Accounting for Fixed

Assets:
 What is a Fixed Asset

They are used in operations and not held

for resale
They are used for long term
 Fixed Assets

Tangible Intangible

Example: Land, Building , Example: Goodwill, Patent,

Machinery etc. Knowhow etc.
 Identification of Fixed Assets:
Why is it important?

Expenditure

Expensed Capitalized
(P\L Account) (Balance Sheet)

Less profit this year More profit this year

Less Depreciation in Coming years More depreciation in coming years
Less assets in Balance Sheet More assets in Balance Sheet
 Some Puzzling Items:

Low Cost Items

Betterment
Replacement
 Cost of a Fixed Asset:

All the expenditure that are necessary to

make the asset ready for its intended use.
Purchase price (net i.e. after making
adjustment for taxes, rebates etc.)
Cost of site preparation
Delivery and handling costs
Installation Cost
Professional fee
Cost of trail run
 Cost of Land

Land costs include:

purchase price
attorney fees, and recording fees
costs of getting land ready for use (clearing,
etc.)
special assessments for local improvements
additional improvements with an indefinite life
Improvements with limited lives are recorded as
Land Improvements (and not as Land)
Sale of salvaged materials reduces cost
 Cost of Self-Constructed Asset:

The cost of self-constructed assets

includes:
cost of direct materials,
cost of direct labor,
variable manufacturing overhead,
a pro rata portion of the fixed overhead,
and
interest costs incurred during
construction
 Useful Life of an Asset:

It may be equal or less than its physical

life.
It should be estimated considering the
following factors:
Expected physical wear and tear
Obsolescence
Legal or other limits on the use of the asset
Expressed in terms of time period or
production units
 Depreciation

Depreciation is a means of cost

allocation.
It is not a method of valuation.
Depreciation involves:
allocating the cost of tangible assets to
expense in a systematic and rational
manner to periods expected to benefit
from use of its depreciable assets.
 Methods of Depreciation

Most Popular Methods

Straight-line Method
Declining Balance Method/
Written Down Value Method
Other Methods:
Years Digit Method
Production Units Method
Double Declining Method
Sinking Fund Method
 Regulations Regarding
Depreciation:
Accounting standards provide no specific method, no
rates
The method once adopted must be followed consistently.
Indian Companies Act 1956, Sec. 205/350: A company
intending to declare a dividend must provide
depreciation in accordance with Schedule XIV.
These rates are legal minimum rates for the purpose of
computing divisible profit.
Different rates are prescribed under Income Tax Act for
Depreciation benefits (under w.d.v. method)
 Changes In Depreciation Policy

Change in Estimated Useful Life:

Adjustment is made for the remaining period
Case : Maruti Suzuki India Ltd. 2007-08, VI Quarter Results
Change in Historical Cost of the Asset:
Adjustment is made for the remaining period
Change in method of Depreciation
Depreciation is recalculate in accordance with the new method
from the date of the asset coming into use.
Any surplus or deficiency is adjusted in the statement of profit
and loss
Such a change is treated as a change in accounting policy and
its effect is quantified and disclosed.
Case: Shree Cement ltd. 2007-08
 How Shree Cement have done
Shree Cement 2007-08 Annual Report,
Notes to Accounts : 08
The Company has restated the revalued
assets at their historical cost which has
resulted in reduction of gross block by
Rs. 22730.31 Lac, accumulated
depreciation by Rs. 16856.31 Lac and
increase in profit for the year by Rs.
450.54 Lac.
 Jet net flies on change in depreciation arithmetic
MUMBAI: A change in the method of calculating depreciation has allowed Jet Airways to show a profit of around Rs 143.38 crore
for the first quarter ended June 30, 2009.

But operating losses stood at nearly Rs 562 crore, primarily due to a surge in fuel expenditure.

A piece of good news for Indias top private airline would be that the losses will reduce because crude prices fell another $4 to $121
levels in early US trade on Tuesday.
In the last two weeks, they have fallen 15% from their peak of $147.

Jet said the current quarter (Q2) is traditionally a low season but the reduction in capacities and the increases in fares/surcharges
will improve the situation to a large extent, apart from the fall in crude.

Jet changed the depreciation calculus on its narrow-body aircraft fleet from the written down value method to the straight line
method with retrospective effect.

This change generated a surplus, helping the airline overcome operating losses.

Fuel costs, which zoomed by a mammoth Rs 940 crore in the quarter to touch Rs 1,539 crore, resulted in an operating loss of Rs
562 crore for the June quarter FY09.
Jet officials were unavailable for comment.

Analysts were surprised by the numbers.

Mark Martin, senior advisor at KPMG said the results do send out a pleasant message.
Airlines will be profitable eventually, as long as they stay focused, with more innovations and a logical approach to business,
Martin said.

But an analyst with a foreign brokerage, who did not want to be named citing internal compliance issues, did not see the numbers
in positive light.

It doesnt reflect the operational environment, which has not improved, he said.
Jet still needs to concentrate on improving operating efficiency.
 Revaluation of An Asset:

Permitted in India and Commonwealth countries

but not in US
Revaluation should not be selective
How to adjust:
Increase in book value:
Create a Revaluation Reserve
Decrease in Book Value
Charge to Income Statement
Depreciation to be charged on revalued value.
Case : Forbes Gokak Ltd. 2005-06
Auditor's opinion, "selective" revaluation of fixed assets is
not in accordance with the Accounting Standard (AS) 10
 Impairment of Assets AS28

A asset is called impaired if its carrying amount

(book value) is more than its recoverable
amount.
Recoverable amount is the higher of an assets
net selling price and its value in use (preset
value of future cash flows).
Company is required to recognize impairment
loss.
Impairment loss is shown in income statement
as an expense and the value of the assets
decreases by the same amount in the balance
statement.
 Case on Impairment Loss

MATRIX LABORATORIES LIMITED 2007-08

Exceptional item represents impairment loss on
Goodwill of Rs. 4,871.21 Millions pertaining to
the investment in Docpharma, held by Matrix
Laboratories NV, a step down subsidiary of the
Company. This impairment loss was triggered by
changes in underlying business conditions of
Docpharma group. The impairment loss has
been determined on the basis of valuation
carried out by independent professionals.
 Retirement and Disposal of
Assets
Profit or Loss on Sale of Asset is recorded
in Income Statement
Accounting for Intangible Assets
AS26
Goodwill:
Purchased goodwill is recorded at cost
Internally generated goodwill is not recognized
Amortized over the reasonable period
Patents:
Recorded at Cost
Amortized over its useful life
Trademark, Brand Name:
Purchased trademark is recorded at cost
Internally generated trademark is not recognized
Amortized over the reasonable period
 Internally Generated
Intangible Assets

Research Phase Development Phase

Expenditures are Expenditures are

Expensed Capitalized
 Deferred Expenses
A heavy revenue expenditure, the benefit of which may be extended
over a number of years used to be treated as deferred revenue
expenditure.
Examples
Expenses incurred on research and development
Huge amount spent on advertisement.
Expenditure on start-up activities
Expenditure on training activity
Accounting Treatment:
Capitalized and written off over the reasonable period

In India after the AS26 becoming mandatory an enterprise can not

recognize above expenditure as deferred revenue expenditure
Expenses still can be recorded in balance sheet as Miscellaneous
Expenses: Discount on issue of shares and debentures and other
expenses of similar nature.
 Case: Deccan Aviation Ltd
The results for the quarter ended September 30, 2007 are after
charging off sums of Rs 227 lakhs and Rs 24 lakhs towards
amortization of training and preoperative expenses respectively
based on the Company's accounting policy of amortizing the said
expenditure over a period of 3 years. The corresponding amounts
for the three months ended September 30, 2006 are Rs 203 lakhs
and Rs 62 lakhs respectively. The corresponding amounts for the
year ended June 30, 2007 were Rs 864 lakhs and Rs 164 lakhs
respectively The Auditors are of the opinion that such accounting
treatment is not in accordance with (AS) 26 on "Intangible Assets"
issued by the Institute of Chartered Accountants of India and such
expenses are required to be written off to the profit and loss account
as and when incurred. Such unamortized training and preoperative
expenses as at September 30, 2007 are Rs 56 lakhs (September
30, 2006 Rs 944 lakhs) (June 30, 2007 Rs 283 lakhs) and Rs 2
lakhs (September 30, 2006 Rs 150 lakhs) (June 30, 2007 Rs 26
lakhs) respectively.