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 To prescribe the accounting treatment for the fixed assets.  The major issues covered are : * The timing of Recognition of the assets. * Determination of C arrying Amount in the financial statements. 10/18/2015 Created by Rajat 2

 Fixed Assets are assets that are held - for use in the production or supply of goods and services, and not held for sale in the normal course of business. AND are expected to be used during more than one period. 10/18/2015 Created by Rajat 3

The cost of an item of PPE is recognised only and only if It is probable that future economic benefit will flow to the entity and The cost of the item can be measured reliably 10/18/ Created by Rajat

If yes - it May be qualify as FA If no - it will be charged to Expenses Use is Irregular It can be used only in connection with an item of Fixed Asset 10/18/ Created by Rajat

10/18/2015 Created by Rajat 6 Amount paid to vendor Import duties and other non refundable taxes or levies Purchasing price Installation cost Delivery and handling cost Costs directly Attributable to bringing the asset to location and condition intended by management

10/18/2015 Created by Rajat 7 Same principles are used as if the asset is purchased. Self constructed Asset Fair value method is used If both the assets are same then, book value of asset given is used. Exchange of Asset

 Day to day expenses is charged to Profit and Loss Account as repair and maintenance.  Expenditure will be Capitalized only if the efficiency of the asset is increased due to such expenditure. 10/18/2015 Created by Rajat 8

10/18/2015 Created by Rajat 9 On sale Asset is eliminated from the books. Any profit or loss is t/f to P&L a/c Disposal Shown separately in the books. Shown at the net book value or net realizable value whichever is lower. Retire from active use & held for disposal

10/18/2015 Created by Rajat 10 Depreciation : In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.

 Assets which are used during more than one accounting period.  Has a limited useful life.  Enterprise holds it for the purpose of production.  For rental to others.  For administrative purposes 10/18/2015 Created by Rajat 11 DEPRECIABLE ASSETS ?

10/18/2015 Created by Rajat 12 METHOD OF DEPRECIATION 1. Straight-line depreciation 2. Reducing-Balance Method 3. Activity depreciation 4. Sum-of-Years' Digits Method 5. Units-of-Production Depreciation Method 6. Units of time depreciation 7. Group Depreciation Method 8. Composite Depreciation Method

 Expected useful life of the Depreciable Asset  Expected Residual value of the Depreciable Asset  Type and Nature of the Depreciable Asset  Nature of the use of the Depreciable Asset 10/18/2015 Created by Rajat 13 Factors to be considered

 The net book value of an asset is reduced by the same amount each period. What this means is that you take the total cost of the asset and divide it by Useful life of the Asset. 10/18/2015 Created by Rajat 14

 For Example- - An Asset is purchased for Rs Useful Life of the asset is 4 years - Expected Scrap value at the end is Rs /18/2015 Created by Rajat 15 YearsOpening Book Value DepreciationAccumulat ed Dep. Closing Book Value (Original cost) (Scrap Value)

 The net book value of an asset is reduced by the same proportion each period. What this means is that at the end of every period you reduce the value by a fixed percentage.  In this method higher depreciation charge is provided in the first year and gradually decreasing charges are provided in subsequent years.  Each period uses the previous period's book value to work out the amount. 10/18/2015 Created by Rajat 16

 For Example- - An Asset is purchased for Rs Expected Scrap value at the end is Rs Rate of Depreciation is 40% 10/18/2015 Created by Rajat 17 YearsOpening Book Value DepreciationAccumulat ed Dep. Closing Book Value (Original cost) ( ) (Scrap Value)

 Book Value of the asset at the beginning of the year.  Depreciation thereon.  Book value at the end of the year.  Method of Depreciation.  If rates applied are different from the rates prescribed by the governing statute then the rates and useful life of the asset should also be disclosed. 10/18/2015 Created by Rajat 18 Disclosure

10/18/2015 Created by Rajat 19 Scenario After 1/4/2011 With Effect from 1 st April, 2011, it is mandatory for every company to adopt IFRS (International Financial Reporting Standards ). Under IFRS, Fixed assets & Depreciation should be accounted for Using the principles in International Accounting Standard (IAS 16) which deals in Property, Plant & Equipment.

Comparative Study Of AS 10 & As 6 with IAS 16 10/18/2015 Created by Rajat 20

10/18/2015 Created by Rajat 21 COST Accounting Standard IAS 16 COST There is no guideline for capitalization of dismantling and site restoration cost. Cost includes: Initial estimates of dismantling and removing the item and restoring the site on which it is located. Components Not mandatory to capitalize the parts of a fixed asset. Each part of asset with significant cost is depreciated separately.

10/18/2015 Created by Rajat 22 Accounting StandardIAS 16 Replacement There is no Requirement of decapitalizing the carrying amount of replaced part The carrying amount of those parts that are replaced should be derecognized. Spares Spares are usually charged to P&l as & when Consumed. If such items are irregular & machine specific, then it may be appropriate to capitalize such item. Spares are carried as inventory and recognized as consumed in p&l. If specific to asset then must be capitalized. Servicing Equipments Servicing equipments are normally capitalized Servicing equipments are usually carried as inventory and recognized in profit and loss account as consumed.

10/18/2015 Created by Rajat 23 Accounting StandardIAS 16 Revaluation Revaluation approach adopted is ad-hoc in nature. When revaluation do not cover all the asset of the given class, it is appropriate that the selection of the asset to be revalued be made on systematic basis. IAS 16 gives option to an entity to choose either cost less depreciation method or revaluation method. If an item of property, plant and equipment is revalued, the entire class to which that asset belongs should be revalued. There is no such requirement. Revaluation must be kept up to date so that the carrying amount does not differ materially from the fair value. Where policy of revaluation is adopted, regular revaluation of all PPE should be done.

10/18/2015 Created by Rajat 24 Accounting StandardIAS 16 Depreciation All companies need to ensure minimum depreciation as per rates prescribed in Schedule XIV to the Companies Act. There is no requirement for separate depreciation for each significant part of the asset. Each part of an item of PPE with a cost that is significant in relation to the total cost of an item will be depreciated separately. There is no need for annual review of estimates of useful life and residual value. It may be reviewed periodically. The residual value and useful life of an asset is reviewed at least each financial year end and if expectations differ from previous estimates, the changes will be accounted for as a change in accounting estimates.

10/18/2015 Created by Rajat 25 Accounting StandardIAS 16 Methods of Depreciation Permitted methods of depreciation are straight line method and written down value method. Depreciation method selected should be applied consistently from period to period. Change is method should be made only in prescribed situation. Various method can be used like straight line method, diminishing balance method, unit of production method etc. Depreciation method selected should be applied consistently from period to period. Change is method should be made only in prescribed situation. Change in method is treated as change in accounting policy and is accounted retrospectively. Change in depreciation method is treated as change in accounting estimates and accounted for prospectively.

10/18/2015 Created by Rajat 26 THANK YOU !!