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Thread: 10 Accounting Standard 10 - Fixed Assets - AS 10

  1. #21
    Accounting Standards
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    Default Accounting treatment of machinery spares of capital nature purchased subsequently as replacement of worn-out spares

    A. Facts of the Case

    1. A public sector company is in the business of refining and marketing of petroleum products. As per the querist, the accounting policies of the company as disclosed in the notes to accounts are in conformity with the Accounting Standards/Guidance Notes issued by the Institute of Chartered Accountants of India (ICAI).

    2. Accounting Standard (AS) 2, ‘Valuation of Inventories’ (revised 1999), issued by the ICAI, has come into force with effect from 1st April 1999, and is mandatory from that date. As per the querist, in line with the said AS 2, the company has an established system of identifying spares which are not specific to a particular item of fixed asset but can be used generally for different items of fixed assets and charging the same to revenue in the year of consumption. Such spares purchased but not consumed, are taken into inventory.

    3. The querist has further stated that Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the ICAI, which became mandatory with effect from 1st April, 1991, requires that machinery spares should be usually charged to the statement of profit and loss, 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 their total cost on a systematic basis over a period not exceeding the useful life of the principal item.

    4. The querist has stated that as per AS 10, machinery spares of the nature of capital spares/insurance spares should be capitalised separately at the time of their purchase whether procured at the time of purchase of the fixed asset concerned or subsequently and their cost should be allocated on a systematic basis over a period not exceeding the useful life of the principal item, i.e., the fixed asset to which they relate.

    5. As per the querist, normal spares are those items that have been identified by the supplier/company as required to be replaced on a regular basis due to normal wear and tear of the spares. Spares that are critical for running of the machinery for uninterrupted refinery operations, but not in the nature of the normal spares as defined above and are required to be kept for use in case of breakdown, are considered as spares with irregular use. For example, spares like “Shaft/Impeller with hub” is identified for use in a particular machinery “ID-Fan” and its usage is irregular. Shaft/Impellers do not wear out in the normal course, but it is critical for the machinery as any breakdown of this item would bring down the refinery operation. This is required to be replaced only if the item breaks down due to any abnormal conditions. According to the querist, the first purchase of these spares are identified as machinery spares referred to in AS 10 and depreciated over a period not exceeding the useful life of the principal item. On consumption of these spares, replacement spares are procured and charged off to revenue in the year of purchase by the company. Thus, as per the querist, in line with AS 10, the company has been identifying spares which are exclusively used with specific items of fixed assets and whose consumption pattern is irregular.

    6. Most of the assets of the refinery are such that the main equipment, in combination with several machinery spares, forms a single unit. Accordingly, they are depreciated as one unit. When some spares of this asset need to be replaced, taking out the worn-out spare and replacing the same with a new spare, while possible physically, removing the spare from the fixed asset register and capitalising the replaced spare in the books is not possible in view of the absence of separate identity of the individual spares.

    7. According to the querist, while AS 10 has prescribed the accounting treatment for the purchase of spares, it has not dealt with the treatment to be followed for the worn-out spares that are replaced. In these circumstances, for replacement of such spares, the company has adopted a policy of not removing the original spares from their gross block. Instead, replacement spares are charged to revenue in the year of purchase. Original spares not being removed from the gross block, continue to be depreciated even after replacement. Accordingly, the relevant accounting policy includes the following clause:

    “Machinery spares which could be used only in connection with an item of fixed asset and whose use is expected to be irregular are depreciated over a period not exceeding the useful life of the principal item of fixed asset. Replacement of such spares is charged to revenue.”

    8. The querist has stated that on AS 10 becoming mandatory, members of the Oil industry, which is a specialised continuous process industry, deliberated at length and came to a consensus that subsequent procurement of machinery spares covered under AS 10 would be charged to revenue in the year of procurement. As per the querist, this needs to be done in view of the absence of separate identification of spares at the time of capitalising the parent asset as explained above.

    9. Replacement spares may also sometimes be installed when the principal item of fixed asset is substantially depreciated. According to the querist, AS 10 does not deal with such assets whose useful life has expired as per the books of account but the assets are still in use. In these cases, charging-off of replacements to revenue would be the most appropriate method of accounting. While AS 10 requires that the cost of spares be depreciated over the life of the principal asset, the company has taken a conservative approach of absorbing the total cost of such replaced spares to revenue in the year of procurement instead of amortising the cost over the life of the parent asset.

    10. The C&AG, while carrying out the audit of accounts, has observed as follows:

    “As per the new accounting policy 1(i), while the machinery spares are depreciated over a period not exceeding the useful life of the principal item of fixed assets, replacement of such spares is charged off to revenue. Accordingly, during the year, replacement of such machinery spares costing Rs. 47.59 lakh was charged off to revenue. Since AS 10 does not differentiate between machinery spares and their replacements, charging-off the replacement of such spares to revenue as per the new accounting policy is contrary to AS 10. Further, the effect of this change in accounting policy has not been disclosed in the accounts, though required as per Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’.”

    11. According to the querist, AS 10 requires that spares which are identifiable to a fixed asset and whose usage is irregular should be capitalised whether purchased along with the principal asset or purchased subsequently. The Standard does not make a specific mention of replacement spares. The Standard has also not dealt with the treatment to be given to the worn-out spares that have been replaced. Accordingly, the company is of the opinion that since the original spares not being removed from the gross block, continue to be depreciated even after replacement, charging-off of replacement spares to revenue would be appropriate.

    12. According to the querist, the company in question as well as the other oil refining and marketing companies in India have been following this practice of charging the replacement spares to revenue consistently.

    B. Query

    13. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting policy followed by the company in respect of replacement of worn-out spares is correct or not.

    D. Opinion

    On the basis of the above, the Committee is of the opinion that the policy of the company is correct to the extent that the machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular are depreciated over a period not exceeding the useful life of the principal item of fixed asset. However, the rest of the accounting policy stated in paragraph 7 above is not correct. The correct accounting treatment would be to charge-off the carrying amount of the capital spare to revenue when that spare is used to replace the worn-out part of the principal item of fixed asset. The new spare purchased to replace the capital spare so used should be capitalised separately and depreciated over the remaining useful life of the principal asset.

    Opinion finalised by the Committee on 27.6.2005

  2. #22
    Accounting Standards
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    Default Depreciation on capital spares of Accounting Standard 10 - Fixed Assets - AS 10

    A. Facts of the Case

    1. A company is a Government of India undertaking incorporated in 1975 under the Companies Act, 1956. One of the objectives of the company is to set up thermal power plants at various geographical locations in the country and to supply bulk power to the various state electricity boards/succession entities.


    2. The company is registered under the Companies Act, 1956, and being an electricity generating company, is governed by the provisions of the Electricity Act, 2003. According to the querist, as the Government has not prescribed any format of statement of accounts for the central undertakings engaged in generation of electricity, the company is preparing its accounts in the format prescribed as per Schedule VI to the Companies Act, 1956. These accounting formats have been adopted since inception of the company and have been accepted by various audit agencies.


    3. The company has 13 coal based generating stations and 7 gas based generating stations located all over the country. Besides, the company is also setting up a hydro generation plant.


    4. According to the querist, in line with the provisions of Accounting Standard (AS) 2, ‘Valuation of Inventories’ (revised 1999), and Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, the company has identified spares, which can be used only in connection with an item of fixed asset and whose use is expected to be irregular. These spares are classified as ‘capital spares’ and spares other than capital spares are classified as ‘inventories’. Capital spares identified by the company are capitalised at the time of their purchase along with the principal item of fixed asset or at the time of subsequent procurement. Depreciation on capital spares purchased along with the item of fixed asset is provided on a systematic basis over the period not exceeding the useful life of the concerned item of fixed asset. The depreciation on the capital spares identified/purchased subsequent to the capitalisation of the concerned items of fixed asset is provided systematically over the balance life of the concerned item of fixed asset. In both the situations, capital spares are amortised to the extent of 95% as required by section 205 and section 350 of the Companies Act, 1956.


    5. The querist has stated that a view has been expressed by the government auditor that the capital spares identified by the company and capitalised along with the concerned item of fixed asset should be amortised to the extent of 100% and not to the extent of 95%. The view is based on the provisions of paragraph 8.2 of AS 10 which, inter alia, provides that "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" (emphasis supplied by the querist).


    6. The company has supported its view based on the provisions of section 205 and section 350 of the Companies Act, 1956. According to the querist, section 205 of the Companies Act, 1956, provides that depreciation shall be provided to the extent specified in section 350 or for any such amount as is arrived at by dividing 95% of the original cost of the asset. Accordingly, the company has been charging depreciation to the extent of 95% in respect of assets including capital spares.

    B . Query

    7. The querist has sought the opinion of the Expert Advisory Committee as to whether as per paragraph 8.2 of AS 10, ‘capital spares’ identified by the company, keeping in view the provisions of AS 2 (revised 1999) and AS 10, are to be depreciated to the extent of 100% over the balance useful life of the concerned item of fixed asset or to the extent of 95% as required by section 205 and section 350 of the Companies Act, 1956.

    D. Opinion

    On the basis of the above, the Committee is of the opinion that as per paragraph 8.2 of AS 10, capital spares identified by the company, keeping in view the provisions of AS 2 and AS 10, should be depreciated to the extent of 100% over the balance useful life of the concerned item of fixed asset and that this is in accordance with the requirements of section 205 and section 350 of the Companies Act, 1956.

    Opinion finalised by the Committee on 28.1.2005

  3. #23
    Accounting Standards
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    Default Accounting for machinery spares of Accounting Standard 10 - Fixed Assets - AS 10

    A. Facts of the Case

    1. A company is engaged in transmission, processing and marketing of natural gas. Besides sale to different customers, natural gas is also used internally by the company as a major raw material for the manufacture of LPG, polymers and other value added products and also as a fuel. The queries raised by the querist are in the context of stores, spares and similar items held by the company.

    2. Paragraph 4 of Accounting Standard (AS) 2, ‘Valuation of Inventories’, states that “inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’.”

    3. Paragraph 8.2 of AS 10 states as below:

    “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 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.”

    4. Paragraph 12 of AS 10 states the following:

    “12. Improvements and Repairs

    “12.1 Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset 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. 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.”

    “12.2 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.”

    5. As per paragraph 8.2 of AS 10 (reproduced above), machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular are to be capitalised. According to the querist, the cost of such spares as are necessary to run a machinery is already capitalised with the cost of the said machinery (at the time of installation). The querist has contended that subsequent capitalisation of other similar machinery spares as suggested in AS 10 does not result in any increase in future benefits from the existing asset beyond its previously assessed standard of performance, i.e., in increase in capacity or efficiency of the said machinery. The expenditure on such spares only enables the enterprise to maintain the concerned machinery to perform as per the previously assessed standard of performance. As per paragraph 12 of AS 10, such expenditure is to be charged to revenue. According to the querist, it appears that paragraph 8.2 and paragraph 12 of AS 10 are contradictory in nature.

    6. The querist has also referred to an earlier opinion of the Expert Advisory Committee (Volume XVII, Query No. 1.30) wherein the Committee had opined that “whether the spares are purchased alongwith the concerned plant and machinery or subsequently, is irrelevant from the point of view of accounting treatment thereof.” The Committee had further opined that “similar would be the treatment in case of spares acquired prior to or subsequent to commencement of commercial production”.

    7. According to the querist, as per the above opinion, every time any spares are procured, they have to be capitalised. As per the querist, this position appears to be contradictory to paragraph 12 of AS 10.

    B. Queries

    8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) What is the definition of stand-by equipment and servicing equipment?

    (b) Which machinery spares are usually charged to the profit and loss statement as and when consumed?

    (c) According to the querist, as the majority of machinery spares are such that they can be used only in connection with an item of fixed asset for which they are procured and their use is irregular, on what basis spares that can be used only in connection with an item of fixed asset and whose use is expected to be irregular are to be identified?

    (d) Whether allocation of the total cost on a systematic basis over a period not exceeding the useful life of the principal item refers to capitalisation of the spares along with the cost of the principal asset and writing them off in the form of depreciation.

    (e) Whether there is any contradiction between paragraph 8.2 and paragraph 12 of AS 10.

    (f) Whether there is any contradiction between the opinion issued by the Expert Advisory Committee (Volume XVII, Query No. 1.30) and paragraph 12 of AS 10.

    D. Opinion
    On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 8:

    (a) Please see paragraph 9 above.

    (b) Machinery spares that do not increase the future benefits from the existing asset beyond its previously assessed standard of performance are charged to the profit and loss statement as and when consumed.

    (c) The issue whether certain spares are in the nature of capital spares should be determined based on the considerations set forth in paragraph 12 above.

    (d) In case the useful life of a capital spare is co-terminous with the useful life of the principal item, its cost can be capitalised along with cost of the principal item. If, however, the useful life of the spare is shorter than the useful life of the principal item, it may be appropriate to account for the spare as a separate item and write it off over its own useful life on a systematic basis.

    (e) There is no contradiction between paragraphs 8.2 and 12 of
    AS 10.

    (f) There is no contradiction between the opinion issued by the Expert Advisory Committee earlier (Volume XVII, Query 1.30) and paragraph 12 of AS 10.


    Opinion finalised by the Committee on 24.4.2000.

  4. #24
    Accounting Standards
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    Default Accounting for machinery spares of Accounting Standard 10 - Fixed Assets - AS 10

    Accounting for machinery spares of Accounting Standard 10 - Fixed Assets - AS 10

    A. Facts of the Case

    1. A government company produces fertilisers at three manufacturing units located at two places. The company’s various plants use different processes/technologies for the manufacture of intermediate/finished products. The company has an inventory of machinery spares of Rs. 85.76 crore as on 31st March, 2000. The company categorises the machinery spares as “insurance spares” since some of them are of proprietary nature with a long lead time for procurement (mainly in respect of imported spares).

    2. The querist has referred to paragraph 4 of the revised Accounting Standard (AS) 2, ‘Valuation of Inventories’ which is mandatory for accounting periods beginning on or after 1.4.1999 which states, inter alia, that inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’. The querist has also referred to paragraph 8.2 of AS 10 which states as below:

    “8.2 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 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.”

    3. As per the querist, according to AS 2, inventories should not include machinery spares which can be sparingly used. Such categories of spares are generally called insurance/capital spares. It will include spares which are proprietary in nature. The querist has referred to an opinion issued by the Expert Advisory Committee earlier which is contained in Compendium of Opinions, Volume XVII, page 95, relating to accounting treatment of inventory of capital/insurance spares.

    4. The company has adopted the following procedure for accounting for machinery spares:

    “If the machinery spare is used as an installed stand-by equipment, the company capitalises the same along with the original equipment. If it is not installed but kept as a reserve in stores, it is charged to the revenue only as and when it is put to use. If the value of the item is very high, and the benefit arising from such spare is estimated for a longer period, the new spare is capitalised as an additional item and written down value of the original spare is removed from the books.”

    5. As per the querist, fertiliser industry is a highly capital intensive industry and requires certain spares which can be used only at critical times. The lead time required for procurement of such spares is very high as these are, generally, imported items. Since the technology has been obtained from abroad the spares are also available only from abroad.

    6. The statutory auditors of the company, in their comments on the annual accounts of the company for the year ended 31st March, 2000, observed as below:

    “Machinery spares which can be used only in connection with fixed assets, have been included in inventories instead of treating it as part of machinery”.

    “Machinery spares, which can be used only in connection with an item of fixed asset and their use is expected to be irregular have to be written off on a systematic basis over a period not exceeding the useful life of the principal item. Presently, machinery spares have been included in inventories without being written off over the life period of principal item. The closing stock of spares at the end of the year is valued at Rs. 85.76 crore. In our opinion this aspect is to be verified and depreciation should be provided in accordance with the Accounting Standard.”

    7. The company replied as under to the statutory auditors:

    “Machinery spares cannot be included under fixed assets and its disclosure in inventory under current assets is in order. We also have a system of making provision for obsolescence.”

    8. The government auditors also made the following comments, in their report under section 619(4) of the Companies Act, 1956:

    “Inventory includes machinery spares of Rs. 907.20 lakh which can be used only in connection with an item of fixed asset and whose use is irregular. This has not been accounted for in accordance with the provisions of AS 2 read with AS 10.”

    9. In its reply to the comments of the government auditors, the company stated that the amount represents certain insurance/critical spares identified by the company so far. The company also stated that AS 2 and AS 10 do not deal specifically with insurance/critical spares. They refer to only machinery spares which can be used only in accordance with an item of fixed asset and whose use is expected to be irregular. The company will review such items presently included under machinery spares in the year 2000-01 after obtaining clarification from the Institute of Chartered Accountants of India. Pending such clarification, the inclusion of these items under machinery spares was in accordance with the past practice.

    10. The querist has stated that different companies adopt different methods for dealing with machinery spares. The querist has provided separately extracts from the annual reports of certain companies in this regard. According to the querist, certain companies follow the accounting standard only for spares procured on or after 1.4.1999. As per the querist, due to lack of uniformity in the accounting treatment for machinery spares, more audit comments could arise in future.

    B. Queries

    11. Keeping the above in view, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether an item of machinery spares can be capitalised before it is put to use.

    (b) Whether it is obligatory to capitalise the machinery spares whose use is expected to be irregular. If yes, whether all the machinery spares held in inventory as on 31.3.1999 should be capitalised or whether only those machinery spares should be capitalised that are procured on or after 1st April, 1999, i.e., from the date AS 2 became mandatory.

    (c) Whether the machinery spares whose use is expected to be irregular can be shown in the balance sheet under the head ‘current assets’ with the nomenclature ‘other current assets --- machinery spares’.

    (d) When the machinery spare is capitalised, whether depreciation is to be calculated on the basis of estimated residual life of the original plant/equipment on which the machinery spare is proposed to be utilised or whether depreciation has to be calculated with reference to the estimated life of the relevant item of machinery spare. According to the querist, this aspect assumes importance since the company has plants with older vintage where a substantial portion of the cost has already been depreciated in the accounts and in such cases the life of the new machinery spare will be more than the estimated residual life of the original plant.

    C. Points considered by the Committee

    12. The Committee notes extracts from paragraph 4 of AS 2, and paragraph 8.2 of AS 10 as reproduced in paragraph 2 above.

    13. The Committee is of the view that the machinery spares referred to in paragraph 8.2 of AS 10 that can be used only in connection with a particular item of fixed asset and their use is expected to be irregular are often termed as ‘capital spares’ (also called ‘insurance spares’). Such spares will also include spares of the nature of stand-by equipment. The cost of such spares is written-off over the useful life of the principal asset unless the useful life of such a spare is shorter than the useful life of the principal asset. However, the machinery spares that can be used in connection with more than one item of fixed asset are of the nature of maintenance spares and not of the nature of capital spares. Such machinery spares should be treated as inventory items and expensed when put to use. The Committee is of the view that determination of whether a machinery spare is a capital spare or not cannot be decided merely on the basis of lead time required for procurement of such spare. Factors normally considered in classification of spares include the purpose for which the spares are kept, separate identification with an item of plant and machinery and their value.

    14. The Committee notes that both the Accounting Standards, viz., AS 2 and AS 10, are mandatory in nature. Therefore, it is obligatory to capitalise machinery spares which are of the nature of capital spares as explained in paragraph 13 above. The date of purchase of such spares would have no relevance on the accounting treatment. In other words, the machinery spares of the nature of capital spares held in inventories as on 31st March, 1999, should also be capitalised in accordance with the principles enumerated above. Since AS 10 is mandatory in respect of accounts for periods commencing on or after 1.4.1991, appropriate disclosures may be required in accordance with Accounting Standard (AS) 5, “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” consequent upon change in the accounting treatment of spares to bring it in line with AS 10.

    D. Opinion

    15. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 11:

    (a) Machinery spares of the nature of capital spares as explained in paragraph 13 above should be capitalised when they are ready for use even though kept in stores.

    (b) All machinery spares whose use is only expected to be irregular are not required to be capitalised. However, machinery spares that can be used only in connection with a particular item of fixed asset and whose use is expected to be irregular should be capitalised. This principle is applicable to all machinery spares irrespective of the date of their purchase (refer to paragraph 14 above).

    (c) Machinery spares that are not of the nature of capital spares should be disclosed in the balance sheet under the head ‘current assets’ as ‘machinery spares’. However, capital spares should not be shown in this manner. These should be disclosed under the head ‘fixed assets’.

    (d) Please refer to paragraph 13 above.

    Opinion finalised by the Committee on 17.1.2001.

  5. #25
    Accounting Standards
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    Default Disclosure of plant and machinery retired from active use but still held for disposal of Accounting Standard 10 - Fixed Assets - AS 10


    Query



    1. A State Government Corporation is engaged in the manufacture of cotton and synthetic yarn. The corporation retired certain new machines from active use and held them for disposal. Depreciation was provided till the date of dismantle. The retired fixed assets were shown in the Schedule of Inventories under the head “Discarded Fixed Assets” at their realisable value. This fact was disclosed by way of a note in the Notes on Accounts.

    2. The querist has informed that the above treatment was given on the basis of Para 14.2 of Accounting Standard 10 “Accounting for Fixed Assets” which states that:

    “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 Account.”

    3. The querist has further informed that their auditors are of different view and are of the opinion that the assets should be either disclosed at the face of the balance sheet under the head “Discarded Fixed Assets” below net block or other current assets under the head “Current Assets Loans and Advances”.

    4. The querist has sought the opinion of the Expert Advisory Committee regarding proper disclosure and treatment of the above mentioned fixed assets in the financial statements


    Opinion February 8, 1995


    1. The Committee notes paragraph 6.1 of Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, which is reproduced below:

    “6.1 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. The Committee is of the view that the machines, first installed and later dismantled and now held for disposal, were procured for the purpose of producing goods. The retirement of these machines from active use does not alter their basic character.

    3. The Committee further notes paragraph 6.1 of Accounting Standard (AS) 2 on “Valuation of Inventories”, issued by the Institute of Chartered Accountants of India, which is reproduced below:



    “6.1 ‘Inventories’ means tangible property held

    (i) for sale in the ordinary course of business, or

    (ii) in the process of production for such sale, or

    (iii) for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares.”

    4. The Committee is of the view that disposal of fixed assets is not a sale in the ordinary course of business. Hence, the assets which are retired from active use cannot be classified as ‘Inventories’, even if they are held with the intention of sale.

    5. The Committee also notes paragraph 24 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, as reproduced below:


    “24. 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.


    6. On the basis of the above, the Committee is of the opinion in respect of the issue raised by the querist in para 5 of the query that the machines, which are retired from active use and dismantled and are not actually sold off, should be disclosed appropriately at the lower of net realisable value and net book value in the Schedule of Fixed Assets or on the face of the balance sheet under the head Fixed Assets.

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