CMA Ramesh Krishnan

Fixed assets can be classified basically in to two categories i.e tangible & intangible, Under IFRS , IAS-16 –Property, Plant & Equipment deals with tangible fixed asset except the assets held for capital appreciation. In case asset held for capital appreciation that assets has been separately covered under IAS-40 Investment properties. In this article we discussed about the IAS-16 – Property, Plant & Equipment which covers the treatment of fixed assets held in business operations.

What is fixed asset: Under IAS-16, if we want to consider an item as fixed asset, it needs to cover under following criteria

a. It is probable that the future economic benefits associated will flow to the entity, the risk & rewards of the assets should be with the entity.

b. The cost of the asset can be measured reliably.

c. Asset should be used for the purpose of production of goods or services or used for the purpose of administration.

How to measure: Once the fixed asset identified then the next step is the measure the value to capitalise the same. Under IAS-16 the initial measurement of asset should be on cost. The cost of an asset includes the following

a. Purchase price

b. Non refundable duties/taxes

c. Cost directly attributable to the asset

d. Installation expenses

e. Professional fees

f. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located

g. Borrowing cost

Deferred payment term: In case asset purchased by deferred payment, then the deferred payment need to be discounted and arrive the present value of the same. The difference between the present value and the deferred payment needs to be treated as interest/finance cost over the period of credit.

Exchange purchase: If an asset is acquired in exchange for another non-monetary asset, the cost will be measured at the fair value unless

(a) The exchange transaction lacks commercial substance or

(b) The fair value of neither the asset received nor the asset given up is reliably measurable.

If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Subsequent cost: If there are major inspection/ Overhaul costs during the life of the asset which requires keeping the asset in performing condition needs to be capitalised.

Subsequent measurement: IAS-16 also guiding the subsequent measurement of a fixed asset once initially recognised at cost. For subsequent measurement we can either of the following methods

a. Cost module – as normal method that actual cost of the asset less accumulated depreciation and accumulated impairment loss as on reporting date.

b. Revaluation module – An entity shall carry an asset at revalue

Revalue amount is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Once the entity adopted the revaluation module, they have to revalue their assets in regular interval (At least yearly).

Once adopted the revaluation module the change of carrying amount as a result of revaluation should be treated in below manner

Carrying amount change Impact into
Increase Other comprehensive income as “ Revaluation reserve” If previously decrease: Amount need to be charged in profit & loss to the extent of earlier decreased amount and the remaining amount should be Other comprehensive income as “ Revaluation reserve”
Decrease Statement of profit & loss If previously increase: Amount need to be charged in Other comprehensive income as “ Revaluation reserve” to the extent of earlier increased amount and remaining amount should be charged into profit &l loss a/c

Depreciation: The depreciation amount of an asset shall be allocated on a systematic basis over its useful life. Depreciation method used shall reflect the pattern in which the asset`s future economic benefits are expected to be consumed by the entity.

The depreciation method applied to an asset shall be reviewed at least at each financial year end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate as per IAS-8 and accordingly adjust and show the effects in current & future periods.

Impairment: Fixed assets need to be tested for impairment as per guidance by IAS-36-Impairment of Assets the effects for the same needs to be incorporated with the financials.

Derecognition: The carrying amount of fixed assets shall be derecognised on disposal of assets or when no future economic benefits are expected from its use. The resulting gain or loss on derecognition of fixed asset shall be charged in the profit & loss a/c .

Disclosure: As per IAS-16, the financial statements shall disclose for each class of asset:

a. The measurement base

b. Depreciation method & Amount

c. Useful life

d. Gross carrying amount, additions, deletion, accumulated depreciation & accumulated impairment losses at the beginning and end of reporting period.

e. Increase & decrease in revaluation reserve

f. Impairment loss charged in Profit & loss a/c

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