Accounting Standard 10- Study on Fixed Assets

Submitted By:

Mamta Chawla - 10075Mikesh Matalia -10079

Neeta More -10092Nidhi Jinesh Shah-10095

Nidhi Gupta-10097

A Report submitted to MET – AMDC in partial fulfillment of the requirement for the award of eMBA for the year

2010.

Under the guidance of:Prof. L.N.Chopde

Mumbai Education Trust – AMDC

1

PREFACE

In our project, we have highlighted the importance of accounting standards as a part of the accounting system. Accounting standards are the subject of guidelines issued by the Institute of Chartered Accountant of India in respect of financial transactions. These accounting standards have many advantages. Accounting Standards provides the information about company such as weather the company has adopted uniform accounting policies or discloses adequate information. The accountability is largely matter of disclosure, of transparency, of explaining company’s activities

This project involves discussion regarding the origin and benefits of accounting standard (AS) 10 along with its provision as drawn by ICAI. Along with this we have also included ‘Accounting for Fixed Assets’ of annual reports of Tata Motors, Voltas to study the practical implication of the same.

2

ACKNOWLEDGEMENT

This project report could not have been prepared, if not for the help and encouragement from various people. Hence, for the same reason I would like to thank my Professor Mr. L.N.Chopde for his able guidance and useful suggestions, which helped me in completing the project work, in time.

I would also like to thank Prof. Vijay Page, Director General, MET AMDC for his constant support and valuable assistance during this project.

3

EXECUTIVE SUMMARY

Assets are any property owned by a person or business. Tangible assets include money, land, buildings, investments, inventory, cars, trucks, boats, or other valuables. Intangibles such as goodwill are also considered to be assets.

Fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. Fixed assets are sometimes collectively referred to as "plant". In financial records these Fixed Assets are usually expressed as the cost of the asset minus depreciation.

Accounting standard 10 – A study of fixed assets helps us understand, how different companies deal with their fixed assets. When it comes to expansion and restructuring, a company has to purchase or lease more assets like land, buildings etc to set up new offices which would help increase the business opportunities or it has to purchase more machinery in order to help increasing the productivity of the company & get rid of outdated technology,. It is absolutely crucial for a company to understand that which asset must be sold off at the right time before it turns outdated and of no use to any producer in the market. Hence we can conclude that Fixed Assets are assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably.

4

CONTENTS

Overview of accounting standards 6

Introduction 7

Definitions 7

Explanation 7

Identification of Fixed Assets 8

Accounting Standards 10 9

Applicability of Accounting Standards 10

Tata Motors Fixed Asset Analysis 2009-10 12

Voltas Fixed Asset Analysis 2009-10 16

IRB Fixed Asset Analysis 2009-10 20

Maruti Suzuki Fixed Asset Analysis 2009-10 25

Bibliography 28

5

OVERVIEW OF ACCOUNTING STANDARDS

The Institute of Chartered Accountants of India (ICAI) recognized the need to harmonize the diverse accounting policies and practices in use in India and constituted the Accounting Standards Board (ASB) on 21st April, 1977. The composition of the ASB was fairly broad-based and ensured participation of all interest-groups in the standard-setting process.

The objective of Accounting Standards Board

a. To conceive of and suggest areas in which Accounting Standards need to be developed.

b. To formulate Accounting Standards with a view to assisting the Council of the ICAI in evolving and establishing Accounting Standards in India.

c. To examine how far the relevant International Accounting Financial Reporting Standard can be adapted while formulating the Accounting Standard and to adapt the same.

d. To review, at regular intervals, the Accounting Standards from the point of view of acceptance or changed conditions, and, if necessary, revise the same.

e. To provide, from time to time, interpretations and guidance on Accounting Standards.

f. To carry out such other functions relating to Accounting Standard/International Financial Reporting Standard

The main function of the ASB was to formulate Accounting Standards so that such standards may be established by the ICAI in India. While formulating the Accounting Standards, the ASB took into consideration the applicable laws, customs, usages and business environment prevailing in India.

6

INTRODUCTION

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 standard deals with accounting for such fixed assets.

Definitions

1. 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.

2. Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm’s length who are fully informed and are not under any compulsion to transact.

3. Gross book value of a 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.

Explanation

Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position. Furthermore, the determination of whether expenditure represents an asset or an expense can have a material effect on an enterprise’s reported results of operations.

7

Identification of Fixed Assets

The definition given above gives criteria for determining whether items are to be classified as fixed assets. Judgment is required in applying the criteria to specific circumstances or specific types of enterprises. 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 asset, because the amount of the expenditure is not material.

Stand-by equipment and servicing equipment are normally capitalized. 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 asset 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.

8

AS-10 — ACCOUNTING FOR FIXED ASSETS

The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.

Self-constructed asset shall be accounted at cost.

In case of exchange of asset, fair value of asset acquired or the net book value of asset given up whichever is more clearly evident shall be considered.

Revaluation is permitted provided it is done for the entire class of assets. The basis of revaluation should be disclosed.

Increase in value on revaluation shall be credited to Revaluation Reserve while the decrease should be charged to Profit and Loss Account.

Goodwill to be accounted only when paid for.

Assets acquired on hire purchase shall be recorded at its fair value.

Gross and net book values at beginning and end of year showing additions, deletions and other movements is required to be disclosed.

Assets should be eliminated from books on disposal or when of no utility value.

Profit/loss on disposal is recognised on disposal to Profit and Loss Account.

Machinery spares that can be used only in conjunction of specific asset shall be capitalised.

9

APPLICABILITY OF ACCOUNTING STANDARDS

Accounting Standards

To all Corporate Entities [As per

Companies (Accounting

Standards) Rules]

To all Non-Corporate entities

[As per ICAI Accounting Standards]

AS 1Disclosure of

Accounting PoliciesY Y

AS 2Valuation of Inventories

Y Y

AS 4Contingencies and

Events Occurring After the Balance Sheet Date

Y Y

AS 5

Net Profit or Loss for the Period, Prior Period Items and

Changes in Accounting Policies

Y Y

AS 6Depreciation Accounting

Y Y

AS 7Construction Contracts

(Revised 2002)Y Y

AS 9 Revenue Recognition Y Y

AS 10Accounting for Fixed

AssetsY Y

AS 11The Effects of Changes

in Foreign Exchange Rates (Revised 2003)

Y Y

AS 12Accounting for

Government GrantsY Y

AS 13 Accounting for Y Y

10

Investments

AS 14Accounting for Amalgamations

Y Y

AS 15 Employee Benefits Y Y

AS 16 Borrowing Costs Y Y

AS 18Related Party Disclosures

YNot applicable to

Level III

AS 19 Leases Y Y

AS 20 Earnings Per Share Y Y

AS 22Accounting for Taxes

on IncomeY Y

AS 24Discontinuing

OperationsY

Not applicableto Level III

AS 25Interim Financial

ReportingY Y

AS 26 Intangible Assets Y Y

AS 28 Impairment of Assets Y Y

AS 29Provisions, Contingent

Liabilities and Contingent Assets

Y Y

11

Tata Motors – 2009-10

12

FIXED ASSETS

Fixed assets are stated at cost of acquisition or construction less accumulated depreciation / amortization.

The product development cost incurred on new vehicle platform, engines, transmission and new products are recognized as fixed assets, when feasibility has been established, the Company has committed technical, financial and other resources to complete the development and it is probable that asset will generate probable future benefits.

Cost includes purchase price, taxes and duties, labour cost and directly attributable costs for self constructed assets and other direct costs incurred upto the date the asset is ready for its intended use. Borrowing cost incurred for qualifying assets is capitalised up to the date the asset is ready for intended use, based on borrowings incurred specifically for financing the asset or the weighted average rate of all other borrowings, if no specific borrowings have been incurred for the asset. The cost of acquisition is further adjusted for exchange differences relating to long term foreign currency borrowings attributable to the acquisition of depreciable asset w.e.f. April 1, 2007.

Software not exceeding Rs. 25,000 and product development costs relating to minor product enhancements, facelifts and upgrades are charged off to the Profit and Loss Account as and when incurred.

As per auditor’s report:a. The Company has maintained proper records showing full

particulars including quantitative details and situation of fixed assets;

b. The fixed assets were physically verified during the year by the Management in accordance with a regular programme of verification which, in our opinion, provides for physical verification of all the fixed assets at reasonable intervals. According to the information and explanation given to us, no material discrepancies were noticed on such verification;

c. The fixed assets disposed off during the year, in our opinion; do not constitute a substantial part of the fixed assets of the Company and such disposal, in our opinion, has not affected the going concern status of the Company.

13

DEPRECIATION AND AMORTIZATION

Depreciation and Amortization (including product development expenditure) for 2009-10 increased by 53.6% to Rs.4,385.33 crores from Rs.2,854.52 crores in 2008-09. The increase in depreciation and amortization expenses of Rs.1,380.36 crores represent impact on account of increased capitalization at TML including the effect of assets installed in the earlier years for which full effect has come in the current year. Further, there has been an increase in amortization of product development cost consequent to commencement of commercial production of new products mainly Prima, Nano and other products. The increase is also attributable to product development written off during the year of Rs.498.20 crores as compared to Rs.347.75 crores in 2008-09 and increased depreciation of tooling at Jaguar Land Rover business.Accumulated Depreciation includes:

a. An adjustment of Rs. 76.78 crores (as at March 31, 2009 Rs. 47.24 crores) on assets transferred / sold / discarded during the year.

b. Lease equalisation of Rs. 4.51 crores (2008-09 Rs. 4.49 crores) adjusted in lease rental income.

c. Depreciation of Rs. 0.44 crore (2008-09 Rs 0.44 crore) on revalued portion of gross block transferred to Revaluation Reserve.

d. Reversal of depreciation of Rs. Nil (as at March 31, 2009 Rs. 6.87 crores) on exchange gain adjusted in the carrying cost of assets in 2008-09 pertaining to 2007-08 has been transferred to general reserve in line with the notification issued by the Ministry of Corporate Affairs.

14

FINDINGS AND UNDERSTANDINGS

The gross fixed assets including Capital Work in Progress increased to Rs.23,648.96 crores as at March 31, 2010 as compared to Rs. 20,852.06 crores as at March 31, 2009.

After considering the depreciation the net block represent Rs.16,436.04 crores as at March 31, 2010, an increase of Rs.1,843.88 crores.

The major additions were Nano project at Sanand, plant and facilities for World Truck etc. and product development cost, mainly towards Nano, Prima and other new products.

15

VOLTAS – 2009-10

16

FIXED ASSETS

Fixed assets are stated at cost less accumulated depreciation. Fixed Assets include assets held for sale aggregating Rs. 1615.82 Lakhs (31-3-2009: Rs. 964.40 Lakhs), valued at the lower of the estimated net realizable value and net book value. It includes factory building of Rs. 110.74 Lakhs (31-3-2009: Rs. 125.16 Lakhs) (original cost) and Rs. 5.47 Lakhs (31-3-2009: Rs. 9.28 Lakhs) (net book value) constructed on leasehold land, the lease period being fifteen years with a renewal option.

Own manufactured goods are capitalised at cost excluding interest but including excise duty net of CENVAT, octroi duty and receiving / installation charges.Interest on borrowed money allocated to and utilized for qualifying fixed assets, pertaining to the period upto the date of capitalization is added to the cost of the assets.

Assets acquired under finance leases are recognized at the lower of the fair value of the leased assets at inception and the present value of minimum lease payments. Lease payments are apportioned between the finance charge and the outstanding liability. The finance charge is allocated to periods during the leased term at a constant periodic rate of interest on the remaining balance of the liability.

As per Auditor’s Report:a. The Company has maintained proper records showing full

particulars, including quantitative details and situation of the fixed assets.

b. The fixed assets were physically verified during the year by the Management in accordance with a regular programme of verification which, in our opinion, provides for physical verification of all the fixed assets at reasonable intervals. According to the information and explanation given to us, no material discrepancies were noticed on such verification.

c. The fixed assets disposed off during the year, in our opinion, do not constitute a substantial part of the fixed assets of the Company and such disposal has, in our opinion, not affected the going concern status of the Company.

17

DEPRECIATION / AMORTISATION

Depreciation and amortization for 2009-10 reduced by 0.95% approx to Rs.18,211.46 lakhs from Rs.18,385.29 lakhs in 2008-09.

Depreciation on all assets of the Parent Company has been provided on the Straight Line Basis at the rates prescribed in Schedule XIV to the Companies Act, 1956, except Depreciation on furniture and fittings, which has been provided on the Written down Value Basis at the rates prescribed in Schedule XIV to the Companies Act, 1956.

Intangible assets are amortised on the Straight Line Basis over their useful life. Manufacturing Rights and Technical Know-how have been amortised over 72 months and Software is amortised over 60 months. Premium paid on Leasehold Land is amortised over the period of the lease, commencing from the date the land is put to use for commercial operation.

In some subsidiaries, depreciation on tools, furniture, fixtures and office equipment is provided for over a period of four years and for motor vehicles over a period of three years.

In one of the subsidiaries, depreciation on all Fixed Assets has been provided for on Written down Value Basis. The foreign subsidiaries and foreign joint ventures cost of assets including intangible assets has been depreciated using the Straight Line Basis over their estimated useful lives. Another subsidiary, depreciation on Computers and Vehicles has been charged at 20% and furniture on the Straight Line Basis at the rate prescribed in Schedule XIV to the Companies Act, 1956.

18

FINDINGS AND UNDERSTANDINGS

There was marginal increase in the Net Fixed Assets of the Company due to incremental investment in buildings, plant and machinery and in software. The Company undertook several initiatives for improving Information Technology systems which also resulted in additional capital expenditure.

Capital Work-in-Progress is net of Government Subsidy received which includes advances against Capital Expenditure Rs. 649.35 Lakhs (31-3-2009: Rs 706.25 Lakhs)].

During year 2009 Rohini Industrial Electrical Limited, Universal Comfort Products Limited, and Saudi Ensas Company for Engineering Services W.L.L. became subsidiaries.

19

IRB 2009-10

FIXED ASSETS

Fixed Assets are stated at cost, less accumulated depreciation & impairment losses if any. Cost comprises the purchase price & any attributable cost bringing the asset to its working condition for its intended use.

INTANGIBLE ASSETS

Toll Collection RightsIntangibles are stated at cost, less accumulated amortization & impairment losses, if any. Costs for acquired toll rights include acquisition & incidental expenses related to such acquisition.Costs for toll collection rights awarded against construction service by the grantor on BOT/DBFOT basis include direct & indirect expenses on construction of roads, bridges, culverts etc. & infrastructure at the toll plazas.

20

DEPRECIATION & AMORTISATION

Depreciation:Depreciation is provided using the Written down Value Method as per the useful life of the assets estimated by the management or at the rates prescribed under Schedule XIV of Companies Act, 1956, whichever is higher.

Depreciation shall be calculated by dividing the 95% of the Assets value by the estimated useful life of the assets. Remaining 5% useful value shall be adjusted only upon disposal of such assets.Based on the internal study, if found necessary to revise the estimated useful life of the asset, the proposed change shall be forwarded to the Board of Directors for approval. In such cases, while providing the depreciation, the guidelines issued by the Company Law Board/ ICAI shall be followed.

Total depreciation considering tangible as well as non tangible assets was 62.45 crores as on March 31, 2010 as compared to 124.34 crores in March 31, 2009. This was due to deletions of 74.35 crores in Plant & machinery (0.17 Crores – highlighted in schedule 6) & toll collection rights (74.18 Crores – highlighted in schedule 6).

Amortisation:

Toll collection Rights are amortised over the concession period ranging from 9 years to 25 years. The rights are amortised based on the projected toll revenue which reflects the pattern in which the assets’ economic benefits are consumed. The projected total toll revenue is based on the latest available base case traffic volume projections. If there is material change in the expected pattern of economic benefits, the amortisation is revised.

Impairment:1. The carrying amounts of assets are reviewed at each balance

sheet date, if there is any indication of impairment based on internal/external factors. An impairment loss is recognised wherever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the greater of the asset’s net

21

selling price & value in use. In assessing value in use, the estimated future cash flows are discounted to their present value at the weighted average cost of capital.

2. After impairment, depreciation is provided on the revised carrying amount of the asset over its remaining useful life.

Application of company policy to fixed asset: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.

Acquisition :

Capital Asset Requisition: Yearly budget should be drawn by Project

Manager/Administrative Office (herein after referred as AO) in consultation with engineers, for fixed assets that would be required at project site and the same shall be put forward to Management for approval.

On the basis of above final approved Fixed Asset budget, site engineers in normal course, should communicate in writing to site in-charge about the need for a particular asset.

Site in-charge in turn should after proper enquiry, prepare a requisition form and forward the same to CGM/AO after signing the same.

CGM/AO headed by V.P.-Asset & Material Procurement, should verify the need for requisitioned asset by referring site in-charge remarks and put his remarks in the requisition.

Ordering: Based on above requisition, CGM/V.P.- Assets & Material

Procurement should ask for three to four quotations from various vendors

Based on the best quotation terms, CGM/V.P. shall issue a Purchase Order on selected vendor which shall be approved as per below mentioned sanction limit.

22

Copy of this purchase order shall be sent to Project Manager and at HO for information.

Inspection:Based on the delivery schedule, vendor would dispatch the asset at project site after intimation to CGM/V.P.-Asset & Material procurement.

Installation:

On satisfactory inspection of the received asset where result is positive, process of installation should begin. Installation shall be normally done by the representative of the vendor with the help of site engineers.

Codification of Fixed Assets:Asset code shall be created in the system by specifying the following details as per the instruction of CGM/GM-Plant.

Asset Tagging:

The fixed asset tagging shall be the responsibility of Project Manager/GM-Plant, depending on the nature of asset procured.

Capitalization:

Fixed asset shall be capitalized on receipt of the Installation Report and GRN from the CGM/V.P.- Asset & Material Procurement. The capitalization cost of fixed asset shall be as set out in the accounting policy.

The asset shall be capitalized on the date specified in the certified installation report. It is very much essential that proper track of all related expenses incurred to bring the machine in its working condition is kept before a machine is capitalized so that all the expenses gets correctly incorporated in capital cost.

As on the date of Balance Sheet in respect of the assets which has already received but not capitalized and pending the installation shall be accounted as CWIP (Capital Work in Progress).

23

Additions:

Addition of assets in financial statement shall be done on capitalization of the asset.

Deletion of Fixed Assets:

Fixed asset shall be eliminated from the financial statement on disposal or when no further economic benefit is expected to be derived from it. Such deletion can be in the form of:

Sale Scrap

Transfer of Fixed Assets

Transfer of fixed assets could be between two projects or departments or offices (at different locations). The transferor shall prepare an Asset Transfer Order (ATO) stating the details of the asset only after getting sanction from AO. ATO shall be signed by Site incharge and GM-Plant/CGM. The copy of this ATO should be sent to AO for information purpose.

FINDINGS & UNDERSTANDINGS

The gross fixed assets reduced to Rs.148.44 crores as at March 31, 2010 as compared to Rs. 220.35 crores as at March 31, 2009.

After considering the depreciation the net block is Rs.85.98 crores as at March 31, 2010, as compared to Rs.96 crores as at March 31, 2009.

Including Capital work-in advances it is 86.36 crores as at March 31, 2010 as compared to 3,470.67 crores as at March 31, 2009.

24

Maruti Suzuki - 2009-10

FIXED ASSETS

(1) Land costing Rs. 5,255 million (Previous year Rs. 4 million) is not yet registered in the name of the Company. A part of this land has been/ would be made available to group companies.

(2) Plant and Machinery Gross Block includes pro-rata cost amounting to Rs. 374 million (Previous year Rs. 374 million) of a Gas Turbine jointly owned by the Company with its group companies and other companies.

(3) Freehold Land includes 600 acres of land allotted to the Company by Haryana State Industrial Development Corporation, a part of which has been made available to group companies.

25

As per Auditor’s Report:

A) Fixed assets (except freehold land which is carried at cost) are carried at cost of acquisition or construction or at manufacturing cost (in case of own manufactured assets) in the year of capitalization less accumulated depreciation.

B) Assets acquired under finance lease are capitalized at the lower of their fair value and the present value of minimum lease payments.

C) The lump sum royalty incurred towards obtaining technical assistance/technical knowhow, ownership of which rests with the technical knowhow provider, to manufacture any new car model is recognized as an intangible asset in accordance with the requirements of Accounting Standard - 26 "Intangible Assets." Royalty payable on sale of products i.e. running royalty is charged to profit and loss account as and when incurred.

DEPRECIATION & AMORTISATION

a) Fixed assets except leasehold assets viz land and vehicles are depreciated on the straight line method on a pro-rata basis from the month in which each asset is put to use.

b) Depreciation has been provided at the rates prescribed in Schedule XIV to the Companies Act, 1956 except for certain fixed assets where, based on the management's estimate of the useful life of the assets, higher depreciation has been provided on the straight line method over the following useful lives:

Plant and Machinery 8 - 11 YearsDies and Jigs 4 YearsElectronic Data Processing Equipments 3 Years

26

c) Depreciation has been provided on Straight Line Method at rate higher than Schedule XIV for some associate companies as follows:

Assets Depreciation rates

Electrical Fittings 3 YearsPlant & Machinery 5 - 13 YearsFurniture & Fittings 5 - 7 YearsVehicles 5 YearsElectronic Data Processing Equipments 3 - 5 YearsIn respect of assets whose useful life has been revised, the unamortised depreciable amount is charged over the revised remaining useful life of the assets.

a) Leasehold assets viz land & Vehicles are amortised over the period of lease.

b) All assets, the written down value of which at the beginning of the year is Rs. 5,000 or less, are depreciated at the rate of 100%. Assets purchased during the year costing Rs. 5,000 or less are depreciated at the rate of 100%.

c) Lump Sum royalty is amortised on a straight line basis over 4 years from the start of production of the related model.

27

BIBLIOGRAPHY

http://www.icai.org/category.html?c_id=136 The 65th Annual Report of Tata Motors, 2009-10. Financial Report of Voltas 2009-10. The 3rd Annual Report of IRB Infrastructure Developers, 2009-10. Financial Report of Maruti Suzuki 2009-10.

28