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Query No. 31
Subject:
Valuation
of fixed assets retired from active life.1
A. Facts of the
Case
1. A public
sector company is engaged in the business of manufacture, repair and overhaul
of aircraft, aero engines, helicopters, etc. The entire share capital of the
company is held by the Government of India and the company is under the
administrative control of Ministry of Defence.
2. With
reference to accounting for assets retired from active use, the company has
followed the following accounting policy:
“Assets declared surplus/discarded are retained in the books
at cost less depreciation provided till the end of the month preceding
the month in which they are disposed off.”
3. The querist
has drawn the attention of the Committee to paragraph
24 of Accounting Standard (AS) 10, ‘Accounting for Fixed
Assets’, issued by the Institute
of Chartered Accountants
of India, which
provides as below:
“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.”
4. According to
the querist, as
stated in the
accounting policy, the depreciated value of the assets retired
from active use is shown separately
in the books of account. However,
with reference to disclosing the same at the lower
of net book
value and net
realisable value, the
company found that ascertaining the net realisable value of an item
retired from active use before it is disposed off is not feasible in all the
cases.
5. The querist
has stated that generally by the time an asset is retired from active use, the
asset is fully depreciated and is carried at a nominal book value of Re.1 for
the purpose of quantitative control and any item which is held for disposal at
a value of Re.1 will definitely fetch more than Re.1
on disposal. It
will be a
very rare occasion
that the asset
is retired from its active use before it is fully depreciated.
6. The
depreciated value of the assets retired from active use for the year 1999-2000
is Rs.4.90 lakh
as against the
net book value
of Rs.28,366.64 lakh of all the assets, and for the year 2000-2001,
depreciated value of the assets retired from active use is Rs.18.90 lakh
against the net book value of Rs.34,000.29 lakh of all the assets.
7. The company
considered amending the above accounting policy as
“assets declared surplus/discarded
are retained in the books at lower of the net book value and net realisable
value”. However, the same has not been
done as the
company finds that
there are practical
difficulties in ascertaining
the net
realisable value of
the assets which
are discarded. Thus, even
if the company
amends the above
policy, the assets
may continue to be disclosed at the net book value which in any case
will be less than the net realisable value.
B. Queries
8. The querist
has sought the opinion of the Expert Advisory Committee on the following
issues:
(a) Whether it
is necessary for the company to amend its existing accounting policy
with regard to
the valuation of
the assets declared
surplus/discarded.
(b) In case it
is necessary, whether the company can continue to disclose the value of the
assets declared surplus/discarded at the net book value since ascertaining the
net realisable value in all the cases is not possible keeping in view the fact
that the total value of the assets declared surplus/discarded is not material and constitutes a very negligible percentage of net book value of the assets
of the company.
(c) In case the suggestion at (b) above is not considered to be appropriate, the company may be advised regarding the procedure to be adopted in future.
C. Points
considered by the Committee
9. Keeping in
view the requirements
of paragraph 24
of AS 10, as
reproduced by the querist in paragraph 3 above, the Committee is of the view
that the company is required to value material items of fixed assets declared
surplus/discarded, at the lower of their net book value and net realisable
value. In other words, the items of fixed assets which are not material may be
valued on a different basis, i.e., immaterial items retired from active
use may be
valued at net
book value only.
However, the material items of
the fixed assets declared surplus/discarded/retired from active use
should be valued
at the lower
of net book
value and net realisable value. For this purpose, where
the retired items of fixed assets are
sold between the
balance sheet date
and the date
of approval of financial statements by the board of
directors, the relevant selling prices may
be used for
the purpose of
determining net realisable
value. The Committee is
also of the
view that in
the estimation of
net realisable value of
items of such
fixed assets, which
are not sold
till the date
of approval of financial
statements, past experience
in respect of
similar transactions, reports of independent experts, etc., may also be
used.
D. Opinion
10. On the basis of
the above, the Committee is of the following opinion on the issues raised in
paragraph 8:
(a) It is necessary
for the company to amend its existing accounting policy with regard to the valuation
of the fixed assets declared surplus/discarded so as to value them at the lower
of net book value and net realisable value, where the amounts involved are
material. Where the
value of fixed
assets declared surplus/ discarded is not
material, the company may
continue to value these assets at net
book value with the appropriate disclosure of the fact that these assets have
been valued at net book value due to the amounts being not material.
(b) Material items of
assets retired from active use are to be valued
at lower of net realisable value
and net book value. However, if the value of the assets discarded/declared
surplus is not material, the company may continue to value the same at net book
value.
(c) The net realisable value of assets discarded/declared surplus may be
estimated as suggested in paragraph 9 above.
1Opinion finalised by the Committee on 5.7.2001.
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