Accounting Standards 6 and 10 presentation Compatibility Mode

Accounting Standards 6 and 10 onon

‘Depreciation Accounting’ and

‘Accounting for Fixed Assets’Accounting for Fixed Assets

Financial Audit Autonomous Bodies, AS 6 and AS Session 1.5 9

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Session Coverage

• AS-6 ‘Depreciation A i ’Accounting’;

d• and• AS 10 ‘Accounting for Fixed• AS-10 Accounting for Fixed

Assets’ Financial Audit Autonomous Bodies,

AS 6 and AS Session 1.5 92

Learning Objective

• At the end of this session, the learner will be able to apply the concepts contained in the Accounting Standard 6 – ‘Depreciation Accounting’ and Accounting Standard 10 – ‘Accounting for Fixed Assets’ in the preparation and presentation ofAssets’ in the preparation and presentation of financial assets to the extent that he will, as an Auditor be able to comment in his report whereAuditor, be able to comment in his report where the financial statements are not in conformity with these standards.


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AS 6 – Depreciation AccountingAS 6 Depreciation Accounting

• This Statement deals with depreciation accounting and applies to all depreciable g pp passets, except :


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• i. forests, plantations and similar regenerative natural resources;

ii i i l di di h• ii. wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerativenatural gas and similar non regenerative resources;

• iii. expenditure on research and development;• iv. goodwill;• v. live stock.


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• This statement also does not apply to land unless it has a limited useful life for the enterprise.


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AS 6 – Depreciation Accountingfi i iDefinitions

• Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage of time or obsolescence through technology and market changes Depreciation is allocated so as to chargechanges. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful lifeaccounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.


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AS 6 – Depreciation AccountingAS 6 Depreciation AccountingDefinitions

• Depreciable assets are assets which • i. are expected to be used during more than

i i done accounting period; • ii. have a limited useful life; and

iii h ld b t i f i th• iii. are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and , p pnot for the purpose of sale in the ordinary course of business.


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• Useful life is either • (i) the period over which a depreciable(i) the period over which a depreciable

asset is expected to be used by the enterprise; orenterprise; or

• (ii) the number of production or similar units expected to be obtained from the useunits expected to be obtained from the use of the asset by the enterprise.


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• Depreciable amount of a depreciable asset is its historical cost, or other amount ,substituted for historical cost in the financial statements, less the estimated ,residual value.


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• Following is the text of the accounting Standard:• The depreciable amount of a depreciable asset should be allocated on adepreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.during the useful life of the asset.


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• The depreciation method selected should be applied consistently from period to period. A change from one method of providingchange from one method of providing depreciation to another should be made only if the adoption of the new method is required by p f q ystatute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparationwould result in a more appropriate preparation or presentation of the financial statements of the enterprise.


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• When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospectivedeficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in thewith the new method should be adjusted in the accounts in the year in which the method of depreciation is changed.


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• In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus the surplusin the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as aloss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.


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• The useful life of a depreciable asset should be estimated after fconsidering the following factors:

i expected physical wear and tear;i. expected physical wear and tear;ii. obsolescence; andiii l l h li i h f hiii. legal or other limits on the use of the

asset.


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• The useful lives of major depreciable assets or classes of depreciable assets may f p ybe reviewed periodically. Where there is a revision of the estimated useful life of an f f f fasset, the unamortised depreciable amount should be charged over the revised gremaining useful life.


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• Any addition or extension, which becomes an integral part of the existing asset, should be depreciated over the remaining useful life of thatdepreciated over the remaining useful life of that asset. The depreciation on such addition or extension may also be provided at the rate y papplied to the existing asset. Where an addition or extension retains a separate identity and is capable of being used after the existing asset iscapable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of an estimate of its


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own useful life.


• Where the historical cost of a depreciable asset has undergone a change due to increase or decrease in long term liability on account of exchange fluctuations, price

dj t t h i d ti i iladjustments, changes in duties or similar factors, the depreciation on the revised unamortised depreciable amount should beunamortised depreciable amount should be provided prospectively over the residual useful life of the asset.


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useful life of the asset.


• If any depreciable asset is disposed of, discarded, demolished or destroyed, the net , y ,surplus or deficiency, if material, should be disclosed separately.p y


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• The following information should be disclosed in the financial statements:

• i. the historical cost or other amount substituted for historical cost of each class of depreciable assets;

• ii. total depreciation for the period for h l f deach class of assets; and

• iii. the related accumulated depreciation.


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• The following information should also be disclosed in the financial statements alongwith the disclosure of other accounting policies:

• i. depreciation methods used; and• ii. depreciation rates or the useful lives

of the assets, if they are different from the i i l ifi d i h iprincipal rates specified in the statute governing

the enterprise.


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Accounting Standards (AS 10) Accounting for Fixed AssetsAccounting for Fixed Assets


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Accounting Standards (AS 10)Accounting Standards (AS 10) Accounting for Fixed Assets

• . This statement deals with accounting for fixed assets except as described in pfollowing paragraphs.


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AS 10 Accounting for Fixed AssetsDefinitions

• Fixed asset is an asset held with the intention of being used for the purpose of g p pproducing or providing goods or services and is not held for sale in the normal course of business.


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• Fair market value is the price that would be agreed to in an open and unrestricted market g pbetween knowledgeable and willing parties dealing at arm’s length who are fully g g yinformed and are not under any compulsion to transact.


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• 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.


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AS 10 Accounting for Fixed AssetsText

• The items determined in accordance with the definition given above (viz., fixed asset f g ( z , fis an asset held with the intention of being used for the purpose of producing or f p p f p gproviding goods or services and is not held for sale in the normal course of business) f f )should be included under fixed assets in financial statements.


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f


• 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 f gfor fixed assets included at historical cost is set out in following paragraphs; the f g p g p ;method of accounting of revalued assets is also set out in following paragraphs.


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f g p g p


• The cost of a fixed asset should comprise its purchase price and any attributable cost p p yof bringing the asset to its working condition for its intended use.f


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• The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for itsbringing the asset to its working condition for its intended use. Financing costs relating to deferred credits or to borrowed funds attributable f fto construction or acquisition of fixed assets for the period up to the completion of construction or acquisition of fixed assets should also beor acquisition of fixed assets should also be included in the gross book value of the asset to which they relate.


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• However, the financing costs (including interest) on fixed assets purchased on a ) f pdeferred credit basis or on monies borrowed for construction or acquisition of f q ffixed assets should not be capitalized to the extent that such costs relate to periods pafter such assets are ready to be put to use.


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• The cost of a self-constructed fixed asset should comprise those costs that relate pdirectly to the specific asset and those that are attributable to the construction activity yin general and can be allocated to the specific asset.p f


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• 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 orgiven up, adjusted for any balancing payment or receipt of cash or other consideration. For these purposes fair market value may be determined bypurposes fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident.


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• Fixed asset acquired in exchange for shares or other securities in the enterprise pshould be recorded at its fair market value, or the fair market value of the securities f fissued, whichever is more clearly evident.


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• Subsequent expenditures related to an item of fixed asset should be added to its book f fvalue only if they increase the future benefits from the existing asset beyond its f f g ypreviously assessed standard of performance.p f


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• Material items retired from active use and held for disposal should be stated at the f plower of their net book value and net realizable value and shown separately in z p ythe financial statements.


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• Fixed asset should be eliminated from the financial statements on disposal or when f pno further benefit is expected from its use and disposal.p


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Accounting Standards (AS 10)Accounting Standards (AS 10) Accounting for Fixed Assets• Losses arising from the retirement or gains or losses arising from disposal of g g f p ffixed asset, which is carried at cost, should be recognized in the profit and loss g z p fstatement.


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• When a fixed asset is revalued in financial statements, an entire class of assets should , fbe revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed.


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• The revaluation in financial statements of a class of assets should not result in the net fbook value of that class being greater than the recoverable amount of assets of that f fclass.


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• 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 asuch increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and lossrecorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement.


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• 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

h d i l t d t isuch a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and which has notto revaluation reserve and which has not been subsequently reversed or utilized, it may be charged directly to that account.


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may be charged directly to that account.


• The provisions are also applicable to fixed assets included in financial statements at a frevaluation.


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• On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should beproceeds and the net book value should be charged or credited to the profit and loss statement except that to the extent that such a ploss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequentlyreserve and which has not been subsequently reversed or utilized, it may be charged directly to that account.


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Accounting Standards (AS 10)Accounting Standards (AS 10) Accounting for Fixed Assets• 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

i t t f i t t Th h ld bappropriate rate of interest. They should be shown in the balance sheet with an appropriate narration to indicate that theappropriate narration to indicate that the enterprise does not have full ownership thereof


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thereof


• 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 bedepreciation and written down value should be stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets may berata cost of such jointly owned assets may be grouped together with similar fully owned assets with an appropriate disclosure thereof


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• Where several fixed assets are purchased for a consolidated price, the consideration f p ,should be apportioned to the various assets on a fair basis as determined by competent f y pvaluers.


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• Goodwill should be recorded in the books only when some consideration in money or y ymoney’s worth has been paid for it. Whenever a business is acquired for a q fprice (payable in cash or in shares or otherwise), which is in excess of the value ), fof the net assets of the business taken over, the excess should be termed as ‘goodwill’.


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g


• The direct costs incurred in developing the patents should be capitalized and written p p zoff over their legal term of validity or over their working life, whichever is shorter.g f ,


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• Amount paid for know-how for the plans, layout and designs of buildings and/or y g f gdesign of the machinery should be capitalized under the relevant asset heads, p z ,such as buildings, plants and machinery, etc. Depreciation should be calculated on pthe total cost of those assets, including the cost of the know-how capitalized.


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f p


• Where the amount paid for know-how is a composite sum in respect of both the p p fmanufacturing process as well as plans, drawings and designs for buildings, plant g g f g , pand machinery, etc., the management should apportion such consideration into pptwo parts on a reasonable basis.


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• Disclosure• The following information should be f g fdisclosed 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

d hand other movements;•


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• Disclosure• The following information should be• The following information should be disclosed in the financial statements:

• ii expenditure incurred on• ii. expenditure incurred on account of fixed assets in the course of construction or acquisition; andconstruction or acquisition; and

•


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• Disclosure• The following information should be disclosed in the financial statements:

• iii. revalued amounts substituted for historical costs of fixed assets the methodhistorical 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


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revalued amounts.

Documents

Accounting Standards 6 and 10 presentation Compatibility Mode