Accounting for Fixed Assets, Cost Components of Fixed Assets

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Accounting for Fixed Assets

Fixed assets are those assets which are held with an intention to use them for the purpose of production of goods or providence of services and not for generating sales. The fixed assets form a significant portion of all the assets an enterprise has, and are important in the presentation of the financial position of the enterprise.

Normally, the servicing and stand-by equipment are capitalized. The machinery spares are also charged to the profit ad los counts statements, as and when they are consumed.

The accounting for the fixed assets items can be improved by allocating the total expenditures to the component parts (they must be separable, practically). Estimation is then made regarding the useful life of these components.

Cost components of fixed assets

The fixed asset’s cost includes its purchase price, import duties along with the non refundable taxes and levies. All directly attributable costs are also included which comprise of:

  • Initial delivery and handling costs.
  • Site preparation costs.
  • Professional fees involved, and
  • Installation costs

The fixed asset’s cost does undergo changes which can be because of exchange fluctuations, changes in duties and price adjustments.

As the administration and overhead expenses do not relate to the cost of fixed assets, they are excluded.

Special classes of fixed assets

Goodwill- goodwill might be recorded in account books but only if some money or money worth of consideration has been paid for it.

Goodwill is written off over a defined period, in lieu with financial prudence. But many enterprises do retain goodwill as an asset and do not write it off.

Specific disclosures on fixed asset accounting have been required by The Accounting Standards 1 on Disclosure on Accounting Policies and the Accounting Standard 6 on deprecation accounting. The disclosures made in financial statements include

1. The expenditure incurred on the account for the fixed assets while construction or acquisition.

2. Additions, acquisitions and other movements of the net and gross book values at the beginning and at the end of the accounting period.

3. The revalued amounts which are substituted for the historical costs of fixed assets, the nature of all the indices which are used, the methods which are adopted for computing the revalued amount and also if an external value was involved in cases where the fixed assets are stated at their revalued amounts.

Costs of improvement and repairs

The expenditures which increase the future benefits form an existing asset beyond their existing standard of performance are only included in the gross book value (for example, an increase in capacity). The cost of additions and extensions of the existing fixed assets, which are an integral part of the fixed assets are also included in the gross book value.

Fair market value-The fair market value for these assets are those values of these fixed assets which are decided between two or more willing and knowledgeable parties, in an open and unrestricted market, while they are dealing at an arm’s length, and have no compulsion for transacting.

Gross book value-The gross book value of these assets is either their historical cost or an amount substituting the historical cost which s contained in financial statements or in the account books.

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