Fixed Assets Valuation - How to Value Fixed Assets
Question: How fixed assets are valued, at historical cost or replacement cost. Historical cost gives only the cost at which it was purchased whereas replacement cost gives us the cost that will be incurred to actually purchase the machine in the present year. According to me fixed assets should be valued at replacement cost since it represents the correct value of the asset. What is your opinion?
Answer: Fixed assets are valued at cost less depreciation if they put to use regularly, i.e., in the normal course of business.
Cost here is:
1. The Cost of purchase
(+) Non refundable taxes
(+) Costs incurred to bring the asset
(-) Any discounts or rebates available (if asset is acquired for cash)
2. If the asset is acquired in exchange of securities, the Fair Value (FV) securities. If that is not ascertainable, the FV of asset is acquired.
3. If the asset is acquired in exchange of another asset, the FV of the asset given up. If that is not ascertainable, the FV of asset acquired.
4. In case the asset is manufactured in house:
All costs incurred for production of the asset (for example material, labor, production overheads, etc.)
(-) Exclude general, admin, and Selling and Distribution overheads.
(+) Costs of testing and interest cost on loan taken for manufacture of asset (if any AS 16 applied)
5. Asset acquired by way of Govt. Grant, refer AS 12.
But, assets held for disposal should be held at NRV (net realisable value) of the asset till the time it is actually disposed. At the time of disposal, the asset is eliminated from the books and profit or loss on sale is taken to P&L a/c.
If a fixed asset is to be revalued then:
- Revaluation can be done either by appraisal by competent valuers; or by indexation.
- Such revaluation should be done on entire class of fixed assets.
- Increase in value of asset should be credited to Revaluation Reserve. Such reserve is NOT available for dividend distribution.
- Decrease in value of fixed asset should be charged to P&L a/c.
The above is as far as my knowledge goes. Please verify. Glad to be of assistance. Pankaj your questions are really useful.