1.26  Query:    

Disclosure of plant and machinery retired from

active use but still held for disposal.

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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