The process of recognizing fixed assets, as per Accounting Standard (AS) 10 prescribed by ICAI, involves some key principles and procedures that ensure accurate reporting of an entity's tangible assets.
- Definition of Fixed Assets: According to AS 10, fixed assets are tangible items that are held for use in the production or supply of goods or services, for renting to others, or for administrative purposes, and are expected to be used over a long period. These assets include land, buildings, machinery, equipment, vehicles, and furniture.
- Recognition Criteria: Fixed assets are only recognized when it is likely that the entity will obtain future economic benefits from the asset, and when the asset's cost can be measured accurately. Hence, the asset must fulfil both the probability criterion (future economic benefits) and the reliability criterion (measurable cost) to be recognized.
- Initial Recognition: Fixed assets are initially recognized at cost. Cost includes all expenditures directly related to bringing the asset to its intended location and condition for use, such as purchase price, import duties, non-refundable taxes, and any directly related costs of preparing the asset for its intended use.
- Subsequent Costs: Costs incurred after the asset has been put into operation, such as additions, improvements, or replacements, are capitalized only if they increase the future economic benefits embodied in the asset. Otherwise, such costs are recognized as expenses in the period in which they are incurred.
- Measurement: Fixed assets are recorded at their original cost and subsequently shown at cost less any accumulated depreciation and impairment losses. Depreciation is the gradual allocation of the depreciable amount of an asset over its useful life. The depreciable amount refers to the cost of the asset less its residual value.
- Revaluation: Although AS 10 allows entities to revalue fixed assets, any upward revaluation should be credited directly to a revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognized as an expense. Revaluation decreases are recognized as expenses.
- Disposal: When a fixed asset is disposed of, its carrying amount is removed from the balance sheet, and any gain or loss arising from the disposal is recognized in the income statement.
- Disclosure: Entities must disclose significant accounting policies adopted for recognizing fixed assets, including the depreciation methods used, useful lives, and residual values. They should also disclose the carrying amounts of each class of fixed assets.
AS10 requires entities to recognize fixed assets accurately in their financial statements, highlighting their true economic substance and providing relevant information to stakeholders. Adhering to these guidelines maintains transparency and comparability in financial reporting.
