Identifying Fixed Assets

The standard deals with the accounting for tangible fixed assets. The standard does not take into consideration the specialized aspect of accounting for fixed assets reflected with the effects of price escalations but applies to financial statements on historical cost basis. An entity should disclose

• the gross and net book values of fixed assets at beginning and end of an accounting period showing additions, disposals, acquisitions and other movements,
• expenditure incurred on account of fixed assets in the course of construction or acquisition,
• revalued amounts substituted for historical costs of fixed assets with the method applied in computing the revalued amount.

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. 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, 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.

Machinery Spares

Whether to capitalise a machinery spare or not will depend on the facts and circumstances of each case. However, the machinery spares of the following types should be capitalised being of the nature of capital spares/insurance spares –

Machinery spares which are specific to a particular item of fixed asset, i.e., they can be used only in connection with a particular item of the fixed asset and their use is expected to be irregular.

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. The total cost of such capital spares/insurance spares 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.

When the related fixed asset is either discarded or sold, the written down value less disposal value, if any, of the capital spares/insurance spares should be written off.

The stand-by equipment is a separate fixed asset in its own right and should be depreciated like any other fixed asset.