Query No. 30

Subject:

Accounting for fixed assets held for sale. ¹

A. Facts of the Case

1. The querist has stated that the question on which the opinion of the Expert Advisory Committee is sought relates to fixed assets with reference to Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India and more particularly with reference to paragraph 27 of AS 10 reproduced below:

“27. When a fixed asset is revalued in financial statements, an entire class of assets should be revalued, or the selection of assets for revaluation should be made on a systematic basis. This basis should be disclosed.”

2. According to the querist, the above provision permits a selective revaluation, provided it is on a systematic basis. The querist has stated that the dictionary meaning of systematic is as under:

 “pertaining to, or consisting of, for the purpose of, observing, or according to system:methodical: habitual: intentional”

3. The querist has further stated that a company is engaged in manufacturing, namely, textiles, engineering precision tools; investment; and business automation, shipping and allied services. The querist has further clarified that the company is not in real estate business. The company has properties (land and buildings) at several places in India, in various business segments, comprising manufacturing plants, offices, residential quarters as well as non- operational assets. The company has identified three of its properties as the properties held for sale and has revalued these three properties, which are held for sale. Apart from these three properties, there are other properties which are not held for sale and which are not revalued. Thus, in revaluing the properties, the company has adopted a system, namely, properties held for sale are revalued and the properties not held for sale are not revalued.

B. Query

4. The querist has sought the opinion of the Committee as to whether the principle followed, namely, revaluation of all properties, i.e., land and buildings held for sale, and continuing other land and buildings not held for sale at historical cost, amounts to a systematic basis and whether such systematic revaluation is within the requirements of the above referred paragraph 27 of AS 10, i.e., whether AS 10 is complied with.

C. Points considered by the Committee

5. The Committee notes from the Facts of the Case that the querist has stated that the company in question is not in the real estate business. It can be inferred from the aforesaid that the query does not relate to assets which are held for sale in the ordinary course of business, i.e., inventories.

6. The Committee further notes that when an entity identifies a fixed asset as ‘held for sale’, it expects that carrying amount of that asset will be primarily recovered through its sale rather than from its continuing use in the production of goods or rendering of services. Thus, these assets will no more be of the nature of fixed assets, rather these will be of the nature of current assets. Accordingly, valuation principles applicable to current assets should be applied in the present case. The Committee notes that as per the generally accepted accounting principles, current assets are valued at the lower of the net book value and net realisable value.

7. The Committee notes that AS 10 also prescribes similar type of treatment in case of fixed assets retired from active use and held for disposal. In this context, the Committee notes paragraphs 24 and 26 of AS 10, which state as follows:

“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.”

 

“26. Losses arising from the retirement or gains or losses arising from disposal of fixed asset which is carried at cost should be recognised in the profit and loss statement.”

8. On the basis of the above, the Committee is of the view that the company should ascertain the net realisable value of the three properties (land and buildings) held by the company for sale and should value the same at the lower of their net book value and net realisable value. The resultant loss, if any, should be transferred to the statement of profit and loss. Hence, in the view of the Committee, the question of revaluation does not arise in the present case. Accordingly, paragraph 27 of AS 10 is not applicable here.

D. Opinion

9. On the basis of the above, the Committee is of the opinion that the land and buildings held by the company for sale should be valued at the lower of their net book value and net realisable value and, accordingly, the question of systematic revaluation of these assets does not arise in the present case as discussed in paragraphs 6 to 8 above.