquisition of fixed assets for the period up to the completion of

construction or acquisition of fixed assets should also be included in the gross

book value of the asset to which they relate. However, the financing costs (including

interest) on fixed assets purchased on a deferred credit basis or on monies borrowed

for construction or acquisition of fixed assets should not be capitalised to the

extent that such costs relate to periods after such assets are ready to be put to use.”

Accounting for Fixed Assets 153

23. Subsequent expenditures related to an item of fixed asset should

be added to its book value only if they increase the future benefits from

the existing asset beyond its previously assessed standard of

performance.

24. Material items retired from active use and held for disposal should

be stated at the lower of their net book value and net realisable value

and shown separately in the financial statements.

25. Fixed asset should be eliminated from the financial statements on

disposal or when no further benefit is expected from its use and disposal.

26. Losses arising from the retirement or gains or losses arising from

disposal of fixed asset which is carried at cost should be recognised in

the profit and loss statement.

27. When a fixed asset is revalued in financial statements, an entire

class of assets should be revalued, or the selection of assets for

revaluation should be made on a systematic basis. This basis should be

disclosed.

28. The revaluation in financial statements of a class of assets should

not result in the net book value of that class being greater than the

recoverable amount of assets of that class.

29. When a fixed asset is revalued upwards, any accumulated

depreciation existing at the date of the revaluation should not be credited

to the profit and loss statement.

30. An increase in net book value arising on revaluation of fixed

assets should be credited directly to owners’ interests under the head

of revaluation reserve, except that, to the extent that such increase is

related to and not greater than a decrease arising on revaluation

previously recorded as a charge to the profit and loss statement, it

may be credited to the profit and loss statement. A decrease in net

book value arising on revaluation of fixed asset should be charged

directly to the profit and loss statement except that to the extent that

such a decrease is related to an increase which was previously

recorded as a credit to revaluation reserve and which has not been

subsequently reversed or utilised, it may be charged directly to that

account.

154 AS 10 (issued 1985)

31. The provisions of paragraphs 23, 24 and 25 are also applicable

to fixed assets included in financial statements at a revaluation.

32. On disposal of a previously revalued item of fixed asset, the

difference between net disposal proceeds and the net book value should

be charged or credited to the profit and loss statement except that to the

extent that such a loss is related to an increase which was previously

recorded as a credit to revaluation reserve and which has not been

subsequently reversed or utilised, it may be charged directly to that

account.

33. Fixed assets acquired on hire purchase terms should be recorded

at their cash value, which, if not readily available, should be calculated

by assuming an appropriate rate of interest. They should be shown in

the balance sheet with an appropriate narration to indicate that the

enterprise does not have full ownership thereof.1 2

34. In the case of fixed assets owned by the enterprise jointly with

others, the extent of the enterprise’s share in such assets, and the

proportion of the original cost, accumulated depreciation and written

down value should be stated in the balance sheet. Alternatively, the pro

rata cost of such jointly owned assets may be grouped together with

similar fully owned assets with an appropriate disclosure thereof.

35. Where several fixed assets are purchased for a consolidated price,

the consideration should be apportioned to the various assets on a fair

basis as determined by competent valuers.

36. Goodwill should be recorded in the books only when some

consideration in money or money’s worth has been paid for it. Whenever

a business is acquired for a price (payable in cash or in shares or

otherwise) which is in excess of the value of the net assets of the business

taken over, the excess should be termed as ‘goodwill’.

12 Accounting Standard (AS) 19, Leases, has come into effect in respect of assets

leased during accounting periods commencing on or after 1-4-2001. AS 19 also

applies to assets acquired on hire purchase during accounting periods commencing

on or after 1-4-2001. Accordingly, this paragraph is not applicable in respect of

assets acquired on hire purchase during accounting periods commencing on or

after 1-4-2001 (see ‘The Chartered Accountant’, November 2001, page 699).

37. 1 3 [***]

38. 1 3 [***]

Accounting for Fixed Assets 155

Disclosure

39. The following information should be disclosed in the financial

statements:

(i) gross and net book values of fixed assets at the beginning

and end of an accounting period showing additions, disposals,

acquisitions and other movements;

(ii) expenditure incurred on account of fixed assets in the course

of construction or acquisition; and

(iii) revalued amounts substituted for historical costs of fixed

assets, the method adopted to compute the revalued amounts,

the nature of indices used, the year of any appraisal made,

and whether an external valuer was involved, in case where

fixed assets are stated at revalued amounts.

13 From the date of Accounting Standard (AS) 26, Intangible Assets, becoming

mandatory for the concerned enterprises, paragraphs 37 and 38 stand withdrawn

(See AS 26). The erstwhile paragraphs were as under :

"37. The direct costs incurred in developing the patents should be capitalised

and written off over their legal term of validity or over their working life, whichever

is shorter.

38. Amount paid for know-how for the plans, layout and designs of buildings

and/or design of the machinery should be capitalised under the relevant asset

heads, such as buildings, plants and machinery, etc. Depreciation should be

calculated on the total cost of those assets, including the cost of the know-how

capitalised. Where the amount paid for know-how is a composite sum in respect

of both the manufacturing process as well as plans, drawings and designs for

buildings, plant and machinery, etc., the management should apportion such

consideration into two parts on a reasonable basis."

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