Accenture Financial Services

Fixed
Assets
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Objectives
At the end of this session, you will be able to:

▪ Visualize the various stages of Fixed Assets

Life Cycle
▪ Understand Accounting Aspects relating to
Fixed Assets
▪ Understand the need for a Control
Environment in Fixed Assets
▪ Devise Control mechanisms relating to Fixed
Assets

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What is a Fixed Asset?

• Asset held for the purpose of producing or providing goods/services.
For Instance:
– Land & Building
– Plant and Machinery / Office Equipment

• Not held for sale in the normal course of business

– Furniture purchased for resale by a Furniture Dealer is not a Fixed Asset.
But Seating Arrangement at the Office Reception is a Fixed Asset

• Expected to be used for > 1 accounting period

• Materiality
– Immaterial amounts are not capitalized but are charged off as expenses.

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What is a Fixed Asset?

Types of Fixed Assets

• Non- Depreciable Assets

– Assets having unlimited useful life

• Depreciable Assets
– Assets having limited useful life

• Tangible Assets
– Assets having physical form

• Intangible Assets
– Assets not having physical form

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Importance
• Why is it important to have dedicated
resources for Fixed Assets Accounting and
Control?

Group Activity

• Organize yourselves in groups to prepare

your response
– Each group should list the top 2-3 points

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Importance
• Essential for running the operations.
– Need to ensure robust capital budgeting methods
– Adequate funds must be available for purchase, replacement.
– Adequate Insurance coverage required

• Amount of Money involved

– A manufacturing organization could have almost 50% of its Balance Sheet
Assets represented by Fixed Assets
– Asset Depreciation is a major charge to the P & L

• Term of impact
– Unlike routine expenditure, it stays with an organization for a long
duration. The release to P&L is gradual. Accounting methods chosen
during set up impact for a long time

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Process
Overview
An Introduction
Life Cycle
Stages
Books and Ledgers

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SIPOC: 1,000 feet!

Supplier Input Process Output Customer

Business / Book Keeping FA Register Updated Business /

Controllership requests for and Financial Fixed Assets Controllership
Teams Fixed Assets Ledgers Register Teams
Maintenance
Updated
Financial
(Budgets,
Ledgers
Indents, POs,
Cap’n,
Payments,
Depn, Reval,
Physical
Verification
Adj)

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Asset Life Cycle:

Introduction
Disposal Planning

Budgeting
Revaluation

Improvements Indents

Depreciation PO

Capitalization

Each of these stages requires dedicated effort on Control, Book-keeping and/or

Accounting
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Asset Life Cycle:

Introduction
Disposal Planning

Budgeting
Revaluation

Financial
Improvements Accounting Indents
Foot-print

Depreciation PO

Capitalization

Let us first understand each one in summary and then we shall cover them in more detail
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Stages (In Summary) - I

Capital Planning and Budgeting go hand in hand

• Capital Planning
A way of defining how we’re going to spend money to get the most
impact for your organization and its mission (May be on a directional
10 year horizon)

• Capital Budgeting
Knowing what we’re going to spend our money on in the next year (or
two or three)

• In short Planning is more strategic whereas Budgeting is slightly

tactical

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Planning and Budgeting

• Example of Plan
– Invest $ 400 Mm in UK over next 5 years on a new Steel Plant
– Invest $ 200 Mm in Australia over next 4 years to upgrade the
existing Painting Facility

• Example of Budget
Code Description Amount
PM 452 Painting Machinery USD 4.5 Mm
RD 012 Research and Development Equipment USD 3.1 Mm
OE 326 Computer Equipment for Admin Office USD 1.2 Mm

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Planning and Budgeting

• How can we ensure that our capital budget is more thorough,
accurate, and meaningful ?
– List needs of the facility, preferably over 3 to 5 years, Needs
comprehensive evaluation of all facilities & systems.
– Start with urgent projects posing immediate health, safety or code-
related issues
– Move on to items on the list that have adverse consequences if
they’re deferred
– Next, undertake tasks that help reduce future capital and operating
costs
– Lastly, think about the marketability of properties and projects that
will add perceived value to the organization. For instance,
Customers should be aware if we have a Latest technology plant.

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Stages (In Summary) - II

Indenting & Purchase Order
• Indents
This is the process of raising requests for specific Capital Purchases
against available budgets. Typically raised by the user departments

• Purchase Order
Once the Indents are in place the Procurement team would start to
identify the Vendors basis quality and cost considerations
Once the vendor is selected, an appropriate Purchase Order is
raised. This represents a legal binding between the Purchaser and
the Seller.

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Stages (In Summary) - III

Installation, Capitalization and Depreciation
• Installation & Capitalization
Process of actually receiving the Asset either in whole or in parts to
be assembled at the location.
Accounting starts at this stage. Till the Assets are ready for use, they
are recorded as Work in Progress. As soon as the Asset is Installed,
they are shown as Fixed Assets.

• Depreciation
Depreciation requirement starts running as soon as the Asset is ready
for use. Essentially involves writing off the asset to the P&L gradually.

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Stages (In Summary) - IV

Improvements and Revaluation
• Improvements
Any long term additions to Assets which enhance their
performance beyond the originally acquired levels
Needs to be added to the historical cost of the assets

• Revaluation
Increasing the Value of Assets in books. The resulting gain is
taken to credit of Revaluation Reserve / Surplus.
Revaluation Reserve is a Capital Reserve not available for
Dividends.

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Stages (In Summary) - V

Repairs and Disposal

• Repairs
Maintenance Expenses incurred on assets to ensure that they
stay in good working condition.
Expensed in the year in which they are incurred.

• Disposal
The final discarding of asset after its useful life. All related
balances are zeroised. Resultant gain / loss is taken to Income
Statement.

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Overview of Books /
Modules (I)
General Ledger and Fixed Assets Register
• General Ledger
The book that holds:
– Asset Ledger Accounts and Accumulated Depreciation Accounts for
reporting in the Balance Sheet
– Depreciation Expense Accounts for reporting in the Income Statement
This is pretty much the requirement from a Financial Statement
perspective so do we need any other book of record?

• Fixed Assets Register

– If the GL has everything we need then why have the FA Register?
– What do you think?

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Overview of Books /
Modules (II)
• Fixed Assets Register
– Actually the General Ledger does not have all the details
– It only has the Account Balances and transactions in summary.
– For eg. it would have the total balance in Plant and Machinery Account
and may be even the transactions but
• No details of the individual assets that comprises the total balance
• It would not know that in the Total Plant and Machinery balance, how much
was spent on the Paint Booth and how much on the 7 different Quality
Check machines
• Further, How much did each Quality Check Machine cost individually?
• How much is the Depreciation on each of these Assets?

– Having all this information in the General Ledger would clutter it a lot.

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Overview of Books /
Modules (III)
Fixed Assets Register
• So it is best to have the Asset Line level details in a separate
place.
– That place is the Fixed Asset Register!

• We will discover connections between both the ledgers as we

go more into details.

• There are other modules involved as well that we shall discuss

in due course, for instance:
– Controlling Module – with details of the Budget Lines, Cost Centre
etc.
– Accounts Payable Module – with details of the Vendors
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Process
Overview
Accounting Footprint

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Accounting Footprint
• Covers the following:
– Acquisition
• WIP
• Capitalization

– Depreciation

– Expenses
• Improvement
• Repairs

– Revaluation

– Disposals

– We will now look at the Accounting Implications of each of these in detail

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Acquisition

Overview

• Revenue vs Deferred Revenue vs Capital

• Value at which to Record

• Work in Progress

• Accounting Entry Scheme

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Expenditure – 3 Types
• Revenue
– Full benefit of such expenditures is received during one accounting period
– For instance
• Rent, Salary, Stationary

• Deferred Revenue
– Predominantly revenue in nature, but its benefits could be enjoyed in
subsequent years. Examples: Expenses incurred by companies on
Research & Development and/or Public issue of shares
– It is conventional to treat such items as capital expenditure and amortize
them over a number of future periods.
– Prudence demands that when it is realized that they have no further
benefit to give, they must be written off immediately.

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Expenditure – 3 Types
• Capital
– These expenditures yield benefit over a long period i.e., more than one
accounting period
– These are therefore considered for Capitalization as Assets
– Examples as already discussed: Machinery, Buildings etc.

• Materiality Aspect
– Immaterial amounts are not capitalized but are charged off as expenses

• Why is it a must to distinguish Expenditures like this?

– Whether an expenditure represents an asset or an expense can have a
significant impact on the bottom line
– As we shall see in the Depreciation section, any impact to the P&L is
gradual if it is a Fixed Asset.
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Recording of Fixed Assets

• An asset is recognized if
– Future economic benefits from the asset are probable
and
– The cost can be measured reliably

• Normally recorded at Historical Cost

– That is cost of acquisition / manufacture of the Fixed Asset
(explained on next slide)

• Revaluations permitted in certain cases

• Certain assets like financial instruments to be reported at fair

market value (IFRS)

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Recording of Fixed Assets

• Cost composition – All costs incurred for making the asset ready for
‘intended use’ are capitalized
+ Purchase Price (-)Trade discounts
+ Import duties, (-) Rebates
+ Taxes etc.
+ Directly attributable costs
+ Installation Expenses

• Borrowing costs relating to deferred credits/ borrowed funds

– Up to the date on which the asset is ready to be used is included in
the cost
– Borrowing Costs post that are charged-off to P & L

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Capital Work-in-Progress
• Work that has not been completed but has resulted in a capital
expenditure being incurred by the company

• The Asset has not been put to use

• For instance if we are in process of constructing a Gen-set for Power

Backup to the Plant
– We may have paid for Purchase of Materials etc. But till it is ready for use
by us, it remains Capital WIP

• Distinguish this from the Routine Inventory under manufacture that is

under Progress. That is also WIP but not of a Capital nature.

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Entry Scheme
Group Activity

• Suggest Accounting entries for the following transactions

– Painting Machinery purchased on Credit: USD 300,000

– As a result of some M&A Activity, manufacturing facility taken over from

Competition and issued Equity shares in return: USD 7.7 Million

– Building under construction. Amount spent: USD 29,000

– Machinery Capital Work in Progress ready to use now: USD 640,000

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Entry Scheme
D/C Account Amount Sub Comment
Ledger

1
Db Painting 300,000 FA Ledgers Asset goes up in
Machinery books
Cr Accounts 300,000 AP Liability towards the
Payable Ledgers Vendor

2
Db Plant and 7,700,000 FA Ledgers Assets go up in books
Machinery
Cr Equity Share 7,700,000 Liability towards
Capital Ownership Capital

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Entry Scheme
D/C Account Amount Sub Comment
Ledger

3
Db CWIP: Building 29,000 FA Ledgers Asset goes up in
books. Not yet
capitalized

Cr Bank / Accounts 29,000 Cash Cash Out / Liability

Payable Mgmt/ AP towards the Vendor
Ledgers

4
Db Plant and 640,000 FA Ledgers Assets go up in books
Machinery
Cr Capital WIP: 640,000 FA Ledgers CWIP decreases
Machinery
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Fixed Asset Register

• Two points of discussion here
– Outright Purchase and Conversion from WIP stage

• Outright Purchase and Capitalization

– For instance a purchase of Furniture (Chairs and Tables for
Canteen would not need to be routed through the WIP stage)

– In the FA Register, we need to set up Asset Codes under the

correct category (Plant & Mach / Office Equipment / Building etc)

– The asset code would be connected to a particular approved Cost

Center (as available in the Controlling Module)

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Fixed Asset Register –

GL Interface
• If it is an Asset that is moving from CWIP stage to the Fixed
Asset Stage

– In this case a WIP Code would already exist in the FA Register

– The same would need to be marked as Capitalized

• Importance of Capitalization
– It is from that date onwards that Depreciation starts
– To facilitate Depreciation some other details are also captured
whenever an Asset is created in FA Register (Discussed in greater
detail later)

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Depreciation
Overview

• Matching Concept

• Causes of Depreciation

• Methods of Depreciation

• Accounting Entry Scheme

• Fixed Assets Register

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Matching Concept (I)

• Elementary Accounting Concept
– Expenses charged to the P&L should be matched with the benefits
earned out of those expenses

• Benefits from a long term asset are enjoyed by the firm over a long
period of time
– Say a firm bought a machine costing $10 Mm that would last 10 years
– Would it be OK to charge the entire cost of the asset to the first year’s
P&L?
– Or should they wait till the last year and then charge it to the P&L when
the Asset is disposed?
– Both the above are wrong as they would distort the P&L greatly
– So, what should we do?

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Matching Concept (II)

• We need to charge the cost to the P&L over the useful lie of the Asset
in a systematic manner
– This is depreciation – It charges off a part of the cost of the asset over its
useful / economic life

• Depreciation also allows the firm to collect enough funds for

replacement of the asset after its useful life.
– It is a Non cash expense
– However by reducing the profits, it also reduces the amount available for
Dividends
– This retains funds within the business which would otherwise have been
paid off
– In another words opportunity for business to preserve these funds and use
them when assets are due for replacement
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What causes depreciation?

• Also referred to as the loss of Value in assets. Causes of this expense:
– Wear and tear due to constant use
– Expiry of time
– Obsolescence
– Depletion in case of wasting assets
– Permanent fall in the market price

• Without charging depreciation:

– Profit / loss would be wrong
• Depreciation is required to determine the true cost of production / gross profit
ratio.
– Balance sheet would be wrong
• Assets would not to be shown at their true values

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Factors for Assessing

Depreciation
• Historical Cost / Revalued amount
– Money outlay or equivalent on acquisition, installation, commissioning or
significant improvements thereto

• Expected useful life of the asset

– The period over which the asset is expected to be used OR
– The number of production units expected to be obtained from the use of
the asset
– Different parts of an asset may have different useful lives, in such cases
they are depreciated separately
– Should be reviewed at each balance sheet date

• Estimated Residual Value (RV) of the asset

– If RV is insignificant, its taken as NIL
– If significant, then its estimated at the time of
acquisition/installation/revaluation
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Methods of Depreciation
• A major factor is the method applied/chosen to calculate
Depreciation

• Some options:
– Straight line Method
– Reducing balance method
– Sum of the years of the Digits Method
– Production Units Method

• Would depend on the Company Policy and Legal Framework

– Methods chosen could be reviewed periodically
– Any change in the depreciation method is treated as a change in
the accounting policy

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Example
• Lets assume the following example to understand each of the
methods

• Cost of Machinery: USD 1,000,000

• Estimated Residual Value : USD 200,000
• Estimated useful life : 8 years
• Depreciable amount
– Historical cost less RV
– USD 1,000,000 – 200,000 = USD 800,000

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Straight Line Method (I)

• An equal amount is written-off over the useful life

• Cost of the asset is reduced to its RV at the end of its useful life

Straight Line Depreciation= Cost of Asset – Residual Value

Useful Life
Depreciation Rate = S.L. Depreciation* 100
Cost of asset

• Suitable for writing-off assets like patents, leases, copyrights

etc.

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Straight Line Method (II)

Straight Line Depreciation = 1,000,000 – 200,000
8
= 100,000 per annum

Depreciation Rate = 100,000 * 100

800,000
= 12.5%

• Simple!

• However, at times the underlying assumption of the asset

providing equal utility over its life does not hold good because
– Assets have declining efficiency over time
– High expenses on repairs as asset ages
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Reducing Balance Method (I)

• Also known as Written Down Value / Diminishing Balance Method

• Depreciation Charge is a Fixed percentage of the diminished value

of the asset over its useful life

• The asset is reduced to its scrap value over its useful life
Depreciation Rate = 1-n√Residual Value/Cost of asset *100

• Considered more suitable for depreciating plant, fixtures etc

• Under this method the charge to revenue is uniform

– When depreciation is high, repairs are negligible
– And vice versa

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Reducing Balance Method (II)

Depreciation Rate = (1 - 8√200,000/1,000,000 ) *100

= (1 - 0.8178) * 100
= 18.22%

• Yearly Depreciation would decline as the years progress as the

base itself reduces

• Considered more suitable for depreciating plant, fixtures etc

• Under this method the charge to revenue is uniform

– When depreciation is high, repairs are negligible
– And vice versa

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Sum of Years Digits Method

• Annual depreciation is calculated by multiplying the depreciable
amount of the asset by the following fraction:
No. of years (including the present year) of remaining life of the asset
Total of all digits of the life of the asset (in years)

• In our example: Total Life = 8 years

– Total of all digits from 1 to 8 is 36 (8+7+6+5+4+3+2+1)

• 1st year depreciation 8/36 *800,000 (net of scrap)

• 2nd year depreciation 7/36 *800,000 and so on….

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Production units method (I)

• Depreciation charge is determined comparing the annual production

to the estimated total production
Annual Depreciation = Annual Production * Depreciable Amt
Estimated Total Production

– For our example: Suppose Expected Production is:

• 1-3 years 10,000 units p.a. (3 years)

• 4-6 years 05,000 units p.a. (3 years)

• 7-8 years 02,500 units p.a (2 years)

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Production units method (II)

Total Production is = (10K * 3) + (05K * 3) + (2.5K * 2) = 50,000 units

Depreciation for 1st year = 10K / 50K * 800,000 = 160,000

Depreciation for 2nd year = 10K / 50K * 800,000 = 160,000
Depreciation for 3rd year = 10K / 50K * 800,000 = 160,000

Depreciation for 4th year = 5K / 50K * 800,000 = 80,000

Depreciation for 5th year = 5K / 50K * 800,000 = 80,000
Depreciation for 6th year = 5K / 50K * 800,000 = 80,000

Depreciation for 7th year = 2.5K / 50K * 800,000 = 40,000

Depreciation for 8th year = 2.5K / 50K * 800,000 = 40,000

Total Depreciation = 800K (leaving a residual balance if 200K)

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Journal Entries
• A ‘Provision for Depreciation Account’ is opened to accumulate
depreciation

• Accounting Entries-
– Debit Depreciation A/c (Expense)
– Credit Provision for Depreciation A/c (Balance Sheet)

– Debit Profit and Loss A/c

– Credit Depreciation A/c

• In the Balance Sheet

– Assets are carried at historical cost
– However the Accumulated Depreciation till that year end is
reduced from the value of the Asset
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Group Activity
Entry Required

• Refer our example of the Asset that lasts for 8 years

– Cost of Machinery: USD 1,000,000

– Estimated Residual Value : USD 200,000
– Estimated useful life : 8 years

• Please Process the Depreciation entry for the 3rd year

• Method: Written Down Value / Diminishing Balance

– Depreciation Rate already calculated: 18.22%

• Also present the Balance Sheet Extract for the Asset

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Calculations & Entry

• Depreciation for Year 1 = 1,000,000 * 18.22% = 182,200

• Depreciation for Year 2 = (1,000,000 -182,200) * 18.22

= 817,800 * 18.22% = 149,003

• Depreciation for Year 3 = (817,800 - 149,003) * 18.22

= 668,797 * 18.22% = 121,855
D/C Account Amount Cost Comment
Centre

Db Depreciation 121,855 XXX-XXX Expenses for XX

Expense
Cr Accumulated 121,855 Creation of a contra
Depreciation Assets in books

In reality the entry would be made in 12 monthly installments

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Balance Sheet
Presentation
• Balance in Asset Account = 1,000,000

• Balance in Accumulated
Depreciation Account
(182,200 + 149,003 + 121,855) = (453,058)

• Net Balance = 546,942

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Fixed Asset Register – Depn

• Normally, Depreciation Calculations are not handled for each asset
separately

• That would be too error prone and time consuming!

• Instead a Depreciation run is processed in the Fixed Asset Register

which calculates the Depreciation for all Assets together

• To enable this calculation, every Asset Code could have the following
details filled in:
– Depreciation Method
– Depreciation Rate (or details like Life, Scrap Value etc to enable the
calculation)
– Date of Acquisition
– Cost Center etc.
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Fixed Asset Register – Depn

The system automatically
• Calculates the Depreciation at the Asset Level
• Summarizes it at the Ledger Account Level (separately for Plant and
Machinery, Office Equipment etc)
• And also at the Cost Centre Level

• And then prepares a ledger entry to be posted via interface to the

General Ledger Accounts

This way the General Ledger and the FA Register are completely in
sync.

Also the details are in the FA ledger while the summary is in the GL.

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Further Expenses on
Fixed Assets
Overview

• Revenue Expense: Repairs and Maintenance

• Additions to Fixed Assets

• Accounting Entry Scheme

• Handling these in the Fixed Assets Register

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Repairs vs Improvements
• Subsequent expenditure on the asset can be
– In the nature of Repairs / Maintenance
• Such expenses are charged-of to P & L

OR

– Improvements
• Such expenditures enhance the future benefits accruing from the
asset beyond its previously assessed standards of performance
• These are included in the gross book value of the asset

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Additions to Fixed Assets

• Addition or extension which becomes an integral part of the existing
asset
– Usually added to its gross book value
– Example: A new wall constructed inside a Building for better utilization

• Addition or extension having a separate identity and capable of being

used after the disposal of the existing asset
– Is accounted for ‘separately’
– Example Enhanced Engine attached on old Aeroplane
If it can be used separately then it should be capitalized separately

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Journal Entries
• For Routine Expenses
– Debit Repair A/c (Expense)
– Credit Accounts Payable (Balance Sheet)
Post this the Repair Expense is transferred to P&L

• For Improvement Type Expenses

– Debit Fixed Asset (Balance Sheet)
– Credit Accounts Payable (Balance Sheet)

After this the impact on Depreciation would be increased accordingly

in the subsequent periods

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Group Activity
Entry Required
• Refer our example of the Asset that lasts for 8 years

• Suppose that in the 4th year the following transactions took place:
– Repairs $ 5,000 (Routine)
– Improvement Repairs $ 20,000

• Please process the entries

• Also state which of these would have an impact on the Fixed Assets
Register

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Entry Scheme
D/C Account Amount Cost Comment
Centre

1
Db Repair and 5,000 XXX-XXX Increase in Routine
Maintenance Expenses
Cr Accounts Payable 5,000 Increase in Current
Liability

2
Db Fixed Asset A/c 20,000 Capitalization of
Expenses
Cr Accounts Payable 20,000 Increase in Current
Liability

Only the Second entry has an impact to the FA Register

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Provision for Repairs

& Renewals
• At times businesses can expect Repair Expenses after a certain
frequency

• Say a machine requires complete overhauling after every 3 years

• Now the payment would be required only after 3 years

• Is it wise to have expenses charged to P&L after 3 years OR

• Is it better to provide for these expenses in the intermediate two years

as well?

• The second option may be preferable in such a case

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Fixed Asset Register –

Expenses
• The Fixed Asset Register would only need to be impacted in case the
expense is of Capital Nature

• Addition or extension which becomes an integral part of the existing

asset
– An existing Asset Code is added to

• Addition or extension having a separate identity and capable of being

used after the disposal of the existing asset
– A separate Asset Code would be required

• Impact in FA Module is required so that Depreciation of subsequent

periods can be calculated correctly.

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Revaluation
Overview

• Meaning of Revaluation

• Accounting Scheme

• Examples
– Upward Revaluation
– Downward Revaluation

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Revaluation
Implies Re-statement of book values
• Property, Plant and Equipment (PPE) carried at fair value less
depreciation and impairment (IFRS)

• Revaluation model to be applied to entire class of assets (IFRS)

• Revaluations have to up-to-date so that carrying amount is not

materially away from fair value (IFRS)

• US GAAP ‘does not’ permit revaluations. PPE is carried at cost

less accumulated depreciation and impairment losses.
– Impairment testing required if there are indications that carrying
amount of asset is not recoverable

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Revaluation-
Accounting Entries
• Increase in the carrying amount as a result of revaluation is
credited under the head ‘revaluation surplus’:
Fixed assets A/c Debit
Revaluation Surplus A/c Credit

• To the extent such increase is related to and not greater than

revaluation decrease previously recognized as expense, it
may be credited to the profit and loss statement
Fixed asset A/c Debit
Profit and loss A/c Credit
Revaluation Surplus A/c Credit

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Revaluation-
Accounting Entries
• Decrease in the carrying amount as a result of revaluation is
recognized as an expense
Profit and loss A/c Debit
Fixed Assets A/c Credit

• To the extent such decrease is related to and not greater than

any revaluation surplus or the same asset, its directly charged
against that surplus
Revaluation Surplus Debit
Profit and loss A/c Debit
Fixed Assets A/c Credit

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Revaluation – Group
Activity
• Say Original Book Value: USD 300,000
– Earlier Revalued Downwards by USD 50,000. This was charged to
the P&L last year
– Now in the latest Revaluation the same asset has been found to
be revalued upwards by USD 70,000

• Say Original Book Value: USD 700,000

– Earlier Revalued Upwards by USD 80,000. This was taken to
Revaluation Surplus Account last year
– Now in the latest Revaluation the same asset has been found to
be revalued downwards by USD 95,000

• What are the entries required in both cases?

– Previous Year
– Current Year
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Entry Scheme:
Revaluation (I)
D/C Account Amount Sub Comment
Ledger

Previous Year
Db Profit and Loss 50,000 Write Off charged to
Account P&L
Cr Fixed Asset 50,000 FA Ledgers Decline in Asset Value
Account

Current Year
Db Fixed Asset 70,000 FA Ledgers Assets Revalued
Account upwards in books
Cr Profit and Loss 50,000 Initial Decline
Account reversed from P&L
Cr Revaluation 20,000 Further Increase
Surplus taken to Capital
nature Reserve
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Entry Scheme:
Revaluation (II)
D/C Account Amount Sub Comment
Ledger

Previous Year
Db Fixed Asset 80,000 FA Assets Revalued
Account Ledgers upwards in books
Cr Revaluation 80,000 Benefit taken to Capital
Surplus nature Reserve

Current Year
Db Revaluation 80,000 Decrease reversed from
Surplus Capital Reserve
Dr Profit and Loss 15,000 Additional Decline
Account charged to P&L
Cr Fixed Asset 95,000 FA Assets Revalued
Account
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Disposals
Overview

• Meaning

• Reasons

• Accounting

• Fixed Assets Register

• Inter-Departmental Transfers

• Disposals of Significant Assets

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Disposal of
Depreciable Assets
• Disposal normally means the scrapping of an Asset from
business use as it has completed its useful life

• Occasionally it could be due to

– Exiting that line of business
– Obsolescence
– To procure a better technology replacement
– Loss by Calamity (Fire / Earthquake)

• On sale/ disposal of the asset

– The depreciation is charged for the period it has been used
– The resulting Profit/loss on sale/disposal of the asset is
transferred to profit and loss account
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Disposal of
Depreciable Assets
• Accounting Entries
– Transferring book value of the asset and related Accumulated
Depreciation to ‘Asset Disposal A/c’
• Asset disposal A/c Debit
• Accumulated Depreciation Debit
• Asset A/c Credit

– For recording the sale proceeds of the asset:

• Bank A/c Debit
• Asset Disposal A/c Credit

– For Profit on the asset disposed off

• Asset Disposal A/c Debit
• Profit & Loss A/c Credit
( In case of loss the above the entry will be reversed)
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Group Activity
Entry Required

• Say Original Book Value: USD 300,000

– Straight Line Depreciation @ 10%
– Asset Disposed at the end of 8th year for USD 70,000

• Say Original Book Value: USD 700,000

– Straight Line Depreciation @ 10%
– Asset burnt by fire in the middle of 6th year
– Insurance Company paid USD 100,000

• What are the entries required in both cases?

– Depreciation in the year of disposal
– Disposal
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Entry Scheme:
Disposal (I)
D/C Account Amount CC Comment

Closing Year Depreciation

Db Depreciation Exp 30,000 XXXXX 10% of 300,000: Yr 8
Cr Acc. Depreciation 30,000 Increase in Provision

Disposal
Db Asset Disposal 60,000 Transfer of Closing
Balances of Asset and
Db Acc. Depreciation 240,000
Related Acc Depn to
Cr Fixed Asset 300,000 Disposal A/c

Db Bank 70,000 Proceeds from

Disposal
Cr Asset Disposal 70,000

Db Asset Disposal 10,000 Net Benefit on Disposal

taken to P&L
Cr P&L 10,000
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Entry Scheme:
Disposal (II)
D/C Account Amount CC Comment

Closing Year Depreciation

Db Depreciation Exp 35,000 XXXXX 5% of 700,000: Yr 6
Cr Acc. Depreciation 35,000 Increase in Provision

Disposal
Db Asset Disposal 315,000 Transfer of Closing
Balances of Asset and
Db Acc. Depreciation 385,000
Related Acc. Dep. to
Cr Fixed Asset 700,000 Disposal A/c

Db Insurance Co. 100,000 Proceeds Receivable

from Disposal
Cr Asset Disposal 100,000

Db P&L 215,000 Net Loss on Disposal

taken to P&L
Cr Asset Disposal 215,000
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Fixed Asset Register

• In the Fixed Asset Register the assets will need to be marked for
disposal

• Disposal in the Register also requires the date of Disposal

• This is to ensure that Depreciation stops getting calculated after that

date
– Some organizations have a policy that disposals are affected only at month
/ quarter ends

• Also Disposal in Register ensures that Assets are not printed in the list
to be verified

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Inter Departmental
Transfers
• What if Department A transfers some Computers worth $
60,000 to another Department B
– Technically the Asset stays within the same business entity
– However it is actually a disposal for Department A and a Purchase
for Department B

• In this case we need to pass the entry

Debit Computer Equipment A/c CC Dept B $60,000
Credit Computer Equipment A/c CC Dept A $60,000

• Also in the FA Register, the Cost Centre of that asset needs to

be changed

• This will ensure that the Depreciation for periods after the
transfer is charged to the new Cost Center
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Disposal of
Significant Assets
• What if a substantial part of the fixed assets of an organization
has been disposed off
– Say lost by fire

• It needs to be checked whether such disposal could affect the

very existence of the company
– If yes, then the company should not follow the Going Concern
Assumption
– Immediately all the assets and Liabilities should be restated to
their Market Values.

• We move to an assumption that the business would need to be

wound up:
– So everything could need to be disposed / settled
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Intangible Assets
Overview

• Meaning

• Recognition Criteria

• Measurement

• Amortization / Carrying Cost / Revaluation of

Intangibles

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Meaning
• Assets not physical in nature
– E.g. Corporate intellectual property, goodwill, brand recognition
– Despite no physical character, there positive impact on company’s
bottom-line profits can be huge
• Coca Cola’s brand strength drives global sales year after year

• Classification
– Indefinite- Unlimited life
• A company’s brand name as long as its operations continue
– Definite- Limited life
• A company enters into a legal agreement to operate under another
company’s patent with no plans of extending the agreement
– Acquired or Internally Generated

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Recognition Criteria
• Separately acquired intangibles
– Are recognized if future economic benefits from the asset
are probable and the cost can be measured reliably

• Internally generated intangibles

– Research Phase
• Cost in this phase are always expensed
• Once expensed cannot be capitalized

– Development Phase
• Costs in this phase are capitalized only on demonstration that
Completion of the asset is technically feasible

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Intangibles-
Measurement
• Acquired Intangibles
– Recognized initially at cost
– The cost is usually the fair value of the consideration paid

• Internally generated intangibles

– Cost would include all expenditures directly attributed/allocated for
producing/creating the asset from the date the when the asset
recognition criteria is met

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Amortization / Carrying
Cost
• If the asset has finite life
– Amortized over its useful life
– Carried at historical cost less accumulated amortization/impairment

• If the asset has indefinite life

– No amortization is done
– Should be tested annually for impairment
– No presumption of maximum life (Under Indian GAAP there is a
presumption that the useful life does not exceed 10 years)
– Carried at historical cost unless impaired

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Revaluation of
Intangibles
• Revaluations of Intangible Assets are
– Extremely rare in practice
– Performed regularly if an entity adopts this
treatment
– Done at the same time for all assets in the
same class
– Not permitted under US GAAP

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Reporting
Requirements
Schedule
Other Ad-hoc Requirements

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Fixed Assets Schedule

• All companies are required to prepare a consolidated Schedule
which goes as an Annexure to the Balance Sheet

• It gives a snap shot

– Opening Balances of Asset and Accumulated Depreciation
– Additions during the year: Assets and Depreciation
– Disposals during the year
– Closing Balances of Asset and Accumulated Depreciation

• Details are segregated at the Asset Category level

– Plant & Machinery, Office Equipment, Land & Buildings, Furniture
and Fittings, Intangibles etc.

• Format given on next page

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F A Schedule: Format
Col. Ref Particulars Categories
L&B P&M Etc.

A Opening Gross Block - - -

B Additions during the year - - -
C Deletions during the year - - -
D = A+B-C Closing Gross Block - - -
E Opening Accumulated Depreciation - - -
F Depreciation During the year - - -
G Dep on Assets Disposed During year - - -
H = E+F-G Closing Accumulated Depreciation - - -
I = D-H Closing Net Block - - -
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Other Reports
• Other Operational reports that the Fixed Assets Processing
Team may be required to submit

• Ad-hoc Data Requirements

– On particular assets that are planned for Disposal / Replacement
• To figure out the Original Book Value and Depreciation till date
• For estimated gain / loss on disposal
– Depreciation Projections for the year basis existing assets and
fresh additions

• Status of Budgets / Indents as available in the Fixed Assets

Register
– More on this in Controls Section

• Reports for Insurance Purposes

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Risks &
Controls
Reasons
Impact
Control Methods

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Group Activity
Some risks that Fixed Assets are more prone to

• Like any other Accounting Process, Fixed Assets Process is

also prone to some risks as well

• What are the Risks that you see here?

• What are the Impacts of these risks?

• What are the Controls that you can see for these risks?

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Risks to Fixed Assets

There are various risks that Fixed Assets are prone to

Among the top risks

• Risk of Overspending

• Mismatch between the GL and FA Register

• Incorrect Depreciation

• Physical Loss of Assets

Lets discuss each one in some detail

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Risk of Overspending
• You are aware that every organization has a certain amount of
budgets for purchase of Fixed Assets

• What if we purchase Fixed Assets higher than the budget available?

• Impact
– Lack of Funds for Day to Day Business
– No point having heavy machinery but insufficient stocks to work with or
inability to hire staff for operating the machines
– Extra Pressure to raise more loans and equity capital even if at higher
costs

• To control this risk we need robust procedures in place much before

Assets are actually purchased

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Controls including
Initial Setup
• The Budget Lines must be in place well in advance in line with the
Strategic Plan so that Indents can be raised against it

• All Indents must have reference against Established Budget Lines.

Needs to be ensured that there is no unauthorized cross utilization of
budgets
– Using the “Office Computers” Budget Line for “Office Furniture”

• Similarly Purchase Orders must be made with reference to Indents.

Also all Invoices must be mapped to relevant Purchase Orders

• Appropriate Authorization at every stage

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Risk of Incorrect
Depreciation
• What if the Depreciation calculations are wrong?

• What if Assets that should be Capitalized are still in WIP stage?

• Or the rates are wrongly mentioned in the FA Register?

• Or even if all the calculations are right but the Account Code /
Cost Center is wrong?

• Impact
– Wrong P&L at the Organization / Cost Center level
– Wrong Balance Sheet

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Controls for
Depreciation
• Quality Check on all Asset related transactions
– High value
– Long term impact

• Trend Analysis with previous year’s data

– Compare any unusual amounts at the Account / Cost Center level

• Certification on WIP that assets are ready for use or still in

Construction stage
– Not always required. For instance for Furniture acquired

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Risk of GL - FA Reg.
Mismatch
• Fixed Assets Register is the Sub Ledger to explain summary
accounts in the GL for
– Asset Accounts
– Depreciation Accounts
– Accumulated Depreciation Accounts
The Register explains each of these at an Asset Code level

• If there is a mismatch, then we lose confidence in the GL

balances

• Controls
– Regular Schedule based Reconciliations
– Ensuring Robust Interface

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Risk of Physical Loss

of Assets
• Self Explanatory

• Could be due to Pilferage, Fire or Natural Calamities

• Impact
– Cash Outflow required to procure new assets
– Financial Impact of write off to the P&L
– Stoppage of Business Operations
• Loss of Customer confidence

• Controls
– Physical Controls (Security, Access etc.. Not discussed further)
– Physical Verification
– Insurance
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Verification of Fixed
Assets
• Physical verification
– Is conducted by the management
– Is to be done at reasonable intervals
– Involves comparison of the physical verification report with the
Fixed Asset Register

• Handling Write Offs

– Approvals required so that not taken for granted
– Investigation required for material discrepancies
– Also Treatment of discrepancies in the books of account as well as
the F.A. Register to ensure that the financial records / F.A.
Register reflect the assets held by the company

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In Closing
Overall Control of FA Records
Summary Process
Closing Summary

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Overall Control of
F.A. Records
• Matching of the opening balances with records such as the
Schedule of fixed assets, ledger or register balances

• New acquisitions to be verified with supporting documents like

purchase orders, invoices, receiving reports and title deeds

• Self constructed fixed assets and Capital Work-in Progress with

reference to supporting documents such as contractor’s bills,
work orders, independent confirmation of the work performed
from other parties

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Summary of
Process Flow
– Approval of capital budgets by the board

– Communication of approved budgets to various user departments-

purchase, Accounts, Department raising the indent.

– Raising of the indent as per the allocated budgets

– Matching of the indent with the allocated budgets by the purchase

department

– Raising of the P.O. as per the approved vendor list. In case of exceptions,
separate approvals to be obtained.

– Matching of the Invoice with the PO, GRN and QC Report

– Capitalization of assets from the date of installation and updation of Fixed

Assets Register

– Processing of the payments

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Final Summary

• We looked at the various stages of Fixed Assets Life Cycle ad

their importance
– All the way from Planning to Disposal

• We understood the Accounting Aspects relating to each of the

stages

• We discussed the chances of errors and their impact

• Also looked at a need for a Control Environment in Fixed Assets

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Thank You!

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