Page 221 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

normal course of business”. Thus fixed assets are those assets which are acquired and retained in Notes
the business for long period for the purpose of carrying on the business. These are not for resale.
As per AS-10, land, building, plant, machinery, vehicle which are not for resale and kept in the
business for the production of goods and services, comprise fixed assets.

10.1.1 Method of Accounting Historical Cost of Tangible Assets

1. The cost of fixed assets comprises of its purchase price including import duties and non-
refundable taxes and any directly attributable cost of bringing the assets to its working
condition for its intended use. The direct attributable costs are:

(a) Site preparation,
(b) Initial delivery and handling cost,
(c) Installation cost, such as special foundation for plant, and
(d) Professional fees as the fees of architects and engineers.
The financing cost relating to deferred credits or to borrowed funds attributable to the
construction or acquisition of fixed assets.
2. Administration and other general overhead expenses are usually excluded from the cost
of fixed assets because they do not relate to a specific fixed cost.
The expenditure incurred on start-up and commissioning of the project, including the
expenditure incurred on test runs and experimental production, is usually capitalized as
an indirect element of the construction cost.
3. If the interval between the date of project is ready to commence commercial production
and the date at which commercial production actually begins is prolonged, all expenses
incurred during this period are charged to the P&L A/c. However, the expenditure incurred
during this period is also sometimes treated as deferred revenue expenditure.
4. To calculate the gross book value of the self-constructed fixed assets, all those costs that
relate directly to specific assets and those that are attributable to the construction activity
in general can be allotted to the specific assets, are considered.
5. 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. It may be appropriate to
consider the fair market value of the asset acquired if this is more clearly evident. An
alternative accounting treatment that is sometimes used for an exchange of assets,
particularly when the assets exchanged are similar, is to record the asset acquired at the
net book value of the asset given up in each case and adjustment is made for any balancing
receipt or payment of cash or other consideration.
6. Subsequent expenditure relating to fixed asset for the improvement should be added to
the gross book value. Only that expenditure which increases the future benefits from the
existing asset beyond its previously assessed standard performance is included in the
gross book value.
7. The cost of an addition to an existing asset which is of a capital nature and which becomes
an integral part of the existing asset is usually added to its gross book value.
8. An item of fixed asset is eliminated from the financial statements, on disposal.
9. Items of fixed assets that have been retired from active use and are held for disposal are
stated at less than their net book value and net realizable value and are shown separately
in the financial statements.

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