© PHI Learning, All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

© PHI Learning, All rights reserved.2 Fixed Assets Chapter 8

© PHI Learning, All rights reserved.3 Fixed Assets in Perspective  Defining fixed assets  Assets intended for own use and not for sale  Tangible assets  Fixed assets that have physical form and substance  Intangible assets  Natural resources Chapter 8

© PHI Learning, All rights reserved.4 Determining Cost of Acquisition  What costs can be capitalised?  Capitalization of borrowing costs  Basket purchases  Donated assets  Self-constructed assets Chapter 8

© PHI Learning, All rights reserved.5 Accounting for Depreciation  What is depreciation?  Issues in depreciation accounting  Establishing the depreciable base  Estimating the useful service life  Choosing a cost allocation method  Depreciable base  Estimating residual value  Useful service life  Obsolescence Chapter 8

© PHI Learning, All rights reserved.6 Depreciation Methods  Straight-line method  Accelerated methods:  Written-down-value method  Sum-of-the-years’-digits method  Production-units method  Comparing the depreciation methods  Managerial considerations in selecting a depreciation method Chapter 8

© PHI Learning, All rights reserved.7 Special Problems in Depreciation Accounting  Depreciation for partial periods  Revision of depreciation rates  Accounting for assets of low unit cost  Changing the depreciation method  Managerial motivations  “Adequate justification”  Group depreciation Chapter 8

© PHI Learning, All rights reserved.8 Capital Expenditures and Revenue Expenditures  Capital expenditure  Revenue expenditure  Importance of the capital-revenue distinction  Additions and improvements  Ordinary repairs  Managerial motivations for accounting treatment Chapter 8

© PHI Learning, All rights reserved.9 Depreciation and Company Law and Income Tax Law  Minimum depreciation rates under Schedule XIV of the Companies Act  Intention  Significance for financial reporting  Depreciation in tax returns  Objective  Rates and asset classes Chapter 8

© PHI Learning, All rights reserved.10 Disposal of Depreciable Assets  Discarded  Sold for cash  Exchanged for other assets  Similar assets  Gains  Losses  Dissimilar assets  Gains  Losses  Gains and losses under tax laws Chapter 8

© PHI Learning, All rights reserved.11 Some Common Myths about Depreciation  Myth One: Depreciation is a source of cash  Myth Two: Depreciation is intended to provide funds for replacement  Myth Three: Depreciation is a valuation process Chapter 8

© PHI Learning, All rights reserved.12 Revaluation of Fixed Assets  The modified historical cost system, a departure from the historical cost system  Why revaluation of fixed assets?  Revaluation surplus  Accounting for revaluation  Depreciation on revalued assets Chapter 8

© PHI Learning, All rights reserved.13 Accounting for Natural Resources  Wasting assets  Depletion  Issues in accounting for natural resources  Oil and gas accounting  Successful efforts method  Full cost method Chapter 8

© PHI Learning, All rights reserved.14 Accounting for Intangible Assets  Defining intangible assets  Amortization of intangible assets  Goodwill  Brands  Research and development costs  Computer software costs  Deferred charges Chapter 8

© PHI Learning, All rights reserved.15 Impairment of Assets  What is asset impairment?  Why is recording impairment important?  Measuring impairment loss  Reversing impairment loss Chapter 8

© PHI Learning, All rights reserved.16 Financial Analysis of Fixed Assets  Fixed asset turnover ratio  How to interpret the ratio Chapter 8