CHAPTER9

AS10=AccountingforFixedAssets
SYNOPSIS
1.
2.
3.
4.
5.

Objective
Scope
Definitions
Recognition and Measurement
Initial Recognition
A. If Asset is Purchased by Payment of Cash/for Credit
B. Self-Constructed Fixed Assets
C. Fixed Asset is Acquired by Issue of Shares or Other Securities
D. Fixed Asset is Acquired by Exchange of Another Asset: (Barter method)
6. Expenditure incurred between after ready to use and actual use
7. Subsequent expenditure on Improvements and Repairs
8. Revaluation of fixed assets
9. Revaluation Accounting
10. Retirement of Fixed asset
11. Disposal of fixed asset
12. Valuation of fixed assets in Special cases
13. Disclosures
Questions & Answers

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1. Objective
Generally fixed assets constitute a significant portion of the total assets of an entity; hence this AS is
important in the presentation of financial position.
This standard discusses whether expenditure incurred should be capitalised as fixed asset or charged
to P&L statement. Hence it has material effect on Balance sheet as well as on P&L.
2. Scope
Fixed assets are generally grouped into various categories/classes, like land, building, plant and machinery,
furniture and fixtures etc.
This standard does NOT deal with the following fixed assets: (Reasons are given in brackets)
(a) Forests, plantations and similar regenerative natural resources; (NO Accounting standard exists,
Industry rules and regulations are followed)
(b) Wasting assets including mineral rights, expenditure on exploration for and extraction of minerals,
oil, natural gas and similar non-regenerative resources; (NO Accounting standard exists, Industry
rules and regulations are followed)
(c) Expenditure on real estate development; and
(d) Livestock; (NO Accounting standard exists, Industry rules and regulations are followed)
(e) Depreciation on fixed assets; (AS 6 deals with depreciation)
(f) Government grants related to fixed assets; (AS 12 deals with this topic)
(g) Borrowing costs incurred related to fixed assets; (AS 16 deals with this topic)
(h) Intangible assets and its amortisation; (AS 26 deals with this topic)
(i) Fixed assets acquired in Amalgamation; (AS 14 deals with this topic)

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Note: An individual fixed asset acquired to develop or maintain the activities covered in (a) to (d) above, and
these are separable from the activities, are to be accounted for as per this Standard.
Concept capsule 1:
Rama Ltd. is involved in exploration of minerals. They acquired a machine for `20 lakh, which is to be
used in exploration of minerals. State whether AS 10 is applicable for accounting?
Suggested answer:
AS 10 is NOT applicable for acquisition of mineral rights and other wasting assets. The machine acquired
is not a wasting asset or mineral right; hence AS 10 is applicable for capitalisation of machine.
3. Definitions

Fixed
Fixed asset
asset is
is

an asset

Producing goods

Held with the

intention of
being used for

OR

Providing services

NOT for sale in the ordinary

course of business
Note: Before classification of an item into fixed asset, investment or inventory, the expenditure should
satisfy the asset definition and conditions to recognise the asset as per the frame work; Intention of usage is
important for classification of asset as fixed asset, investment or inventory;
Gross book value: It is historical cost of the asset or Revalued amount;
Net book value:
Amount
XXX
(XX)
XXX

Gross book value

Less: Accumulated depreciation
Net book value
4. Recognition and Measurement
Sub topics of
Recognition & Measurement

Initial
Recognition

Subsequent
expenditure

Revaluation of
fixed assets

Retirement &
Disposal

Special cases

5. Initial Recognition
This topic explains at what amount a fixed asset is to be capitalised at the time of initial acquisition.
Amount to be capitalised is based on the nature of consideration paid for the asset. A fixed asset can be
acquired in the following ways.
Initial recognition
Asset is acquired by
Payment of Cash/
Self construction
for credit
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Issue of shares /
other securities

Exchange of
other asset

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A. IF ASSET IS PURCHASED BY PAYMENT OF CASH/FOR CREDIT

Cost of asset includes the following
Particulars
Purchase price (Basic price)
( + ) Non refundable taxes & duties
( + ) Initial delivery and handling costs
( + ) Site preparation cost (e.g. special foundation costs)
( + ) Installation costs
( + ) Professional fees (e.g. fees of architects and engineers)
( + ) Borrowing cost (If permitted by AS 16)
( + ) Expenditure incurred on test runs & experimental production
after deducting the net proceeds received on sale of items
produced during test runs.
( + ) Any directly attributable cost to bring the asset to
working condition for its intended use
(+/-) Subsequent price adjustments
(+/-) Changes in duties and similar items
( - ) Trade discounts and rebates (if included in above items)
( - ) Government grants (As per AS 12)
Cost of fixed asset to be capitalised

Amount (`)
XXX
XXX
XXX
XXX
XXX
XXX
XXX

XXX
XXX
XXX
XXX
(XXX)
(XXX)
XXXX

General administration and other overhead expenses are usually excluded from the cost as they are not related
to specific asset. However, any expense if specifically attributable to construction of a project or acquisition
of a fixed asset or to bring it to working condition for its intended purpose, it should be included in the cost of
the fixed asset.
Concept capsule 2:
Krishna Ltd. acquired machinery for `50 lakh, freight cost is `1 lakh, professional fees paid is `2 lakh.
General overheads incurred during the installation period are `5 lakh. The entity spent `3 lakh to remove the
existing machine and to prepare proper base for the new machine. In addition to the above expenditure, It
spent `2 lakh for trail run, material and labour. The products manufactured during the trail run are sold for
`25,000. What is the cost of acquisition of machinery as per AS 10?
Suggested answers:
Cost of acquisition of machinery as per AS 10 is computed as following
Particulars
Purchase price

`in lakh
50

Freight cost

Professional fees paid

Site preparation cost (to remove old machine and to prepare site)

Trail run expenditure net off recovery from sale of products

manufactured during trail run (`2,00,000 25,000)
Amount to be capitalised

1.75
57.75

Note: Allocation of general and administration overhead is not added to the cost of asset as it is not directly

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related to acquisition of the asset and it is a mere allocation of overheads.

Concept capsule 3:
Madhava Ltd. purchased plant & machinery in the year 2008-09 for `45 lakh. A balance of `5 lakh is still
payable to the suppliers for the same. The supplier waived off the balance amount during the financial year
2011-12. The company treated it as income and credited to profit & loss account during 2011-12. Is the
accounting treatment of the company correct? If not, state with reasons.
Suggested answer:
As per AS 10, the cost of fixed asset may undergo changes subsequent to its acquisition or construction on
account of price adjustments, and changes in duties or similar factors.
In the given case, `5 lakh waived off is directly related to fixed asset hence it can be considered as price
adjustment and should be deducted from the cost of fixed asset. Hence the companys accounting treatment
is not correct and it should deduct `5 lakh from the book value of fixed asset on the date of waiving off. (As
per suggested answer given by ICAI)
Authors view: After the capitalisation of asset, the amount is waived off. The adjustment has nothing to do
with the fixed asset and it is all about clearing the liability. Redeeming the liability by paying less amount
is a profit and can be transferred to P&L.
Concept capsule 4:
Vamana Ltd. took a building on lease for 25 years (Non cancellable lease). They spent around `1 crore to
make it suitable for their requirements. Renovation took around a year and the company paid lease rent of
`12 lakh during the period but it could not use it for its office work. How to deal with the lease hold
improvements and rent paid during the improvement period?
Suggested answer:
The lease hold improvements will be useful over the lease term and it is reasonable to capitalise `1
crore as fixed asset and charge it to P&L over the useful life of the improvements or lease period
whichever is lower. E.g. If the useful life of improvements is 30 years, the entity will not be able to
use for more than 25 years; hence it should be depreciated over a period of 25 years.
During the first year the improvement work took place which is useful for the future, hence
capitalisation of rent amount is reasonable.
Concept capsule 5:
Damodara Ltd. acquired a standby generator during the year for `20 lakh and servicing equipment for `30
lakh. Can the company capitalise these assets as fixed assets?
Suggested answer:
As per AS 10, a fixed asset is an asset which is used for producing goods or for providing services. As the
standby asset and servicing equipments can satisfy the definition of the fixed asset, they should be
capitalised.
Concept capsule 6:
X Ltd. acquired an aircraft for `50 crore. The life of the engine is 20 years and body of aircraft should be
changed in 10 years, hence the company wants to allocate the total cost between the engine (`40 crore and
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body (`10 crore) to depreciate it over its respective useful life separately. Is this permitted as per AS 10?
Suggested answer:
Yes. The accounting treatment adopted by the company is reasonable as the assets are depreciated over the
life of respective parts of asset. This is permitted by AS 10. But it is NOT mandatory as per AS 10.
Machinery spares
Accounting treatment of machinery spares depends on the facts and circumstances of each case.
However, the machinery spares of the following types should be capitalised
(i) Machinery spares which are specific to a fixed asset, i.e., they can be used only in connection
with a particular item of the fixed asset, and
(ii) Their use is expected to be irregular.
Machinery spares in the nature of capital spares should be capitalised separately at the time of their
purchase whether procured at the time of purchase of the fixed asset concerned or subsequently.
The total cost of such spares should be depreciated in a systematic basis over a period not exceeding
the useful life of the fixed asset concerned.
When the principal fixed asset is either discarded or sold, the written down value less disposal value,
if any, of the capital spares/insurance spares should be written off.
The stand-by equipment is a separate fixed asset in its own right and should be depreciated like any
other fixed asset.
If the machinery spares do NOT satisfy the above conditions, it should be treated as inventory and charged to
profit and loss statement when it is issued from stores for usage.
B. SELF CONSTRUCTED FIXED ASSETS
The following costs should be capitalised when the assets are constructed by the entity.
Amount (`)
Particulars
All the costs which are capitalised under the sub-topic A above
XXX
Any other costs of construction that directly relate to the specific asset
XXX
Any other costs that can be attributable/allocable to the construction activity
XXX
Cost of self constructed fixed asset
XXXX
Note: The entity should NOT include internal profits on any items used from its stores. Only cost of the items
should be capitalised.
Concept capsule 7:
Rahim Ltd. is involved in Cement manufacturing. The company started constructing a new plant. Cement
required for construction is taken from its warehouse. Total cement used for construction is 1,000 bags.
The company generally sells each bag at `500 each in the open market and its cost to the company is `400.
The accountant capitalised `5,00,000 (`500 * 1,000 bags) to the building cost. Is this accounting treatment
correct as per AS10?
Suggested answer:
As per AS 10, in case of self constructed fixed assets - Internal profits should NOT be capitalised. Only
actual costs incurred should be capitalised. Hence the accounting treatment of the entity is NOT in
accordance with the standard. As per the Standard it should capitalise `4,00,000 (`400 * 1,000 bags).
C. FIXED ASSET IS ACQUIRED BY ISSUE OF SHARES OR OTHER SECURITIES
When a fixed asset is acquired by issuing shares or other securities of the entity, it is usually recorded at
The fair market value of the securities issued; or
The fair market value of the fixed asset received;

Whichever is more clearly evident

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Concept capsule 8:
Buddha Ltd. issued 50,000 equity shares of `10 each (fully paid up) in consideration for receipt of certain
machinery. The quoted rate on the date of transaction in Bombay Stock Exchange (BSE) is `15 per share.
In the absence of fair market value of the machinery, how should the entity record the transaction in the
books of the company?
(PCC May 2007)
Suggested answer:
As per AS 10, fixed asset acquired in exchange for shares or other securities in the entity should be
recorded at its fair market value of fixed asset, or the fair market value of the securities issued, whichever is
more clearly evident. Based on the information given, fair value of fixed asset cannot be determined
clearly, so it is appropriate to consider the fair value of the shares issued. Hence, the company should
record the machinery at `7, 50,000. (i.e., 50,000 shares * `15 per share)

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D.
FIXED ASSET IS ACQUIRED BY EXCHANGE OF ANOTHER ASSET: (Barter method)
When a fixed asset is acquired in exchange or part exchange for another asset, the asset received is usually
recorded at
(a) The fair market value of the consideration (asset) given; (first priority)
(b) The fair market value of the asset acquired only when it is clearly evident; (Second priority)

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The entity can follow alternatively the following when the assets exchanged are similar:
Particulars

Amount

Net book value of the asset given up (as per books)

XXX

+ / - any amount received or payment of cash or other consideration

XXX

Value of asset received

XXX

Concept capsule 9:
On March 31, 2012, Radha Ltd. traded an old machine having a carrying amount of `16,800 and paid cash
difference of `6,000 for new machine having a total cash price of `20,500. On March 31, 2012, what
amount of loss should the company recognize on this exchange?
Suggested answer:
As per AS-10, when a fixed asset is acquired in exchange or part exchange for another asset, the cost of the
asset acquired should be recorded either at its fair market value or the net book value of the asset given up,
adjusted for balance payment or receipt of cash or other consideration.
The difference between the FV of new machine and amount payable is treated as FV of the old machine.
i.e. `14,500 (`20,500 - 6,000). This can be treated as sale value of old machine and the difference between
the selling price of old machine and book value is recognised as loss i.e. `2,300 (`16,800 `14,500). As the
fair value of the asset acquired is clearly evident than the fair value of the asset given up - it is appropriate
to value the asset acquired at `20,500.
6. Expenditure incurred between after ready to use and actual use
All expenses (including borrowing cost as per AS-16) incurred between the date of ready to use and actual
commencement of commercial production should be charged to profit and loss statement irrespective of the
amount involved.
There are NO inflows of future economic benefits from the expenditure incurred during the period; hence it
does NOT satisfy the definition of asset and it should NOT be recognised as deferred revenue expenditure.
Recognition of deferred revenue expenditure is specifically prohibited by AS 26. (Refer AS 26 for further
information)
Concept capsule 10:
Ravana Ltd. completed the construction of the cement plant on 1-6-2011 and the plant is ready to be used.
However due to market conditions, the entity started actual production in 2012-13. The overheads incurred
from the date of ready to use to date of actual use are capitalised along with the cost of plant. Is this
accounting treatment correct? Discuss.
Suggested answer:
As per AS 10, Any costs directly attributable to bring the fixed asset to working condition for its intended
use should be capitalised along with the fixed asset. In the given situation, the overheads are incurred after
the plant is ready to use for its intended purpose, hence these overheads should NOT be capitalised.
Concept capsule 11:
Continuation to the above example, if the overheads are significant, can the entity treat it as deferred
revenue expenditure and charge it to P&L over 3 to 5 years?
Suggested answer:
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As per para 9.5 of AS 10, the expenses incurred after ready to use cannot be capitalised and it can be
treated as deferred revenue expenditure and it can be charged to P&L over 3 to 5 years.
However the expenditure does NOT satisfy the definition of asset and as per AS 26, it is specifically
prohibited from recognition of deferred revenue expenditure. Hence it should be charged to P&L
immediately during the period irrespective of amount involved. AS 26 guidance overrides AS 10 guidance
as it is issued at a later point of time.
7. Subsequent expenditure on Improvements and Repairs
Subsequent expenditure is the expenditure, which is incurred after the initial recognition i.e. after the asset is
ready to use or being used. In this topic we discuss, whether subsequent expenditure should be capitalised
along with the fixed asset or charged to P&L statement. It depends on the nature and benefits from the
expenditure incurred.
Does subsequent expenditure increase the future
economic benefits from its previously assessed
level of capacity?
Yes
No
Capitalise along
with fixed asset

Charge to P&L
Statement

Generally it is difficult to determine whether subsequent expenditure amounts to improvements or repairs. It

depends on each situation and circumstance.
If the subsequent expenditure increases the future benefits beyond its previously assessed standard of
performance (capacity) It will be treated as improvement and such expenditure is added to the gross book
value. E.g. increase in number of goods produced, reduction in cost, etc.
Repairs, maintenance expenditure and replacement of a part of a big asset generally DO NOT increase future
economic benefits hence it should be charged to Profit and Loss statement irrespective of the amount
involved.
The cost of an addition or extension to an existing asset which is of capital nature and which becomes an
integral part (which cannot be used after the existing asset is disposed off) of the existing asset is usually
added to its gross book value.
Any addition or extension, which has a separate identity (Not an integral part of existing asset) and is capable
of being used after the existing asset is disposed off, is accounted as a separate fixed asset.
The following examples help you to understand the concept.
Concept capsule 12:
During the current year 201213, Jain Limited incurred the following expenditure relating to its plant
and building:
Amount (`)
Routine Repairs

4,00,000

Major overhaul expenses

1,00,000

Partial replacement of roof tiles

Substantial improvements to the electrical wiring system
which will increase efficiency

50,000
10,00,000

What amount should be capitalized along with the fixed assets and why?(IPCC May 2010 & Nov 2014)
Suggested answer:
As per AS 10, expenditure that increases the future benefits from the existing asset beyond its

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previously assessed standard of performance is added to the gross book value.

General Repairs and major overhaul expenses and Partial replacement of roof tiles `5.5 lakh (`4 + 1 +
0.5 lakh) does NOT increase future benefits hence it should be charged to P&L statement.
Substantial improvement to the electrical writing system is increasing economic benefits hence `10
lakh incurred should be capitalized.
Concept capsule 13:
Hindu Limited acquired a Xerox machine in 2010 and during 2012 the company spent `30,000 on the
machine so as to use it for printing purpose. How to deal with this expenditure?
Suggested answer:
As per AS 10, any expenditure that increases the future benefits from the existing asset beyond its
previously assessed standard of performance is added to its gross book value.
In the given situation, the machine was used only for Xerox (copying) purpose and because of the
subsequent expenditure; it can be used for printing purpose also. As it is increasing the future benefits,
`30,000 should be added to gross book value of the fixed asset.
Concept capsule 14:
Christ Limited is involved in manufacturing soaps. During the year it spent `2 crore to change the sequence
of machines. Due to this there is no increase in number of units of production but there is saving in cost by
`0.25 per soap. How to deal with this expenditure?
Suggested answer:
Savings in costs also amounts to increase in future benefits; hence `2 crore should be added to the fixed
assets and should be depreciated over the period of such benefit.
Concept capsule 15:
Buddha Limited acquired a machine and a conveyor belt along with the machine in 2010. Both of them
were capitalised at the time of initial acquisition. During 2012, due to technical problems the conveyor belt
had to be replaced with new one amounting to `7 lakh. The accountant of the entity would like to defer the
expenditure as it is a material expenditure and amortise over 3 years. Is this accounting treatment
appropriate as per AS 10?
Suggested answer:
As per AS 10, subsequent expenditure should be added to gross book value of fixed asset only when there
is an increase in future benefits beyond its previously assessed level of performance. Replacement of
conveyor belt results in maintaining the previous capacity and it does not increase it. Hence the expenditure
is treated as maintenance expenditure and should be charged to P&L statement irrespective of the amount
involved. The accounting treatment adopted by the company is not correct.
Concept capsule 16:
Sindhi Limited acquired a building which had non-moving tenants. Subsequently the company paid
compensation of `50 lakh to these tenants, so that the property could be leased to a third party at much
higher rate. How to deal with this subsequent expenditure as per AS 10?
Suggested answer:
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Compensation paid to the tenants enhances the value of the building and increases the future benefits more
than previously assessed level of capacity; hence `50 lakh should be added to the gross book value of the
building.
Generally differentiating the expenditure from improvements and repairs & maintenance is difficult.
8. Revaluation of fixed assets
Revaluation of fixed assets is NOT mandatory. Depending on the managements decision, the entity can
revalue its fixed assets. When the assets are revalued the entity should comply with the guidance given in the
Standard.
Frequency of Revaluation: No guidance is given in the Standard. Hence it depends on the management
decision i.e. it can revalue when there is significant variation between the fair value and book value.
Method of Revaluation: The standard does NOT prescribe any specific method to be followed.
Any other guidance on method: Generally accepted and preferred method of revaluation is appraisal method.
The entity can adopt other methods like indexation, discounted cash flows, etc. When other methods are
adopted, the valuation should be cross checked periodically with valuation under appraisal method. The entity
should disclose the method followed and other information in financial statements.
Who should perform revaluation? A competent valuer;
Does the entity need to revalue all fixed assets OR can it revalue only selected fixed assets?
Revaluation should be performed for an entire class of fixed assets such as plant and machinery or
buildings or lands etc. i.e. if the entity take a decision to revalue its buildings, it should revalue ALL
the buildings of the entity. (Revaluation of selective assets within a class is NOT permitted)
It is NOT mandatory to revalue all classes of fixed assets.
E.g. The entity can divide the fixed assets into classes based on the nature of items like land, buildings, plant
and machinery, furniture and fixture, etc.
Exception: As per the Standard, it is appropriate to revalue the selected assets on a systematic basis. For
example, an enterprise may revalue all assets of a plant/ division/ unit, etc.
Any Limit on revalued amount? The revalued amount should not be more than recoverable amount i.e.
recoverable from sale or its usage over the life.
What is appraisal method? Technical experts carry out a detailed examination of the assets with a view to
determine their fair market value. The factors which are considered in determining the value of an asset are as
follows:

Date of purchase.

Extent of use i.e. single shift, double shift, triple shift.

Type of asset. Whether the asset is a general purpose or special purpose asset?

Repairs & Maintenance policy of the enterprise.

Availability of spares in the future, mainly in the case of imported machines.

Future demand for the product manufactured by an asset.

If the asset is part of a bigger fixed asset, the life of the latter is crucial.

9. Revaluation Accounting
As we understood in the above paragraphs, the entity can do revaluation any number of times and it can be
upward or downward revaluation.
When fixed assets are revalued for first time:

If it is upward revaluation Revaluation gain should be transferred to revaluation reserve.

Fixed asset a/c .Dr

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To Revaluation reserve a/c

If it is downward revaluation Revaluation loss should be charged to P&L a/c

P&L a/c Dr
To Fixed asset a/c

When fixed assets are subsequently revalued:

The following accounting treatment is based on the first time revaluation (upward/downward):
If first time is upward revaluation
o

Next time also upward revaluation Further increase should be transferred to revaluation
reserve.
JE is same as upward revaluation.

Next time downward revaluation Utilise the revaluation reserve to the extent available in
the balance sheet and the remaining balance should be charged to P&L a/c.
Revaluation reserve a/c ..Dr
P&L a/c ...Dr (balancing fig)
To Fixed asset a/c

If first time is downward revaluation

o

Next time also downward revaluation Further decrease should be transferred to P&L
statement.
JE is same as downward revaluation.

Next time upward revaluation Credit the P&L statement to the extent it was charged to
P&L in earlier revaluation and remaining balance should be credited to revaluation reserve.
Fixed asset a/c ..Dr
To P&L a/c (to the extent charged earlier)
To Revaluation reserve (balancing figure)

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AS 10 = Accounting for Fixed Assets

Let us take an example of land revaluation: (as you know land is NOT depreciable)
Land
Book value = 100

Initial
revaluation

Subsequent
revaluation

Upward Revaluation to `120

FA a/c Dr 20
To RR a/c...
20

Revalued to `150
FA a/c Dr 30
To RR .30

Revalued to `105
RR a/c Dr 15
To FA .15

Downward revaluation to `70

P&L a/c .. Dr 30
To FA a/c
30

Revalued to `90
RR a/c Dr 20
P&L a/cDr 10
To RR .30

Revalued to `60
P&L a/c Dr 10
To FA ..10

Revalued to `85
FA a/c Dr 15
To P&L a/c 15

Revalued to `110
FA a/c Dr 40
To P&L a/c.30
To RR ...10

10. Retirement of Fixed asset

If any fixed asset is retired from active use and it is held for disposal such fixed asset should be stated in
balance sheet either at
Net book value; or
Net realisable value (NRV);

Whichever is LOWER

Disclose such items separately in the financial statements. Any expected loss should be recognised
immediately in the profit and loss statement.
Concept capsule 17:
Chandra Ltd. expects that a plant becomes useless which is appearing in the books at `10 lakh gross value.
The company charges SLM depreciation over an estimated period of 10 years and estimated scrap value is
3% of the cost. At the end of 7th year the plant has been assessed as useless. Its estimated net realizable
value is `3,10,000. Determine the loss/gain on retirement of the fixed assets.
Suggested answer:
Cost of the plant `10,00,000
Estimated realizable value at the beginning (10,00,000 * 3%) = `30,000
Depreciable amount (10,00,000 - 30,000) = `9,70,000
Depreciation per year (9,70,000 /10 years) = `97,000
WDV at the end of 7th yr. = [`10,00,000 - (97,000 * 7years)] = `3,21,000 (net book value)
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As per AS 10, items of fixed assets that have been retired from active use and held for disposal, are stated
at the lower of the net book value and net realizable value. Any expected losses should be recognised
immediately in P&L.
In the given case, the expected loss of `11,000 (i.e. 3,21,000 - 3,10,000) should be charged to P&L and
fixed asset of `3,10,000 to be shown in Balance Sheet separately.
11. Disposal of fixed asset
The following diagram helps to understand the accounting treatment of disposal of fixed assets.
Accounting disposal of FA
If fixed asset is
Revalued & Revaluation
Reserve exists in BS

NOT revalued earlier

Profit / Loss on disposal should
be transferred to P&L

Profit on disposal should be transferred to

P&L;
Loss on disposal should be first debited to
Revaluation reserve to the extent available
in Balance Sheet & remaining loss should
be charged to P&L.
After disposal if any Revaluation reserve
exists transfer to General reserve.

After disposal of a fixed asset, it should be completely eliminated from the financial statements i.e. gross
value and accumulated depreciation related to the asset.
Concept capsule 18:
On 1-4-2012 Indra Ltd. sold some of its fixed assets for `100 lakh; Written down value was `250 lakh.
These assets were revalued earlier. As on 1-4-2012 the revaluation reserve corresponding to these assets
stood at `200 lakh. Discuss the accounting treatment.
Suggested answer:
As per AS 10, on disposal of a previously revalued item of a fixed asset, the loss is normally charged to
P&L except that to the extent of such losses related to an increase which was previously credited to
revaluation reserve and which has not been subsequently reversed or utilized, it is charged directly to that
account. Any balance in revaluation reserve (related to the disposed asset) after such adjustment should be
transferred to general reserve.
In the given situation, loss of `150 (`250 `100) should be adjusted with revaluation reserve. The balance
of revaluation reserve `50 (`200 - `150) should be transferred to general reserve. The entity should record
the following JEs:
Cash/ Bank a/c ..Dr 100
Revaluation Reserve..Dr

200

To Fixed asset .250

To General reserve50

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129

12. Valuation of fixed assets in Special cases

Fixed asset acquired on Hire purchase terms
Hire purchase is a finance lease as per AS 19 Leases, hence it should be accounted for as per AS 19. (Refer AS 19 for further details);
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Jointly owned fixed assets

When an entity owns fixed assets jointly with others, the pro rata cost of such jointly owned assets is
grouped along with similar assets which are fully owned.
Details of such jointly owned assets should be disclosed separately in the fixed assets register.
Group of assets purchased for consolidated price
When several assets are purchased for a consolidated amount, the consideration given should be
apportioned to the various assets on a fair basis (reasonable basis) as determined by competent
valuer.
Purchased Goodwill
Goodwill, in general, is recorded in the books only when some consideration in money or moneys worth has
been paid for it. Whenever a business is acquired for a price (payable either in cash or in shares or otherwise)
and the consideration is more than the value of net assets acquired, the excess is treated as goodwill.
As a matter of financial prudence, goodwill is written off over a period. However, many enterprises do not
write off goodwill and retain it as an asset.
Concept capsule 19:
SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on 01.04.2008 and paid
`50,000 towards goodwill. On 01.04.2009, SAD enterprises decided to admit W as partner and the goodwill
was valued at `1,00,000 for the purpose. Please explain with reasons, at what price goodwill can be shown
in the books of account.
(IPCC Nov 2009)
Suggested answer:
As per AS 10, Accounting for Fixed Assets states that goodwill can be recorded in the books only when
some consideration in money or moneys worth has been paid for it. Therefore, only purchased goodwill
should be recorded in the books. In the said case, payment of `50,000 was made towards purchase of
goodwill, hence to this extent goodwill can be recorded in the books. Additional goodwill of `50,000 is self
generated goodwill, which should not be recorded. On admission, death or retirement of a partner, goodwill
adjustments can be carried out through capital accounts.
13. Disclosures

(PE II - May 2007)

Accounting policy of fixed assets;

Gross and net book values of fixed assets at the beginning and end of an accounting period showing
additions, disposals, acquisitions and other movements;
Expenditure incurred on account of fixed assets in the course of construction or acquisition; &
Revaluation related disclosure:
o

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;

Example of disclosure:
Fixed assets accounting policy of NIIT Limited: Fixed Assets are stated at acquisition cost except where
they are taken over pursuant to an acquisition at a consolidated price. Individual fixed assets taken over
pursuant to acquisition are recorded at their fair value on the date of acquisition based on valuation carried
out by independent valuers.
Format of other disclosures:
Gross Block

Accumulated depreciation

Chap. 9

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AS 10 = Accounting for Fixed Assets

Openin
g bal

Additio
ns

Deletio
ns

Closing
balance

Openin
g bal

CY
dep

Revers
ed in
CY

Closing
balance

Net
book
value

D =A + B
C

I =E +G H

D- I

Land

1,000

200

1,200

500

500

700

Building

2,000

2,000

1,000

120

1,120

880

P&
Machinery

5,000

400

-150

5,250

3,000

350

-100

3,250

2,000

F& Fixtures

100

100

25

10

35

65

Vehicles

500

25

-10

515

45

10

-8

47

468

8,600

625

-160

9,065

4,570

490

-108

4,952

4,113

Fixed assets

Total

Add: Capital work in progress

Total Net fixed assets

153
4,266

Questions & Answers

Question No. 1:
State with reasons whether the following is true or false:
AS-10 Accounting for Fixed Assets is also applicable to wasting assets like quarries, minerals and oil &
natural gas.
(PCC - June, 2009)
Answer:
AS 10 is NOT applicable to wasting assets.
Question No. 2:
State your comments and observations on the following:
(i) Fixed assets have been revalued & the resulting surplus has been adjusted against the brought
forward losses.
(Nov, 2000)
(ii) Cost of structural alterations amounting to `60,000 to self-owned factory premises has been charged
to Building repairs.
(Inter, May 2001)
Answer:
(i) As per AS-10, the surplus resulting from revaluation should be credited to Revaluation Reserve A/c
and should not be adjusted against brought forward losses.
(ii) Structural alterations amount to Capital Expenditure. Therefore, `60,000 should be capitalized and
should not be charged to building repairs.
Question No. 3:
As an Auditor, what would you do in the following situations?
One customer from whom `5 lakh is receivable for credit sales gives a Motor Car in full settlement of the
dues. The Directors estimate that the market value of the car is `5.25 lakh. As on the date of the balance sheet
the car has not been registered in the name of the auditee.
(Inter, Nov 2001)
Answer:
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Chap. 9

When a Fixed asset is acquired in exchange for other asset, the asset received is usually recorded at
(i) The FMV of the asset given up ; OR
(ii) The FMV of the asset acquired (only when it is clearly evident)
Therefore, it shall be more appropriate to record the cost of Motor Car at `5 lakh since the value of asset given
up is more clearly evident than the FMV of asset acquired. (As the FMV of motor car is estimated by the
Directors)
Question No. 4:
As an auditor, comment on the following situations:
B Ltd acquired a car for its MD on Hire Purchase basis. The interest payable as well as penalty for the
payment of instalments was added to the cost of the car.
(May 2002)
Answer:
Penalty and interest on instalments payable does not form part of cost of the car and therefore should not be
added to the cost of the car. Treatment of cost and outstanding instalments is correct as per AS-10.
Question No. 5:
A publishing Company undertook repair and overhauling of its Machinery at a cost of `250 lakh to maintain
them in good condition & capitalized the amount as it is more than 25% of the original cost of the machinery.
Comment
Answer:
As per AS 10, subsequent expenditure should be capitalized only when it increases the future economic
benefits beyond the previously assessed level. In this case, expenditure on repairs doesnt increase the
economic benefits hence it should not be capitalised. The companys accounting treatment is not correct.
Question No. 6:
A Partnership Firm revalued its fixed assets like Land & Buildings. The firm adequately disclosed the
revalued amounts in the Balance Sheet. Do you, as an Auditor, approve the disclosure given by the
Partnership firm?
(Nov 2009)
Answer:
The disclosure made by the firm is not adequate. As per AS 10, the entity should disclose the method of
revaluation, nature of indices used, appraisal method, etc in notes on accounts.
Question No. 7:
Fire Ltd. purchased equipment for its power plant from U Ltd. during the year 2006-07 at a cost of `100 lakh.
Out of this they paid only 90% & balance 10% was to be paid after 1 year on satisfactory performance of the
equipment. During the financial year 2007-08, U Ltd. waived off the balance 10% amount. Fire Ltd credited
it to P & L as discount received. Comment.
( Nov 2008)
Answer:
The treatment made by Fire Ltd is not correct. This should be accounted as a Reduction in the cost of Fixed
asset. (Represents Rebate subsequent to acquisition)
Question No. 8:
A Ltd entered into a binding contract with C Ltd to buy a machine for `1,00,000. The machine is to be
delivered on 15th February, 2009. On 1st January 2009, A Ltd changed its process of production. The new
process will not require the machine ordered and it shall have to be scrapped immediately after delivery. The
expected scrap value of the machine is nil. Explain as to how A Ltd should recognize the entire transaction in
its books of accounts for the year ended 31st March, 2009.
(Nov, 2009)
Answer:

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An asset is the one which gives future economic benefits to the entity. In this case, the expenditure doesnt
satisfy the asset definition. Hence it should be charged to P&L as loss.
Question No. 9
M/s. Tiger Ltd. allotted 7,500 equity shares of `100 each fully paid up to Lion Ltd. in consideration for supply
of a special machinery. The shares exchanged for machinery are quoted at National Stock Exchange (NSE) at
`95 per share, at the time of transaction. In the absence of fair market value of the machinery acquired, show
how the value of the machinery would be recorded in the books of Tiger Ltd.?
( IPCC May 2011)
Answer:
In the given situation, the market value of the shares exchanged for the asset is more clearly evident, the
company should record the value of machinery at `7,12,500 (i.e., 7,500 shares x `95 per share) being the
market price of the shares issued in exchange.
Question No. 10
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction:
Materials (including excise duty of Rs. 50,000, CENVAT credit is
available for 50% of the duty paid)

16,00,000

Direct Expenses

3,00,000

Total Labour charges ((200 out of the total of 600 men hours worked,
on installation work)

6,00,000

Spare parts and tools consumed in installation

60,000

Total salary of supervisor (time spent for installation was 25% of the
total time worked.)

24,000

Test run and experimental production expenses

23,000

Consultancy changes to architect for plant set up

9,000

Total Office & Administrative Expenses

9,00,000

(4% is chargeable to the construction)

Depreciation on other assets used for the construction of this asset

15,000

The machine was ready for use on 15-1-2015 but was used from 1-2-2015. Due to this
aldelay further expenses of ` 19,000 were incurred. Calculate the value at which the
plant should be capitalized. (IPCC Nov 2012, Nov 2013 & May 2015- modified)
Answer:
Calculation of cost of fixed assets
Materials [16,00,000 (50,000 * 50%)]

`
15,75,000

Direct expenses

3,00,000

Labour charges (6,00,000/600*200)

2,00,000

Spare parts and tools consumed in installation

Supervisor salary (Rs. 24,000 * 25%)
Test run and experimental production expenses
Consultancy charges
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60,000
6,000
23,000
9,000

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Office and administrative expenses (4% `9,00,000)

36,000

Depreciation on assets

15,000

Cost of fixed asset

22,24,000

Note: It is assumed that 4% of office and administrative expenses are specifically attributable to construction
of a fixed asset. Alternatively, it may be assumed that 4% of office and administrative expenses are only
allocated to construction project and is not specifically attributable to it. In such a case, the cost of fixed
assets will be `19,55,000.
Expenses of ` 19,000 from 15.1.2015 to 1.2.2015 to be charged to P&L as plant were ready for production on
15.1.2015.
Question No. 11:
A new Plant X was acquired in exchange of old Plant B and on payment of `20,000. The carrying amount of
the old Plant B was `1,75,000 (Historical cost less depreciation). The fair value of the Plant B on the date of
exchange was `1,50,000. Suggest the accounting entry in the books of the enterprise. (IPCC Nov 2012)
Answer:
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. Accordingly, the value of Plant X will be
`
Exchange value of Plant B

1,50,000

Add: Additional cash paid

20,000
1,70,000

Journal entries for acquisition of Plant X will be given as:

`
1 Plant X A/c

Dr.

1,70,000

To Plant B A/c

1,50,000

To Bank A/c

20,000

(Being new plant X acquired in exchange of Plant B on additional payment of `20,000)

2 Profit and Loss A/c

Dr.

25,000

To Plant B A/c

25,000

(Being loss on exchange of old Plant B transferred to Profit and Loss Account)
Note: Fair value of Plant B on the date of exchange has been considered for computation of cost of Plant X in
the above answer.
An alternative treatment is also possible when the assets exchanged are similar in nature. In such a case,
new asset may be recorded at the net book value of the asset given up after making adjustments for balance
receipt or payment of cash. Accordingly, the value of plant will be `1,95,000 (1,75,000+20,000) instead of
`1,70,000 and the following entry will be made:
Plant X A/c
To Plant B A/c
To Bank A/c

Dr.

1,95,000
1,75,000
20,000

(Being New plant X was acquired in the exchange of plant B on additional payment of `20,000)

Chap. 9

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AS 10 = Accounting for Fixed Assets

1.
Question No. 12:
In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000 on 1.4.2013. However on scrutiny it
was found that machinery worth ` 1,20,000 was included in the purchases on 1.6.2013. On 30.6.2013 the
company disposed a machine having book value of ` 1,89,000 on 1.4.2013 at ` 1,75,000 in part exchange of a
new machine costing ` 2,56,000. The company charges depreciation @ 20% WDV on plant and machinery.
You are required to calculate:
(i) Depreciation to be charged to P/L
(ii) Book value of Plant and Machinery A/c as on 31.3.2014
(iii) Loss on exchange of machinery.

(IPCC Nov 2014)

Answer:
(i)

Depreciation to be charged in the Profit and Loss Account

(`)
Depreciation on old Machinery
[20% on `6,32,000 for 3 months(01.4.13 to 30.6.13)]

31,600

Add: Depreciation machinery acquired on 01.06.2013

(` 1,20,000 x 20% x 10/12)

20,000

Depreciation on Machinery after adjustment of

[20% of `(6,32,000 -1,89,000+2,56,000) for 9 months]

1,04,850

Total Depreciation to be charged in Profit and Loss

1,56,450

(ii) Book Value of Plant and Machinery as on 31.03.2014

`
Balance as per books on 01.04.2013
Add: Included in purchases on
01.06.2013 Add: Purchase on
30.06.2013

1,20,000
2,56,000

`
6,32,000
3,76,000
10,08,000
(1,89,000)

Less: Book value of Machine sold on 30.06.2013

8,19,000

Less: Depreciation on machinery in use (1,56,450-

(1,47,000)
6,72,000

9,450) Book Value as on 31.03.2014

(iii) Loss on exchange of Machinery
Book value of machinery as on 01.04.2013
Less: Depreciation for 3 months

1,89,000
9,450

WDV as on 30.06.2013
Less: Exchange value
Loss on Exchange of machinery

1,79,550
1,75,000
4,550

"Life isn't about waiting for the storm to pass; it's about learning to
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136

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dance in the rain."

- VIVIAN GREENE
AS 10: Fixed Assets

Asset held for producing goods or providing services but not for sale
Recognition
Subsequent expenditure

Initial expenditure

Capitalize only when it increases

previously assessed level of capacity
Cash/Credit
Purchase price
+ Freight
+ Non refundable taxes
+All direct exp inc till
Ready to use
+ AS 16 BC
-Discount
-Govt. grants

Exchange with
another asset
XX
XX
XX
XX
XX
XX
XX
XX

By issue of
securities

Self construction
All costs incurred for
construction
+
All
allocated costs directly
related.

FMV of asset given/securities issued

OR
FMV of asset received
Whichever is clearly evident.

(Dont include internal

profits)

Retirement & Disposal

State in BS either at
WDV
Or
NRV

Not revalued before

Revalued earlier

P/L = Sale price - WDV

Transfer to P& L

Loss

Profit

P&L
- First adjust with
Revaluation reserve (RR)
- Balance to P & L
- Balance of RR transfer to GR