Title (Arial bold 30 point)

Companies Act 2013

Fixed asset accounting

Agenda

LEAD - Fixed Asset AccountingOverview of fixed asset accounting

Key changes in fixed asset accounting in Companies Act, 2013

Practical issues involved

Questions

Page #Overview and Key changes Publication page no. 35Overview of fixed asset accounting

Page #Overview of fixed asset accountingLEAD - Fixed Asset Accounting

Page #Overview and Key changes Publication page no. 35Definition of fixed assetNot defined in the Companies Act. But the Accounting standard 10 issued by the ICAI defined fixed asset as 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.

Identification of fixed assetsCriteria for identification of fixed assets as per IAS 16:Probable flow of future economic benefits associated with the asset to the entityReliable measurement of the asset cost

Measurement and accounting of assetsMeasurement of assets should be at the historical cost. Cost includes all costs necessary to bring the asset to working condition for its intended use

Factors to be considered while accounting fixed assetsCostswhether revenue/ capital expenditureWhether measurableBenefitsLife of the assetsTheoretical lifeIntended lifeOverview of fixed asset accounting

LEAD - Fixed Asset AccountingPage #Overview and Key changes Publication page no. 35Depreciation of assetsMeasure of wearing out, technology and marketing changesImpacts the profit and loss accounts of the company

Impairment of assetsAssessment of impairment indicatorsIf indication exist, the enterprise should estimate the recoverable amount of the assetAdequate disclosures while financial reporting

Overview of fixed asset accounting

LEAD - Fixed Asset AccountingPage #Overview and Key changes Publication page no. 35Key changes to fixed asset accountingPage #Key changesLEAD - Fixed Asset AccountingComponent Accounting (Refer next slide for details)

Change in life of asset impacting the depreciation computationsFor class of companies complying with accounting standards issued by ICAI for financial statements Asset life can vary from the life indicated in the schedule II. For other companies Asset life cannot exceed the life prescribed under the schedule

Depreciation incase of assets built on BOT (Build Operate and Transfer) modelRevenue based allocation of depreciation was allowed as per earlier Act. The same was not allowed in Companies Act, 2013. which was subsequently addressed by way of amendment to schedule II

Extra shift depreciationNo separate rates were prescribed. But for selected categories, depreciation will be increased by 50%/ 100% incase of multiple shifts

Residual valueDefined as a maximum of 5%

Transitional provisionsComputation of remaining life of assetsAdjustment against retained earningsPage #Overview and Key changes Publication page no. 35Component accountingLEAD - Fixed Asset Accounting

Component accounting is optional as per earlier AS 10. But, the same is now made mandatory as per Companies Act, 2013. Refer below for illustrative component accounting workflowPage #Overview and Key changes Publication page no. 35Component accountingLEAD - Fixed Asset Accounting

Key facetsIdentification of the material components is judgmentalDetermining useful life of the assets prospectively is not merely an accounting exerciseReplacement costs are to be capitalized as separate component. While the same used be charged off to P&L earlierThere is a conflict between Ind AS 16 and companies Act, 2013 on aspects like major inspection/ overhaul. No clarity is providedDisclosure on life of different components belonging to same asset will be critical. Asset: ComputerLife of the asset: 5 yearsComponent1: MonitorEstimated life: 7 yearsComponent2: CPUEstimated life: 5 yearsComponent3: OthersEstimated life: 2 yearsPage #10Asset: Building

Components:Structural designStaircaseElevatorsAir conditionHeating systemWater systemElectrical systemMajor overhaul/ inspectionsIllustrations for component accountingLEAD - Fixed Asset AccountingIllustration 1Asset: Ship

Components:HullKeelEngineNavigation systemMajor overhaul/ inspectionsOther fit out assets

Illustration 2Page #11DepreciationLEAD - Fixed Asset AccountingParticularsCompanies Act 1956Accounting standardsCompanies Act 2013a. Governed bySchedule XIVAS 6Schedule IIb. Depreciation ratesMinimum depreciation rates prescribedNot prescribedNot prescribed. Life of assets prescribedc. Special depreciation100% for assets with cost of less than INR. 5000Not prescribedNot prescribede. Disclosurea. Depreciation method usedb. Depreciation rates or the useful lives of the assets for computing depreciation, if they are different from the specified a. The historical cost or other amount substituted for historicalcost of each class of depreciable assetb. Total depreciation for the period for each class of assetsc. The related accumulated depreciationa. Depreciation method usedb. the useful lives of the assets for computing depreciation, if they are different from the life specified Comparison with the old ActPage #12Practical issuesPage #Whether the life of assets prescribed are to be applied prospectively/ retrospectively?

Should the depreciation be recomputed if the company desires to declare dividend relating to earlier years in the current year?

Act provides the depreciation rates of the principal asset. The same also mandates for component accounting. Is a disclosure required if the component has a life different from the principal asset?

If a company uses a useful life or residual value which is different from Schedule II, justifications are to be disclosed. Is this proviso applicable if the change is to comply with the accounting standards?

Whether the amendments regarding BOT assets is only for toll roads? Or the same can be applied for all the BOT assets?

Practical issuesLEAD - Fixed Asset AccountingPage #Overview and Key changes Publication page no. 35Questions ?LEAD - Fixed Asset Accounting

Page #Overview and Key changes Publication page no. 35Thank youPage #