S. Aparna, FCA

Accounting Standard-6, 10 and 28

AS 6- Depreciation Accounting

AS 10- Accounting for fixed assets

AS-28- Impairment of assets

Applies to all depreciable assets except

Forests, plantations and similar regenerative natural resources

Wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources

Expenditure on research and development

Goodwill

Live stock

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 includes amortization of assets whose useful life is predetermined

Depreciable assets are assets which are expected to be used during more than one accounting period;

have a limited useful life; and

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 not for the purpose of sale in the ordinary course of business.

Useful life is either

the period over which a depreciable asset is expected to be used by the enterprise; or

the number of production or similar units expected to be obtained from the use of the asset by the enterprise.

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

Depreciation methods should be applied consistently

Method can be changed only if required by the statute or change in accounting standard or needed for better presentation of the financial statements

If method changed, then depreciation to be recalculated from the time the asset was ready to use

The deficiency or surplus due to retrospective application of the changed depreciation method should be adjusted to the profit and loss account

Change in accounting policy and its effect should be quantified and disclosed.

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

expected physical wear and tear;

obsolescence; and

legal or other limits on the use of the asset.

Where there is a revision of the estimated useful life of an asset, the unamortised depreciable amount should be charged over the revised remaining useful life.

If addition is an integral part of the asset, then to be depreciated over the useful life of the asset

If addition has a separate identity, depreciation to be calculated independently over its useful life

Changes to historical cost of asset on account of exchange rate fluctuations would impact depreciation prospectively

The historical cost or other amount substituted for historical cost of each class of depreciable assets;

Total depreciation for the period for each class of assets; and

Related accumulated depreciation.

Disclosure of accounting policy for depreciation i.e depreciation methods used; and

Depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the enterprise.

A measurement standard

Applicable to all entities

Defines fixed assets- An asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business

Gives guidelines on measurement of fixed assets

Fair Market Value

Price in an open and unrestricted market

Arms length transaction between knowledgeable and willing parties

Not under any compulsion to contract

Gross book Value-historical cost or other amount substituted for historical cost

Net book Value- is Gross book value minus the accumulated depreciation

Purchase price plus

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

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.

Assets acquired in exchange of another asset

- at fair value of the asset that is acquired in exchange or the asset given up whichever can be arrived at more correctly.

- Adjustment for balance cash paid or received is to be adjusted

Assets acquired in exchange of shares and securities

- at fair value of the asset that is acquired in exchange or the shares and securitie or the fair value of the shares and securites given up whichever can be arrived at more correctly

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

Material items retired from active use and held for disposal - stated at the lower of their net book value and net realizable value

Shown separately in the financial statements

Eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal.

Losses arising from the retirement or gains or losses arising from disposal of fixed asset, which is carried at cost, should be recognized in the profit and loss statement.

Basis of revaluation should be disclosed

Entire class of assets to be revalued or

Selection of assets for revaluation to be done on a systematic basis

Book value after revaluation cannot be higher than its realisable value.

Increase in book value to the extent of the accumulated depreciation on that asset to be credited to profit and loss account

The balance if any to be shown as Revaluation reserve.

A decrease in book value to the extent of increase previously recorded as a credit to revaluation reserve should be adjusted to the Revaluation reserve

The balance if any should be charged to the Profit and loss account

The provisions are also applicable to fixed assets included in financial statements at a revaluation

Loss on disposal to the extent of an increase previously recorded in Revaluation reserve to be charged directly to that account

The balance if any or the profit to be directly charged or credited to the Profit and Loss account as applicable.

Fixed assets acquired on hire-purchase basis-to be recorded at cash value if available

Or else to be recorded assuming an appropriate rate of interest

In case of jointly owned fixed assets, 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

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

Self generated goodwill should not be recognised

Only when a price is paid for purchase of assets in excess of their net value, goodwill is to be accounted

Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements

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.

Impairment loss- Amount by which the carrying amount exceeds its recoverable amount

Net selling price- Cost of disposal in an arms length transaction

Value in use- Present value of estimated future cash flows till its disposal on end of its useful life

External indications

Decline in market value significantly

Significant changes with an adverse effect on the enterprise due to technological, market, economic or legal environment

Decrease in assets value in use due to adjustment in the discount rate as a result of increase in market interest rate or other market rates of ROI

Carrying amount of the net assets of the enterprise is more than its market capitalisation

Internal indicators

Obsolescence or physical damage of an asset

Significant changes with an adverse effect on the enterprise regarding use of the asset

Decline in economic performance of the asset

Recoverable amount is Net selling price or value in use whichever is higher

If any one of the calculations is higher than the carrying amount, there is no need to calculate the other

No impairment if either of the amounts are greater than the carrying amount

Binding sale agreement

Market price

Current bid price

Price of the most recent transaction

Based upon best information available

Estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal

Applying the appropriate discount rate to these future cash flows

The following factors to be considered

Effect of price increase due to general inflation

Adjustment of associated risk factors

Pre-tax inflows or outflows to be considered.

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount

That reduction is an impairment loss

Impairment loss to be recognised as an expense in the profit and loss account

Adjustment against revaluation reserve if existing against the same asset

Depreciation for future periods to be adjusted as per revised carrying amount

Reversal of impairment loss

If there are indications, that an impairment loss no longer exists, the enterprise should estimate the recoverable amount of the asset

In case recoverable amount is higher than asset’s carrying amount, the impairment loss earlier recognised may be reversed

The increased carrying amount of an asset due to a reversal of an impairment loss should not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised for the asset in prior accounting periods.

The amount of impairment loss and the reversal, if any recognised in profit and loss account

The amount of impairment loss and its reversal, if any, recognised against revaluation surplus

The events and circumstances that led to the recognition or reversal of the impairment loss

The nature and basis of recoverable amount determined for recognising (reversing) impairment loss

Other disclosures