Accounting For Fixed Assets

CHAPTER 7 Dr Alaa M Malo-Alain
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Chapter 7
Fixed Assets and Accounting Standards
7.1
INTRODUCTION
very business enterprise prepares its financial statements in accordance with the generally acceptable accounting principles (GAAP). In fact, they should have been called generally acceptable accounting standards (GAAS).1 The GAAP are guidelines for specific accounting issues, which are to be followed by the preparers of financial statements, and are further subject to scrutiny by the auditors, who attest that the financial statements have been prepared in accordance with the GAAP. Since the GAAP are generally acceptable to the preparers, auditors and other categories of users, the annual accounts have to be prepared according to the principles laid down. GAAP in USA. In USA, the GAAP are clearly laid down. Primarily, the 51 Accounting Research Bulletins Procedures, 31 opinions issued by the Accounting Principles Board, and 137 financial accounting standards and 42 interpretations issued by the Financial Accounting Standards Board Comprise the GAAP. GAAP in India. In India, the GAAP will comprise primarily the 16 Accounting Standards issued by the Institute of Chartered Accountants in India, (ICAI) preface to the Statements of Accounting Standards (ICAI), 20 Standard Auditing Practices (SAP) issued by the ICAI, the International Auditing Guidelines issued by the International Federation of Accountants (IFAC), besides the Expert Opinions (18 volumes), statements and Guidance Notes on Accounting and
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auditing (all these issued by the ICAI). The annual financial statements have, of course, to be prepared in India under the provisions of statutory laws and regulations.
7.2
ACCOUNTING FOR FIXED ASSETS, AS-10
The Institute of Chartered Accountants of India issued standard No.-10 for Fixed Assets Accounting.2 This standard is recommended for use by companies listed on a recognised stock exchange other large commercial industrial and business enterprises in the public and private sectors. Financial statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trademarks and designs. This statement does not deal with the specialised aspects of accounting for fixed assets that arise under a comprehensive system reflecting the effects of changing prices but applies to financial statements prepared on historical cost basis. This statement does not deal with accounting for the following items to which special considerations apply : (i) (ii) forests, plantations and similar regenerative natural resources; wasting assets including mineral rights, expenditure on the exploration for an extraction of minerals, oil, natural gas and similar non-regenerative resources; expenditure on real estate development; and livestock.
(iii) (iv)
Expenditure on individual items of fixed assets used to develop or maintain the activities covered in (i) to (iv) above, but separable from those activities, is to be accounted for in accordance with this statement. 7.2.1 Definitions
The following terms are used in this statement with their meanings specified :
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Fixed asset is 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. Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arms length who are fully informed and are not under any compulsion to transact. Gross book value of 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. 7.2.2 Identification of Fixed Assets
It may be appropriate to aggregate individually insignificant items, and to apply the criteria to the aggregate value. An enterprise may decide to expense an item which could otherwise have been included as fixed assets, because the amount of the expenditure is not material. Stand-by equipment and servicing equipment are normally capitalised. Machinery spares are usually charged to the profit and loss statement as and when consumed. However, if such spares can be used only in connection with an item of fixed assets and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal item. In certain circumstances, the accounting for an item of fixed asset may be improved if the total expenditure thereon is allocated to its component parts, provided they are in practice separable, and estimates are made of the useful lives of these components. For example, rather than treat an aircraft and its engines as one unit, it may be better to treat the engines as a separate unit if it is likely that their useful life is shorter than that of the aircraft as a whole. 7.2.3 Components of Cost
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The cost of an item of fixed assets comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are: (i) (ii) (iii) (iv) site preparation; initial delivery and handling costs; installation cost, such as special foundations for plant; and professional fees, for example, fees of architects and engineers.
The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors. Financing costs relating to deferred credits or to borrowed funds, acquisition of fixed assets for the period up to the completion of construction or acquisition of fixed assets are also sometimes included in the gross book value of the asset to which they relate. However, financing costs (including interest) on fixed assets purchased on a deferred credit basis or on monies borrowed for construction or acquisition of fixed costs, are not capitalised to such costs relate to periods after such assets are ready to be put to use. Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed assets. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs experimental production, is usually capitalised as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalised and is treated as revenue expenditure even though the contract may stipulate that the plant
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will not be finally taken over until after the satisfactory completion of the guarantee period. If the interval between the date 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 profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production. 7.2.4 Self-Constructed Fixed Assets
In arriving at the gross book value of self-constructed fixed assets, the same principles apply as those described as above. Included in the gross book value are costs of construction that relate directly to the specific asset and costs that are attributable to the construction activity in general and can be allocated to the specific asset. Any internal profits are eliminated in arriving at such costs. 7.2.5 Non-Monetary Consideration 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 also 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 an adjustment is made for any balancing receipt or payment of cash or other considerations. When a fixed asset is acquired in exchange for shares or other securities in the enterprise, it is usually recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident. 7.2.6 Improvement and Repairs
Frequently, it is difficult to determine whether subsequent expenditure related to fixed assets represents improvements that ought to be added to the gross book value or repairs that ought to be charged to the profit and loss statement.
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Only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value e.g. an increase in capacity. The cost of an addition or extension 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. Any addition or extension which has a separate identity and is capable of being used after the existing asset is disposed of, is accounted for separately. 7.2.7 Amount Substituted for Historical Cost
Sometimes financial statements that are otherwise prepared on a historical cost basis include part or all of fixed assets at a valuation in substitution for historical costs and depreciation is calculated accordingly. Such financial statements are to be distinguished from financial statements prepared on a basis intended to reflect comprehensively the effects of changing prices. A commonly accepted and preferred method of restating fixed assets is by appraisal, normally undertaken by competent valuers. Other methods sometimes used are indexation and reference to current prices which when applied are cross checked periodically by appraisal method. The revalued amounts of fixed assets are presented in financial statements, either by restating both the gross book value and accumulated depreciation so as to give a net book value by adding therein the net increase on account of revaluation. An upward revaluation does not provide a basis for crediting to the profit and loss statement the accumulated depreciation existing at the date of revaluation. Different bases of valuation are sometimes used in the same financial statements to determine the book value of the separate items within each of the categories of fixed assets or for the different categories of fixed assets. In such cases, it is necessary to disclose the gross book value included on each basis. Selective revaluation of assets can lead to unrepresentative amounts being reported in financial statements. Accordingly, when revaluation does not cover all the assets of a given class, it is appropriate that the selection of assets to be revalued be made on a systematic basis. For example, an enterprise may revalue a whole class of assets within a unit.
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It is not appropriate for the revaluation of a class of assets to result in the net book value of the class being more than the recoverable amount of the assets of that class. An increase in net book value arising on revaluation of fixed assets is normally credited directly to the owners interests under the heading of revaluation reserves and is regarded as not available for distribution. A decrease in net book value arising on revaluation of fixed assets is charged to profit and loss statement except that, to the extent that such a decrease is considered to be related to a previous increase on revaluation that is included in revaluation reserve, it is sometimes charged against that earlier increase. It sometimes happens that an increase to be recorded is a reversal of a previous decrease arising on revaluation which has been charged to profit and loss statement in which case the increase is credited to profit and loss statement to the extent that it offsets the previously recorded decrease. 7.2.8 Retirements and Disposals
An item of fixed asset is eliminated from the financial statements on disposal. Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realisable value and are shown separately in the financial statements. Any expected loss is recognised immediately in the profit and loss statement. In historical cost financial statements, gains or losses arising on disposal are generally recognised in the profit and loss statement. On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value is normally charged or credited to the profit and loss statement except that, to the extent such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised, it is charged directly to that account. The amount standing in revaluation reserve following the retirement or disposal of an asset which relates to that asset may be transferred to general reserve.
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7.2.9
Valuation of Fixed Assets in Special Cases
In the case of fixed assets acquired on hire purchase terms, although legal ownership does not vest in the enterprise, such assets are recorded at their cash value, which if not readily available, is calculated by assuming an appropriate rate of interest. They are shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership thereof. Where an enterprise owns fixed assets jointly with others (otherwise than as a partner in a firm), the extent of its share in such assets, and the proportion in the original cost, accumulated depreciation and written down value are stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped together with similar fully owned assets. Details of such jointly owned assets are indicated separately in the fixed assets register. Where several assets are purchased for a consolidated price, the consideration is apportioned to the various assets on a fair basis as determined by competent valuers. 7.2.10 Fixed Assets of Special Types Goodwill : in general, is recorded in the books only when some consideration in money or moneys worth has been paid for it. Whenever a business is acquired for a price (payable either in cash or in shares or otherwise) which is in excess of the value of the net assets of the business taken over, the excess is termed as goodwill. Goodwill arises from business connections, trade name or reputation of an enterprise or from other intangible benefits enjoyed by an enterprise. As a matter of financial prudence, goodwill is written off over a period. However, many enterprises do not write off goodwill and retain it as an asset. Patents : are normally acquired in two ways: (i) by purchase, in which case patents are valued at the purchase cost including incidental expenses, stamp duty, etc. and (ii) by development within the enterprise, in which case identifiable costs incurred in developing the patents are capitalised. Patents are normally written off over their legal term of validity or over their working life, whichever is shorter.
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Know-how : In general Know-how is recorded in the books only when some consideration in money or money's worth has been paid for it. Know-how is generally of two types : (i) (ii) relating to manufacturing processes; and relating to plans, designs and drawings of buildings or plant and machinery.
Know-how related to plants, designs and drawings of buildings or plant and machinery is capitalised under the relevant asset heads. In such cases depreciation is calculated on the total cost of those assets, including the cost of the know-how capitalised. Know-how related to manufacturing processes is usually expensed in the year in which it is incurred. Where the amount paid for know-how is a composite sum in respect of both the types as has been mentioned such consideration is apportioned amongst them on a reasonable basis. Where the consideration for the supply of know-how is a series of recurring annual payments as royalties, technical assistance fees, contribution to research, etc., such payments are charged to the profit and loss statement each year. 7.2.11 Disclosure Certain specific disclosures on accounting for fixed assets are already required by Accounting Standard 1 on Disclosure of Accounting Policies and Accounting Standard 6 on Depreciation Accounting. Further disclosures that are sometimes made in financial statements include: (i) gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements; expenditure incurred on account of fixed assets in the course of construction or acquisition; and revalued amount substituted for historical cost of fixed assets, the method adopted to compute the revalued amounts, the nature of any indices used,
(ii)
(iii)
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the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amounts. The cost of a fixed asset should comprise its purchase price and any attributable costs of bringing the asset to its working condition for its intended use. Financial costs relating to deferred credits or to borrowed funds attributable to construction or acquisition of fixed assets for the period up to the completion of construction or acquisition of fixed assets should also be included in the gross book value of the asset to which they relate. However, the financing costs (including interest) on fixed assets purchased on a deferred credit basis or on monies borrowed for construction or acquisition of fixed assets should not be capitalised to the extent that such costs relate to periods after such assets are ready to be put to use. 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. 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 or receipt of cash or other consideration. For these purposes fair market value may be determined by reference. 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 should be stated at the lower of their net book value and net realisable value and shown separately in the financial statements. Fixed asset should be 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 recognised in the profit and loss statement. When a fixed asset is revalued in financial statements, an entire class of assets should be revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed. The revaluation in financial statements of a class of assets should not result in the net book value of that class
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being greater than the recoverable amount of assets of that class. When a fixed asset is revalued upwards, any accumulated depreciation existing at the date of the revaluation should not be credited to the profit and loss statement. 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 a decrease arising on revaluation previously recorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement. 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 such a decrease is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised, it may be charged directly to that account. On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss statement except that to the extent that such a loss is related to an increase which was previously recorded as a credit to revaluation reserve and which has not been subsequently reversed or utilised, it may be charged directly to that account. 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 appropriate rate of interest. They should be shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership thereof. In the case of fixed assets owned by the enterprise jointly with others, the extent of the enterprises share in such assets, and the proportion of the original cost, accumulated depreciation and written down value should be stated in the balance sheet. Alternatively, the pro rata 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 should be apportioned to the various assets on a fair basis as determined by competent valuers. Goodwill should be recorded in the books only when some consideration in money or moneys worth has been paid for it. Whenever a business is acquired for a price (payable in cash or in shares or otherwise) which in excess of the value of the net assets of the business taken over, the excess should be termed as 'goodwill'. The direct cost incurred in developing the patents should be capitalised and written off over their legal term of validity or over their working life, whichever is shorter. Amount paid for know-how for the plans, layout and designs of buildings and/or design of the machinery should be capitalised under the relevant asset heads, such as, buildings, plants and machinery etc. Depreciation should be calculated on the total cost of those assets, including the cost of the know-how capitalised. Where the amount paid for know-how is a composite sum in respect of both the manufacturing process as well as plans, drawings and designs for buildings, plant and machinery, etc., the management should apportion such consideration into two parts on a reasonable basis. Disclosure : The following disclosures regarding fixed assets should be made : (i) gross and net book values of fixed assets at the beginning and end of an accounting period along with additions, disposals, acquisitions and other movements during the year; (ii) expenditure incurred on account of fixed assets in the course of construction or acquisition; and (iii) 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.
7.3
AUDITING ASPECTS OF FIXED ASSETS
The statement on Auditing Practices of the Institute of Chartered Accountants of India (ICAI) lays down specific procedures regarding the audit of various assets, liabilities, and items of the profit and loss account. The auditors in India are expected to carry out their audit engagements in accordance with these
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procedures. It may, however, be emphasized that the statement on auditing practices does not purport to lay down a comprehensive audit programme, giving all audit steps required in reviewing financial statements. It merely lists the significant practices which an auditor is expected to include in his audit programme. However, it has been superseded by the "Guidance Note on Audit of Fixed Assets issued by the Auditing Practices Committee of the ICAI."3 The Guidance Note makes the following important recommendations regarding audit of fixed assets.
7.3.1
Features of Fixed Assets The following features of fixed assets affect the audit procedures :-
(A)
As compared to current assets, fixed assets are more permanent. Normally, fixed assets are carried over from year to year. The average unit of fixed assets is normally of a relatively higher rupee value. Therefore, their acquisition has to be controlled more effectively. The control aspect assumes special significance where fixed assets are selfconstructed. In an inflationary economy, the book value of fixed assets is generally considerably lower than their replacement value. Review of Internal controls
(B)
(C)
7.3.2
An auditor should review the system of internal controls relating to fixed assets, particularly the following : (A) Control over expenditure incurred on fixed assets acquired or selfconstructed. An effective method of exercising this control is proper capital budgeting, which ensures proper authorisation of expenditure and helps in controlling the same through periodic comparison of actuals with budgeted figures.
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(B)
Accountability and utilisation controls : Accountability over each fixed asset (or each class of fixed assets) is established, among other things, by maintaining appropriate records. This facilitates proper physical verification and control over disposal of fixed assets. Utilisation controls ensure that the individual fixed assets are properly used for meeting the objectives of the enterprise. Information Controls : These ensure that reliable information is available for calculating and allocating depreciation, recording disposals or retirements, preparing tax returns, establishing the amount of insurance cover, filing insurance claims, controlling repairs and maintenance charges, etc.
(C)
7.3.3 1.
Verification Verification of fixed assets consists of examination of records and physical verification. The auditor should normally verify the records with reference to the documentary evidence and on the basis of evaluation of internal control. Physical verification of fixed assets is primarily the responsibility of the management. The opening balances of the fixed assets should be verified from relevant records, e.g. schedule of fixed assets, ledger or register balances. Acquisition of new fixed assets and improvements to the existing ones should be verified with reference to the supporting documents such as orders, invoices, receiving reports and title deeds. Self-constructed fixed assets, improvements and capital work-in-progress should be verified with reference to the supporting documents such as contractors' bills, work-order records and independent confirmation of the work performed. Expense accounts (e.g. repairs and renewals) should be scrutinised to ascertain that new capital assets and improvements have not been included therein.
2.
3.
4.
5.
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6.
Where fixed assets have been written off or fully depreciated in the year of acquisition/ construction, the auditor should examine whether these were recorded in the fixed assets register before being written off or depreciated. In respect of fixed assets retired, i.e. destroyed, scrapped or sold, the auditor should examine (A) whether the retirements has been properly authorised and appropriate procedures for invitation of quotations have been followed wherever applicable; (B) whether the assets and depreciation accounts have been properly adjusted; (C) whether the sale proceeds, if material, have been properly adjusted and disclosed in the profit and loss account.
7.
8.
It is possible that certain assets destroyed, scrapped or sold during the year have not been recorded. The auditor may use the following procedures to ascertain such omissions: (A) Review of work orders/physical verification reports that trace any retirements. Examination of major additions to ascertain whether they represent additional facilities or replacement of old assets which may have been retired that all assets scrapped, destroyed or sold have been recorded in the books.
(B)
9.
Ownership of assets such as land and buildings should be verified by examining the title deeds. In case the title deeds are held by other persons such as solicitors or bankers, confirmation should be obtained directly by the auditor through a request signed by the client. It is the responsibility of the management to carry out physical verification of fixed assets at appropriate intervals in order to ensure that they are all in existence. However, the auditor should satisfy himself that such verification is done. For this purpose, he should observe the verification being conducted by the management wherever possible. He should also examine the written instructions issued to the staff by the management and the relevant working papers. The auditor should also satisfy himself that the persons conducting the verification, whether the employees of the enterprise or outside experts (if employed), had the necessary competence.
10.
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11.
The auditor should examine whether the method of verification was reasonable under the circumstances relating to each asset. For example, in the case of certain process industries, verification by direct physical check may not be possible in the case of assets which are in continuous use or which are concealed within larger units. In such cases, indirect evidence of the existence of the assets may suffice. For example, the very fact that an oil refinery is producing at normal levels of efficiency may be sufficient to indicate the existence of the various process units even where each such unit cannot be verified by visual inspection. Where the fixed assets can be moved and where verification of all assets cannot be conducted at the same time, they should be marked with distinctive numbers. The auditor should examine whether the frequency of verification was reasonable under the circumstances of each case. Where the assets are a few and can be easily verified, an annual verification may be considered reasonable. However, where the assets are numerous and difficult to verify, a verification, say, once every three years by rotation - so that all assets are verified at least once in every three years - may be sufficient. The auditor should test-check the book records of fixed assets with the physical verification reports. He should examine whether the discrepancies noticed on physical verification have been properly dealt with or not.
12.
13.
7.3.4 1.
Valuation and Disclosure The auditor should satisfy himself that the fixed assets have been valued and disclosed in the financial statements according to the generally accepted bases of accounting which are determined by law, professional pronouncements and prevailing practices. The auditor should test-check the calculations of depreciation and the total depreciation arrived at should be compared with that of the preceding years to identify reasons for variations. He should particularly examine whether the depreciation charge is adequate, keeping in view the generally accepted bases of accounting for depreciation.
2.
3.
Revaluation of fixed assets implies restatement of their book values on the basis of systematic scientific appraisal, which would include ascertainment
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of working condition of each unit of fixed assets, technical estimate of future working life and the possibility of obsolescence. Such an appraisal is usually made by independent and qualified persons such as engineers, architects, etc. To the extent possible, the auditor should examine these appraisals. As long as the appraisals appear reasonable and based on adequate facts, he is entitled to accept the revaluation made by the experts. 4. Where several assets have been purchased for a consolidated price, the auditor should examine the method by which the consideration has been apportioned to the various assets. In case this has been done on the basis of an expert valuation, he should examine whether the same appears reasonable and based on adequate facts. 5. Where an enterprise owns assets jointly with others (otherwise than as a partner in a firm), the auditor should examine the relevant documents such as title deeds, agreements etc. in order to ascertain the extent of the enterprise's share in such assets.
7.4
DEPRECIATION ACCOUNTING, AS-6
Accounting Standard (AS) 6, Depreciation Accounting,4 issued by the Institute of Chartered Accountants of India lays down the accounting principles regarding depreciation. The guidance note on accounting for depreciation in companies and the guidance note on some important issues arising from the Amendments 10, Schedule XIV to the Companies Act, 1956, issued by ICAI also deal with the aspects of depreciation, especially in the context of companies. The following may be noted in this regard : 1. Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined. 2. The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.
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'Depreciable assets' have been defined as assets which are expected to be used during more than one accounting period, they have a limited useful life, and are held by an enterprise for use in the production or supply of goods and services, or for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business. Thus, most of the fixed assets would qualify to be classified as depreciable assets. 'Depreciable amount' of a depreciable asset refers to the historical cost, or the revalued amount, as reduced by the estimated residual value. Thus, if an item of plant and machinery is purchased for Rs. 1,00,000 and its residual value is estimated to be Rs. 5,000, the depreciable amount would be Rs. 95,000. Useful life of a depreciable asset is either the period over which it 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. The standard recommends that the depreciation charge each year should be arrived at on a systematic basis. In other words, the annual depreciation charge should be determined by applying a systematic method, and not on an ad hoc or intuitive or subjective basis. 3. The depreciation method selected should be applied consistently from period to period. The standard recommends that whatever method of depreciation is selected, it should be applied consistently. The selection of the method depends on the type of the asset, the nature of its use and the circumstances prevailing in the business. A combination of more than one method of depreciation can also be used, provided it is followed consistently. Thus, a company can adopt the straight line method for charging depreciation on patents, while it uses the reducing balance method to charge depreciation on plant and machinery. 4. A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. Thus, the method of depreciation can be changed only in certain specified circumstances.
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5.
The useful life of a depreciable asset should be estimated on considering the following factors : (a) (b) (c) expected physical wear and tear; obsolescence; and legal or other limits on the use of the asset.
The standard recognises that the useful life of a depreciable asset may be shorter than its physical life. The determination of the useful life is a matter of estimation. In many cases, the statute governing an enterprise may provide the basis for determining the useful life. Where the statute so lays down, the management can charge a higher depreciation if, on a rational consideration of various factors, it estimates that the useful life of an asset is shorter than that envisaged under the provisions of the relevant statute. If, however, the management estimates that the actual useful life of the asset is longer than that envisaged under the statute, it is legally required to take the useful one like an envisaged under the statute. 6. The useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically. If, as a result of such a review, there is a revision of the useful life, two alternative accounting treatments have been recognised. The first is that the unamortised depreciable amount (the written down book value minus the estimated residual value) should be charged over the revised remaining useful life. Alternatively, the aggregate depreciation chargeable to date on the basis of revised life can be computed and the difference between the amount so computed and the depreciation actually charged to date can be adjusted in the profit and loss account. The adjustment should be disclosed as an extraordinary item in the accounting period of revision. The following illustration shows the application of the two methods of accounting for depreciation on revision of useful life of an asset. A machine was purchased on 1-4-1986 for Rs. 1,00,000. Its residual value was estimated at Rs. 5,000. For three years, the machine was depreciated @ 9.5% per annum on straightline basis. On 1-4-1989, its useful life was reviewed. It was then estimated that, due to obsolescence, the total useful
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life of this machine would be reduced to 8 years as against 10 years estimated earlier. Under the first method, the written down value as on 1-4-1989, i.e. Rs. 71,500 will be left undisturbted. Rs. 66,500 [Rs. 71,500-Rs. 5,000 (residual value)] will be written off over the revised remaining useful life of five years, i.e. 1989-90 to 1993-94. The annual depreciation charge for these years will be Rs. 13,300. Under the second method, the depreciation charge as per the revised life will be recomputed from the beginning. Thus, the annual depreciation charge under this method would be Rs. 11,875 (Rs. 95,000/8). On this basis, the depreciation chargeable in respect of the period which has already expired (i.e. 1986-87 to 1988-89) would be Rs. 35,625. Since depreciation charged till date is only Rs. 28,500, a shortfall of Rs. 7,125 will be charged to the profit and loss account of the year. The depreciation charge for the year 1989-90 and each of the subsequent years would be Rs. 11,875. 7. Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. Alternatively, depreciation on such addition or extension may be provided at the rate applied to the existing asset. However, where an addition or extension retains its separate identity and is capable of being used after the existing asset is disposed of, depreciation on the same should be provided independently on the basis of an estimate of its own useful life. Thus, the basic test is whether an addition or extension has a separate identity and is capable of being used after the existing asset is disposed of. Where the historical cost of a depreciable asset has undergone a change, depreciation should be provided on the revised unamortised depreciable amount prospectively over the residual useful life of the asset. For example, suppose some machinery was purchased for Rs. 1,00,000 on 1-4-1986 and the useful life of the machinery was estimated as 10 years. During 1989-90, due to an increase in the long-term liability on account of foreign exchange fluctuations, the cost of the machine increased by Rs. 20,000. This increase would be added to the net book value of Rs. 91,500 minus the residual
8.
263
value would be charged off as depreciation over the remaining useful life of the machinery, i.e. 7 years. 9. Where a depreciable asset is revalued, provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful life of such asset. If the effect of revaluation on the amount of depreciation is material, the same should be disclosed separately in the year in which revaluation is carried out. If any depreciable asset is disposed of in any way, the net surplus or deficiency, if material, should be disclosed separately. 11. The historical cost of the revalued amount of each class of depreciable assets should be disclosed in the financial statements. The total depreciation for the period for each class of assets, as well as the related accumulated depreciation, should be similarly disclosed. Disclosure also be made of the accounting policy relating to depreciation, i.e. the depreciation methods as well as the depreciation rates or the useful lives of the assets, if they are different from the rates prescribed by the law governing the entity.
10.
7.5
GUIDANCE NOTE ON ACCOUNTING FOR DEPRECIATION IN COMPANIES
In September 1989, the Research Committee of the ICAI issued a Guidance Note on Accounting for Depreciation in Companies',5 consolidating its earlier documents on the subject in the light of amendments to the provisions of the Companies Act (1956) relating to depreciation by the Companies (Amendment) Act, 1988. The aforesaid amendments made it obligatory for companies to provide for depreciation under sections 205 and 350 at the rates prescribed in the newlyintroduced Schedule XIV to the Act (instead of the rates given in the Income-tax Act/Rules, as was the case prior to the amendment). The Guidance Note makes the following recommendations. Adoption of Different Methods for Different Types of Assets : A company (or, for the matter, any enterprise) may adopt different methods of depreciation for different types of assets, provided the same are adopted consistently from year to year. For example, a company can adopt the straight line method for
264
charging depreciation on some depreciable assets (e.g., patents) while using the written-down value method in the case of other depreciable assets (e.g., plant and machinery). Further, units in different geographical locations may follow different methods of depreciation on machinery purchased in the same year. Change in the Method of Providing Depreciation : A change from one method of providing depreciation to another can be made only in the circumstances listed in Accounting Standard (AS) 6, Depreciation Accounting, as discussed earlier in this chapter. When a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date on which the asset came into use. Any deficiency arising from retrospective recomputation of depreciation in accordance with the new method should be charged to the profit and loss account of the year in which the method of depreciation is changed. Any surplus should, however, be transferred to general reserve through the 'appropriations' part of the profit and loss account in the year of the change. The following example clarifies this recommendation. Suppose an asset costing Rs. 1,00,000 was commissioned on April 1, 1986. From 1986-87 to 1988-89, depreciation on this asset was charged on the basis of the written-down value (WDV) method, at the rate of 20 per cent per annum. This resulted in a total provision of Rs. 48,800 as depreciation till the end of 1988-89. Suppose on April 1, 1989, it was proposed to change the method of charging depreciation from the WDV method to the straightline method. According to the recommendation, this would require recomputation of depreciation provision for the expired period (1986-97 to 1988-89) by applying the straightline rate corresponding to a WDV rate of 20 per cent (as per schedule XIV to the Companies Act). Thus, the recomputed provision for depreciation for the period from 1986-87 to 1988-89 on straightline rate would be Rs. 21,210. In the year 1989-90, Rs. 7,070 will be charged as depreciation for the year. A surplus of Rs. 27,590 on account of the difference between Rs. 48,800 charged under the WDV method during 1986-87 to 1988-89 and Rs. 21,210 required to be charged under the new method for this period would be transferred to general reserve through the profit and loss appropriation account. A change in the method of providing depreciation should be treated as a change in accounting policy and its effect should be quantified and disclosed.
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Pro rata Depreciation : Schedule XIV to the Companies Act provides that depreciation on assets acquired or sold/discarded during the year should be calculated on a pro rata basis from the date of the addition or up to the date on which the asset was sold/discarded. The Guidance Note recommends that, depending upon the materiality of the amounts involved, a company may group additions and disposals in appropriate time period(s), e.g. 15 days, a month, a quarter, etc. for the purpose of charging pro rata depreciation in respect of additions and disposals of its assets. Further, where the financial year comprises a period of more than or less than 12 months, the rates of depreciation prescribed in Schedule XIV to the Companies Act should be applied proportionately taking into consideration the duration of the financial year.
Depreciation on Low-cost Items : The Income-tax Act provides for 100 per cent depreciation on those items of plant and machinery whose actual costs do not exceed Rs. 5,000 each. Schedule XIV to the Companies Act is, however, silent on this aspect. In this regard, the Guidance Note recommends that the concept of materiality should be taken into account in determining the amounts which may be completely written off. Thus, while it may be proper to charge 100 per cent depreciation on low-cost items in the case of large companies, the same may not be proper in the case of small companies. It is also recommended that the accounting policy followed in this regard should be disclosed appropriately in the financial statements. Depreciation on Revalued Assets : Where a company has revalued its fixed assets, depreciation thereon should be charged on the revalued amounts. However, there is no legal bar on transferring an amount equal to the additional depreciation relatable to revaluation from revaluation reserve to the credit of the profit and loss account. Such transfer should be shown in the profit and loss account separately; an appropriate note would also be desirable. Where a company has, in the past, been charging the additional depreciation to the profit and loss account without a corresponding transfer from the revaluation reserve, it can transfer (e.g. at the time of retirement of the relevant asset) an amount equivalent to cumulative additional depreciation from the revaluation reserve to the profit and loss account or to the general reserve, with appropriate disclosure.
266
Minimum Amount of Depreciation in the Case of Companies : According to the Guidance Note, the rates prescribed in Schedule XIV to the Companies Act, 1956, represent "the minimum rates of depreciation to be provided". In arriving at account of the true commercial depreciation rate, i.e. the rate which is adequate to write off the asset over its normal working life. Where such rate is higher than the corresponding rate prescribed in Schedule XIV, the company should provide depreciation at such higher rate, with appropriate disclosure as required by Schedule XIV. However, if the rate so arrived at is lower than the rate prescribed in Schedule XIV. In this regard, the Department of Company Affairs has also clarified that "the rates as contained in Schedule XIV should be viewed as minimum rates, and, therefore, a company will not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. If, however, on the basis of bonafide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual accounts".6 The guidance note recognises that the determination of commercial life of an asset is a technical matter. It is, therefore, recommended that the decision of the Board of Directors based on technological evaluation should be accepted by the auditor unless he has reasons to believe that such decision results in a charge which does not represent true commercial depreciation.
Depreciation in Respect of Multiple-shift Working : In order to provide depreciation in respect of multiple-shift working as required in Schedule XIV to the Companies Act, 1956, various units / departments / mills / factories should be taken as separate concerns. Where a company has not provided depreciation in respect of multiple-shift working, the auditor should qualify his report appropriately. An example of such a qualification is given below : Depreciation in respect of extra or multiple-shift allowance amoung to Rs. ........... has not been provided which is contrary to the provisions of Schedule XIV to the Companies Act. This has resulted in the profit being overstated by Rs. ...... and plant and machinery overstated by Rs. ............
Depreciation on assets existing on the date on which Schedule XIV came into force. The guidance note recommends that the depreciation on assets existing
267
on the date on which Schedule XIV came into force (i.e. April 2, 1987, according to the circular issued by the Department of Company Affairs7 should be provided as given below : (a) Where a company has been following the written-down value method of depreciation in respect of its assets, the WDV rates prescribed in Schedule XIV should be applied to the written-down value as the end of the previous financial year as per the books of the company. Where a company has been following the straightline method of depreciation in respect of its assets existing on the date of Schedule XIV coming into force, the following alternative bases may be adopted for computing the depreciation charge : (i) The specified period may be recomputed by applying to the original cost the revised rate as prescribed in Schedule XIV and the depreciation charge may be calculated by allocating the unamortised value as per the books over the remaining part of the recomputed specified period. Depreciation may continue to be provided at the old rates, i.e. the company may ignore the rates prescribed in Schedule XIV for providing depreciation on assets existing on the date on which the said Schedule came into force. The straightline depreciation rates prescribed in Schedule XIV may be applied to the original cost of the existing assets.
(b)
(ii)
(iii)
The guidance note recommends that appropriate disclosures should be made in cases where a company changes the rates of depreciation on its existing assets (i.e. it follows alternative (i) and (iii) above). Depreciation on Assets Purchased but not Used During a Particular Year. It has been opined that as soon as an item of plant and machinery is installed and is fit for use, depreciation should be provided. The Company Law Department has concurred with the view that depreciation arises also out of efflux of time. However, if a plant and machinery has not been installed and is, thus, not ready
268
for being put to use in a particular year, it is not necessary to provide depreciation thereon.8 Depreciation on Second-hand Assets Taken Over. Where a company has taken over assets and liabilities for an undertaking, there arises the question of charging depreciation on the second-hand fixed assets thus taken over. It has been opined that depreciation on second-hand assets should be provided with reference to the unexpired period of the life of the asset as estimated originally. If this is not possible, a technical estimate of the remaining useful life should be made and depreciation should be provided accordingly. The depreciation so provided should not be less than the minimum depreciation required to be provided under a statute.9 Depreciation on Assets Used During Construction Period. Depreciation on the assets utilised directly or indirectly during the construction period should be captialised as a part of indirect capital expenditure, which in turn is to be allocated to specific asset heads. If any item of fixed assets used during the construction period is retained by the project for use after construction, the residual book value of such an asset should be depreciated in the normal way after commencement of production.10
7.6
INTERNATIONAL ACCOUNTING STANDARD INFORMATION REFLECTING THE ASPECTS OF CHANGING PRICES (IAS-15)
The following is the text of the International Accounting Standard 15 issued by the Institute of Chartered Accountants of India in 24th September, 1981.11 (1) This statement deals with information reflecting the effects of changing prices on the measurement used in the determination of an enterprises results of operation and financial position. In most countries, such information is supplementary to, but not a part of primary financial statements. This statement does not apply to the accounting and reporting policies required to be used by an enterprise in the preparation of its primary financial statements, unless those financial statements are presented on a basis that reflects the effects of changing prices.
269
(2)
This International Accounting Standard supersedes International Accounting Standard 6, accounting responses to changing prices. This statement applies to enterprises whose levels of revenue, profit, assets or employment are significant in the economic environment in which they operate. When both the parent company and its consolidated financial statements are presented, the information called for by this standard need only be presented on the basis of consolidated information. The information called for this standard is not required for a subsidiary operating in the country of domicile of its parent if consolidated information on this basis is presented by the parent. For subsidiaries operating in a country other than the country of domicile of the parent, the information called for this standard is only required when it is accepted practice for similar information to be presented by an enterprise of economic significance in that country.
(3)
(4)
(5)
Presentation of information reflecting the effects of changing prices is encouraged for other entities in the interest of promoting more informative financial reporting.
Explanation (6) Prices change over time as the result of various specific or general economic and social forces. Specific forces, such as changes in supply and demand and technological changes, may cause individual prices to increase or decrease significantly and independently of each other. In addition, general forces may result in a change in the general level of prices and therefore in the general purchasing power of money. In most countries, financial statement are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to changes in specific prices of assets held, except to the extent that property, plant and equipment may have been revalued or inventories or other current assets reduced to net realisable value. The information required by the Standard is designed to make users of an enterprise's financial statements aware of the effects of changing prices on results of its operation. Financial statements, however, whether prepared under the
(7)
270
historical cost method, or under a method that reflects the effects of changing prices, are not intended to indicate directly the value of the enterprise as a whole.
7.6.1 (8)
Responding to Changing Prices Financial information intended to be useful to the effects of changing price can be prepared in a number of ways. One way shows financial information in terms of general purchasing power, another way shows current cost in place of historical cost, recognising changes in specific prices of assets. A third way combines features of both these methods. Underlying these responses are two basic approaches to the determination of income : one recognises income after the general purchasing power of shareholders equity in the enterprises has been maintained, the other recognises income after the operating capacity of the enterprise has been maintained and may or may not include a general price level adjustment. General Purchasing Power Approach The general purchasing power approach involves the restatement of some or all of the items in the financial statements for changes in the general price level. Proposals on this subject emphasise that the general purchasing power restatements change the unit of account but do not change the underlying measurement bases. Under this approach, income normally reflects the effects, using an appropriate index of monetary items and is reported after the general purchasing power of the shareholders equity in the enterprise has been maintained. The Current Cost Approach The current cost approach is found in number of different methods. In general, it uses replacement cost as the primary measurement basis. If however, replacement cost is higher than both net realisable value and present value, the higher of the two is usually used at measurement basis.
(9)
7.6.2 (10)
7.6.3 (11)
271
(12)
Replacement cost of a specific asset is normally derived from the current acquisition cost of a similar asset, new or used, or of an equivalent productive capacity or service potential. Net realisable value normally represents the net current selling prices of an asset. The present value represents a current estimate of future net receipts attributable to the asset, appropriately discounted. Specific price indices, all often used as a means to determine current cost for items, particularly if no recent transaction involving those items has occurred, no price tests are available or the use of pull tests is not practical.
(13)
(14)
Current cost methods generally require recognition of effect on depreciation and cost of sales of changes in prices specific to the enterprise. Most such methods also require the application of some from of adjustments which have in common a general recognition of the interaction between changing prices and the financing of an enterprise. As discussed in paragraphs 15-17 below, opinions differ on the from these adjustments should take. Some current cost methods require an adjustment reflecting the effects of changing prices on all net monetary items, including long-term liabilities, leading to a loss from holding those net monetary assets or to gain from having net monetary liabilities when prices are rising and vice-versa. Other methods limit this adjustment to the monetary assets and liabilities included in the working capital of the enterprise. Both types of adjustments recognise that not only non-monetary assets but also monetary items are important elements of the operating capacity of the enterprise. A normal feature of the current cost methods described above is that they recognise income after the operating capacity of the enterprise has been maintaianed. Another view is that it is unnecessary to recognise in the income statement the additional replacement cost of assets to the extent that they are financed by borrowing. Methods based on this view report income after the position of enterprises operating capacity that is financed by its shareholders has been maintained. This may be achieved for example, by reducing the cost of adjustment for depreciation in the cost of sales, where the method requires its monetary working capital.
(15)
(16)
272
(17)
Some current cost methods apply a general price level index to the amount of shareholder's interests. This indicates the extent to which shareholders equity in the enterprise has been maintained in terms of general purchasing power when the increase in the replacement cost of assets arising during the period is less than the decrease in the purchasing power of the shareholders interests during the same period. Sometimes this calculation is merely noted to enable a comparison to be made between net assets in terms of general purchasing power and net assets in terms of current costs. Under other methods, which recognise income after the general purchasing power of shareholders equity in the enterprise has been maintained, the difference between the two net assets figures is treated as a gain or loss accruing to the shareholders. Current Status While financial information is sometimes provided using the various methods for reflecting changing prices described above, either in primary or supplementary financial statements, there is not yet an international consensus on the subject. Consequently, the international accounting standards committee believes that further experimentation is necessary before consideration can be given an enterprise to prepare primary financial statements using a comprehensive and uniform system for reflecting changing price. Meanwhile, evaluation of the subject would be assisted if enterprises that present primary financial statements on the historical costs basis also provide supplementary information reflecting the assets of price changes.
7.6.4 (18)
(19)
There is a variety of proposals as to the item to be included in such information ranging from a few income statement items to extensive income statement and balance sheet disclosures. It is desirable that there be an internationally established minimum of items to be included in the information. Minimum Disclosures The minimum disclosures required by this standard are :
7.6.5 (20)
273
(a)
The adjustment to or the adjusted amount of depreciation of property, plant and equipment and cost of sales that are necessary to reflect the effects of changing prices. Adjustments relating to monetary items, the effect of borrowing, or equity interests as described in paragraphs 15-17 when such adjustments are taken into account in determining income under the method adopted; and The overall effect on results of adjustments made to reflect the effects of changing prices.
(b)
(c)
In addition under a current cost approach, the current cost of property, plant and equipment and inventories are relevant and are disclosed. (21) A description of the procedures adopted to make the computation, including the nature of any indices used, is necessary for an understanding of the information, required by the standard. Other Disclosures Enterprises are encouraged to provide additional disclosures and in particular a discussion of the significance of the information in the circumstances of the enterprises. Disclosure of any adjustments to tax provision or tax balance is usually helpful.
7.6.6 (22)
INTERNATIONAL ACCOUNTING STANDARD 15 : INFORMATION REFLECTING THE EFFECTS OF CHANGING PRICES

International Accounting Standard 15 comprises paragraphs 23-28 of this statement. The Standard should be read in the context of paragraphs 1-22 of this statement and of the preface to the statements of International Accounting Standards. (23) Enterprises to which this standard applies should present infomation disclosing the item set out in paragraphs 24 to 26 using an accounting method reflecting the effects of changing prices.
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(24)
The items to be presented are : (a) The amount of the adjustment to or the adjusted amount of depreciation of property, plant and equipment. The amount of the adjustment to or the adjusted amount of cost of salary. The adjustments relating to monetary items, the effect of borrowing, or equity interests when such adjustments have been taken into account in determining income under the accounting method adopted, and The overall effect on results on the adjustments described in (a) & (b) and where appropriate (c), as well as any other items reflecting the effects of changing prices that are reported under the accounting methods adopted.
(b)
(c)
(d)
(25)
When a current cost method is adopted the current cost of property, plant and equipment, and of inventories should be disclosed. Enterprises should describe the methods adopted to compute the information called for in paragraphs 24 and 25 including the nature of any indices used. The information required by paragraphs 24 to 26 should be provided on a supplementary basis unless such information is presented in primary financial statements.
(26)
(27)
Effective Date (28) This International Accounting Standard supersedes International Accounting Standard 6, accounting responses to changing prices, and become operative for financial statements covering periods beginning on or after 1st January 1983.
7.6.7 INDIA AND PRICE LEVEL ACCOUNTING
275
The problem of price level changes and its impact on the financial statements has assumed considerable importance in the last few decades. As a matter of fact, the very need for a method of accounting to take cognizance of changing prices has often been questioned. The choice of an appropriate method has been widely debated. Keeping in view these facts, the Institute of Chartered Accounts have suggested way of accounting for changing prices in the hope that it will stimulate thought and encourage a wider use of the method of accounting for price level changes. The most relevant aspects of the Guidance Note are as follows : (i) The adoption of a system of accounting for changing prices would require a considerable amount of time, money and specialised skills. Also the various techniques are still in the process of development. However, in view of the importance of the subject it is recommended that enterprises, particularly the large enterprises, may develop the necessary system to prepare and present this information. Out of the various methods of accounting for changing prices, the current cost accounting method seems to be most appropriate in the context of the economic environment in India. The periodic revaluation of fixed assets and adoption of LIFO formula for inventory valuations are partial responses to the problem of accounting for changing prices. Current Purchasing Power Accounting though simple to apply does not ensure the maintenance of operating capability of an enterprise. Current Cost Accounting (CCA) on the other hand is a rational and comprehensive system of accounting for changing prices, as it considers the specific effects of prices on individual enterprises and thus ensures that profits are reported only after maintaining the operating capability. However, the introduction of a full-fledged system of current cost accounting on a wider scale in India will inevitably take sometime. During that transitional phase, a periodic revaluation of fixed assets along with the adoption of LIFO formula for inventory valuation would reflect the impact of changing prices substantially in case of manufacturing and trading enterprises. Considering the importance of the information regarding the impact of changing prices, it is recommended that while the primary and financial
(ii)
(iv)
276
statements should continue to be prepared and presented on the historical cost basis, supplementary information reflecting the effects of changing prices may also be provided in the financial statements on a voluntary basis, at least by the large enterprises. (v) Apart from its utility in external reporting, accounting for changing prices may also provide useful information for internal management purposes. Accounting information system is designed primarily to provide relevant information to various levels of management with a view to assist in managerial decision making, control and evaluation. However, in periods of rapid and violent fluctuations in prices, the information provided by the historical cost-based accounting system may need to be supplemented by information regarding the impact of changing prices. The areas in which such information may be of prime importance to the management include investment decisions and allocation of resources, divisional and overall corporate performance evaluation, pricing policy, dividend policy, etc. (vi) In countries like the United Kingdom there have been some reforms in the tax structure as means of introduction of accounting for changing prices. Though the tax legislation in India at present does not give recognition to such an accounting system, even then accounting for changing prices would be useful for generating relevant information for internal and external decision making. There is no denying the fact that inflation has come to stay. It is therefore the responsibility of business as well as the government and professional bodies to take the bold step of making a positive recommendation regarding providing the way inflation really hits the profits. The system recommended should be simple, suitable to the Indian conditions and duly recognised by the government.
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NOTES AND REFERENCES

1. L.S. Porwal, Accounting Theory, 3rd edition, Tata McGraw-Hill Publishing Company Limited, New Delhi, 2001, p. 69. Accounting for Fixed Assets, (AS 10), Institute of Chartered Accountants of India (ICAI), New Delhi, reprinted, 1991. Guidance Note on Audit of Fixed Assets, Auditing Practices Committee, Institute of Chartered Accountants of India, (ICAI), New Delhi, 1989. 4. Depreciation Accounting, Accounting Standard (AS) 6, Institute of Chartered Accountants of India, ICAI, New Delhi, reprinted 1995. Guidance Note on Accounting for Depreciation in Companies, Research Committee, ICAI, Published in The Chartered Accountant, September 1989, pp. 259-264. Circular No. 2/89 No. 1/17/87-CLV dated 7-3-1989, Department of Company Affairs, Ministry of Industry, New Delhi. Ibid. Compendium of Opinions, Vol. II, Expert Advisory Committee, ICAI, New Delhi, 1982, Query No. 1.16, p. 31. Compendium of Opinions, Vol. I, 3rd edn., 1986, Query No. 1.64, pp. 122-124. Compendium of Opinions, Vol. II, Query No. 1.3, pp. 6-8. International Accounting Standard-15, Information Reflecting the effects of charging prices, Issued by the Research Committee ICAI, New Delhi, 1981.
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CHAPTER 7 Dr Alaa M Malo-Alain

Fixed Assets and Accounting Standards

CHAPTER 7 Dr Alaa M Malo-Alain