Financial Accounting II Lecture 14

Presentation and Disclosure of Assets in Balance Sheet Areas Covered

We have studied the presentation and disclosure requirements of the asset side of the balance sheet according to Companies Ordinance 1984 and International Accounting Standards. Following IAS affect the recognition, presentation and disclosure of fixed assets in financial statements

IAS 1 – Presentation of Financial Statements IAS 16 – Property Plant and Equipment IAS 23 – Borrowing Costs IAS 36 – Impairment of Assets (not included in syllabus) IAS 38 – Intangible Assets

Now we will take examples of actual data and show you the relevant disclosures. Following information about the fixed assets of a company is available. Fixed Assets

Capital work in progress on July 01 amounting to Rs. 500,000, included an under construction building. A further cost of Rs. 200,000 was incurred during the year after which the building was capitalized. Other Assets purchased during the year included: Plant and MachineryRs. 1,070,000 Office EquipmentRs. 55,000 Leased VehiclesRs. 580,000 Fixed Assets

Assets disposed off during the year included a company owned vehicle costing Rs. 1,000,000 and having accumulated depreciation of Rs. 488,000. The car was sold to an employee of the company under terms of employment at book value. Fixed Assets

The company got its land and building revalued in the last year that resulted in a revaluation surplus of: LandRs. 1,500,000 BuildingRs. 1,000,000 This surplus is included in the balance of cost as on July 01. Balance of revaluation surplus on July 01 was Land Rs. 1,500,000, Building Rs. 950,000 The revaluation resulted in an increased charged of depreciation charge of Rs. 47,500. Fixed Assets

During the year lease term of a machine costing Rs. 6 million and having accumulated depreciation of Rs. 2,928,000 on July 01 was completed and the machine was transferred to the company owned assets. Fixed Assets

The company charges depreciation on written down value of the assets at following rates Building on Freehold Land5 Plant and Machinery10 Tools and Equipment20 Furniture and Fixture20 Office Equipment20 Vehicles20 Fixed Assets

The company charges full year’s depreciation in the year of purchase and no depreciation is in the year in which the asset is disposed off. Land, Building, Machinery and Tools are all utilized in production. Half of Furniture Fixture, Office Equipment and Vehicles are used for Administration and balance for marketing and sales. Fixed Assets

Now lets see how the disclosure of this information will be given in the financial statements. Three different headings (line items) in the balance sheet will be shown, i.e. Property Plant and Equipment Capital work in Progress Surplus on Revaluation Details of the above three items will be given in the notes to the accounts. In addition a policy note, giving the details of policies adopted will also be given Fixed Assets

Fixed capital expenditure and depreciation Operating fixed assets except freehold land are stated at cost less accumulated depreciation. Freehold land has been revalued by an independent valuer and is stated at revalued amount. Cost in relation to certain operating assets comprises historical cost, exchange differences and cost of borrowing during construction period in respect of loans taken for specific projects. Property Plant and Equipment

Depreciation on all operating fixed assets is charged to profit and loss account on the diminishing balance method so as to write off the written down value of an assets over its estimated useful life. Full year’s depreciation is charged on additions during the year and no depreciation is charged for assets disposed off during the year.

Maintenance and repairs are charged to income as when incurred. Major renewals and improvements are capitalized and the assets so replaced, if any, are retired. Gains and losses on disposal of fixed assets are taken to the profit and loss account. Capital work-in-progress Capital work-in-progress is stated at cost.

Assets acquired under a finance lease are depreciated over the useful life of the asset on diminishing balance method. Depreciation of leased assets is charged to profit and loss account.

3.1Revaluation of Land and Building was carried out in the year ----, resulting in a surplus of Rs. 1,500,000 and Rs.1,000,000 respectively. The revaluation was carried out by independent valuers on the basis of market value in case of land and discounted current replacement cost in case of building. Had there been no revaluation the carrying value of land and building would have been Rs. 21,588,000 and Rs. 21,503,000 respectively. Revaluation of Assets