Accounting For Depreciation Study Note - 3 PDF

# Study Note - 3: Accounting For Depreciation ## STUDY NOTE - 3 ## ACCOUNTING FOR DEPRECIATION ### This Study Note Includes: - Introduction - Certain Useful Terms - Nature of Depreciation - Causes of Depreciation - Characteristics of Depreciation - Objective of and Necessity for providing Deprecia...

# Study Note - 3: Accounting For Depreciation ## STUDY NOTE - 3 ## ACCOUNTING FOR DEPRECIATION ### This Study Note Includes: - Introduction - Certain Useful Terms - Nature of Depreciation - Causes of Depreciation - Characteristics of Depreciation - Objective of and Necessity for providing Depreciation - Measurement of Depreciation - Methods of Charging Depreciation - Provision for Depreciation Account - Disposal of an asset - Profit or Loss on sale of assets - Method of Depreciation Calculation - Change of Method - Prospective and Retrospective - Application of AS 6 - Depreciation Accounting - Application of AS 10 - Accounting for Fixed Asset ### 3.1 INTRODUCTION A business or concern holds fixed assets for regular use and not for resale. The capability of a fixed asset to render service cannot be unlimited. Except land, all other fixed assets have a limited useful life. The benefit of a fixed asset is received throughout its useful life. So its cost is the price paid for the 'Series of Services' to be received or enjoyed from it over a number of years and it should be spread over such years. Depreciation means gradual decrease in the value of an asset due to normal wear and tear, obsolescence etc. In short, depreciation means the gradual diminution, loss or shrinkage in the utility value of an asset due to wear and tear in use, effluxion of time or introduction of technology in the market. A certain percentage of total cost of fixed assets which has expired and as such turned into expense during the process of its use in a particular accounting period. Indian Accounting Standard (AS 6) states that “Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset." Certificate in Accounting Technicians (CAT) ## Paper I: Fundamentals of Financial Accounting “Depreciation accounting is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation. Depreciation for the year is the portion of the total charge under such a system that is allocated to the year. Although the allocation may properly take into account occurrences during the year, it is not intended to be the measurement of the effect of all such occurrences." The above definition may be criticized as under: 1. It does not classify properly what is meant by systematic and rational manner. The word 'rational' may mean that it should reasonably be related to the expected benefits in any case. 2. Historical cost and any other kind of cost should be allocated or not to be does not defined by this definition. 3. Some Accountants are in a belief that depreciation is nothing but an arbitrary allocation of cost. According to them, all the conventional methods say allocation of historical cost over a number of years arbitrarily. ### 3.2 CERTAIN USEFUL TERMS: - **Amortization** - Intangible assets such as goodwill, trademarks and patents are written off over a number of accounting periods covering their estimated useful lives. This periodic write off is known as Amortization and that is quite similar to depreciation of tangible assets. The term amortization is also used for writing off leasehold premises. Amortization is normally recorded as a credit to the asset account directly or to a distinct provision for depreciation account; Though the write off of intangibles that have no limited life is not approved by some Accountants, some concerns do amortize such assets on the ground of conservatism. - **Depletion** - This method is specially suited to mines, oil wells, quarries, sandpits and similar assets of a wasting character. In this method, the cost of the asset is divided by the total workable deposits of the mine etc. And by following the above manner rate of depreciation can be ascertained. Depletion can be distinguishable from depreciation in physical shrinkage or lessening of an estimated available quantity and the latter implying a reduction in the service capacity of an asset. - **Obsolescence** - The term 'Obsolescence' refers to loss of usefulness arising from such factors as technological changes, improvement in production methods, change in market demand for the product output of the asset or service or legal or medical or other restrictions. It is different from depreciation or exhaustion, wear and tear and deterioration in that these terms refer to functional loss arising out of a change in physical condition. - **Dilapidation** - In one sentence Dilapidation means a state of deterioration due to old age or long use. This term refers to damage done to a building or other property during tenancy. ### 3.3 NATURE OF DEPRECIATION: Depreciation is a term applicable in case of plant, building, equipment, machinery, furniture, fixtures, vehicles, tools. These long-term or fixed assets have a limited useful life, i.e. they will provide service to the entity (in the form of helping in the generation of revenue) over a limited number of future accounting periods. Depreciation implies gradual decrease in the value of an asset due to normal wear and tear, obsolescence etc. In short, depreciation means the gradual diminution, loss or shrinkage in the utility value of an asset due to wear and tear in use, effluxion of time or introduction of technology in the market. It makes a part of the cost of assets chargeable as an expense in profit and loss account of the accounting periods in which the assets helped in earning revenue. Thus, International Accounting Standard (IAS)-4 provides that “Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life.” In Accounting Research Bulletin No. 22, AICPA observed that “Depreciation for the year is the portion of the total charge under such a system that is allocated to the year. Although the allocation may properly take into account occurrences during the year, it is not intended to be the measurement of the effect of all such occurrences." ### 3.4 CAUSES OF DEPRECIATION **A. Internal Causes** 1. **Wear and tear**: Plant & machinery, furniture, motor vehicles etc. suffer from loss of utility due to vibration, chemical reaction, negligent handling, rusting etc. 2. **Depletion (or exhaustion)**: The utility or resources of wasting assets (like mines etc.) decreases with regular extractions. **B. External or Economic Causes** 1. **Obsolescence**: Innovation of better substitutes, change in market demand, imposition of legal restrictions may result into discarding an asset. 2. **Inadequacy**: Changes in the scale of production or volume of activities may lead to discarding an asset. **C. Time element**: With the passage of time some intangible fixed assets like lease, patents. copy- rights etc., lose their value or effectiveness, whether used or not. The word "amortization” is a better term to speak for the gradual fall in their values. **D. Abnormal occurrences**: An accident, fire or natural calamity can damage the service potential of an asset partly or fully. As a result the effectiveness of the asset is affected and reduced. ### 3.5 CHARACTERISTICS OF DEPRECIATION The Characteristics of Depreciation are : 1. It is a charge against profit. 2. It indicates diminution in service potential. 3. It is an estimated loss of the value of an asset. It is not an actual loss. 4. It depends upon different assumptions, like effective life and residual value of an asset. 5. It is a process of allocation and not of valuation. 6. It arises mainly from an internal cause like wear and tear or depletion of an asset. But it is treated as any expense charged against profit like rent, salary, etc., which arise due to an external transaction. 7. Depreciation on any particular asset is restricted to the working life of the asset. 8. It is charged on tangible fixed assets. It is not charged on any current asset. For allocating the costs of intangible fixed assets like goodwill. etc, a certain amount of their total costs may be charged against periodic revenues. This is known as amortization. ### 3.6 OBJECTIVE OF AND NECESSITY FOR PROVIDING DEPRECIATION Eric Kohler defined depreciation as “the lost usefulness, expired utility, the diminution in service yield." Its measurement and charging are necessary for cost recovery. It is treated as a part of the expired cost for an asset. For determination of revenue, that part or cost should be matched against revenue. The objects or necessities of charging depreciation are : 1. **Correct calculation of cost of production**: Depreciation is an allocated cost of a fixed asset. It is to be calculated and charged correctly against the revenue of an accounting period. It must be correctly included within the cost of production. 2. **Correct calculation of profits**: Costs incurred for earning revenues must be charged properly for correct calculation of profits. The consumed cost of assets (depreciation) has to be provided for correct matching of revenues with expenses. 3. **Correct disclosure of fixed assets at reasonable value**: Unless depreciation is charged, the depreciable asset cannot be correctly valued and presented in the Balance Sheet. Depreciation is charged so that the Balance Sheet exhibits a true and fair view of the affairs of the business. 4. **Provision of replacement cost**: Depreciation is a non-cash expense. But net profit is calculated after charging it. Through annual depreciation cash resources are saved and accumulated to provide replacement cost at the end of the useful life of an asset. ### 3.7 MEASUREMENT OF DEPRECIATION Measurement of depreciation is quite difficult to calculate the exact amount of depreciation since they depend on a number of factors. Some of the factors are; 1. The actual cost of asset. 2. The additions, if any, made to the assets during the year taking into consideration the date of purchase. 3. The expected amount of interest of opportunity loss. 4. The estimated life of the asset. 5. The scrap, break-up or the residual value of asset. 6. Obsolescence, i.e. the chance of the asset going out of fashion. 7. The renewals and repairment of the asset. 8. The legal provisions relating to the depreciation.(Provision of Companies Act, Income Tax Act and others) All the above said factors should be taken into consideration at the time of determining the amount of depreciation in such a way that a proper and reasonable estimate can be provided against the amount of depreciation. ### 3.8 METHODS OF CHARGING DEPRECIATION There are different concepts about the nature of depreciation. Moreover, the nature of all fixed assets cannot be the same. As a result, different methods are found to exist for charging depreciation. A broad classification of the methods may be summarized as follows : **Capital/Source of Fund** - Sinking Fund Method - Annuity Method - Insurance Policy Method **Time Base** - Fixed Installment Method - Reducing Balance Method - Sum of Years’ Digit Method - Double Declining Method **Use Base** - Working Hours Method - Mileage Method - Depletion Service Hours Method Unit method **Price Base** - Revaluation Method - Repairs Provision Method Some important Methods of Charging Depreciation are discussed as below : #### 1. Fixed/Equal Installment OR Straight Line Method Features : 1. A fixed portion of the cost of a fixed asset is allocated and charged as periodic depreciation. 2. Such depreciation becomes an equal amount in each period. 3. The formula for calculation of depreciation is : $Depreciation = (V-S)/n$ Where, - V= Cost of the Asset - S= Residual value or the expected scrap value - n= estimated life of the asset #### II. Sinking Fund Method A sinking fund is a fund created with a specific purpose which may be : 1. To redeem or repay a long term liability, e.g., debenture, long-term loans, etc. or 2. To replace a wasting asset, e.g., a mine; or 3. To replace an asset of depreciable nature; or 4. To renew a lease. When a sinking fund is created to provide for replacement of wasting assets, it is in effect depreciation; the installments are charged against profits. Under this method, the asset is kept in the books at its original cost. Every year during the estimated life of the asset, an equal amount of depreciation is charged to profit and loss account and credited to a Depreciation Fund or Sinking Fund Account. At the same time a provision for replacement of the asset is made by investing an amount equal to the depreciation charged, in securities outside the business by debiting Depreciation Fund Investment or Sinking Fund Investment Account and crediting Bank. Interest received on the investment is credited to the Depreciation Fund Account and is also reinvested likewise. The amount that is annually provided as depreciation is such that this, with compound interest will be sufficient to provide a sum equal to the cost of asset, less residual value (if any), by the time the asset is expected to become useless. At the end of the working life of the asset, the investment are sold away and the money realised therefrom is utilized for purchasing a new asset. Profit or Loss on such sale, if any, is transferred to the Depreciation Fund Account. The old asset account, standing in the books at original cost, is closed by setting it off against the Depreciation Fund Account. The formula for calculation of the depreciation amount is as follows : $D = \frac{Ci}{(1+i)n-1}$ Where, - D = Depreciation - C = Cost of the asset - i = Rate of Depreciation n = Life of the asset **Journal Entries under the Sinking Fund method :** **At the end of first year** 1. For annual depreciation Profit & Loss A/c Dr. To Depreciation Fund A/c (annual contribution) or To Sinking Fund A/c 2. For investment of annual depreciation Sinking Fund Investment A/c Dr. To Bank A/c (invested amount) **At the end of second/subsequent years** 1. Profit & Loss A/c Dr. To Sinking Fund A/c (annual contribution) 2. Bank A/c Dr. To Interest on Investment A/c (annual interest) 3. Interest on Investment A/c Dr. To Sinking Fund A/c (interest transferred) 4. Sinking Fund Investment A/c Dr. To Bank A/c [amount invested usually = annual contribution + annual interest] When the working life of the asset ends (i), (ii) & (iii) same as above; (iv) not made in the last year 5. Bank A/c Dr. To Sinking Fund Investment A/c 6. Sinking Fund Investment A/c Dr. To Sinking Fund A/c (Profit on Sale) (Investments sold out) OR 7. Sinking Fund A/c............ Dr. To Asset A/c [Asset A/c closed] 8. Sinking Fund A/c Dr. To Sinking Fund Investment A/c (Loss on Sale) **Notes:** 1. No investment is made in the last year as the investments are to be sold out. 2. Sinking Fund Account may be called Depreciation Fund Account also. It is to be shown on the liability side of Balance Sheet. 3. Sinking Fund Investments Account may be called Depreciation Fund Investments Account also. It is to be shown on the Asset side of the Balance Sheet. 4. Annual Contribution (charged in lieu of annual depreciation) = Original Cost x Present Value of Rs. 1 at given interest rate. #### III. Annuity Method The annuity method considers that the business, besides losing the original cost of the asset also loses interest, on the amount used for buying the asset, which he would have earned in case the same amount would have been invested in some other form of investment. Thus, the asset account is debited with interest, which is ultimately credited with amount of depreciation which remains fixed year after year. The annual amount of depreciation is determined with the help of annuity table. The amount of depreciation is determined by adding the cost of the asset (i.e., purchase price) and interest thereon at an expected rate. **The Journal entries are as follows :** 1. Depreciation A/c Dr. To Asset A/c (for depreciation as calculated from annuity table) 2. Asset A/c Dr. To Interest A/c (for charging interest to asset as calculated on diminishing values) 3. Profit & Loss A/c Dr. To Depreciation A/c (for transfer of depreciation to P/L A/c) 4. Interest A/c Dr. To Profit & Loss A/c (for transfer of interest to P/L A/c) #### IV. Revaluation Method This method should be adopted only where the asset is represented by a large number of small and diverse items of small unit cost, e.g., hand tools, live-stock, sacks etc. in such cases it is not possible to attempt to depreciate each individual item. In this method the following steps to be taken : 1. 1st, at the end of financial year, all items, which are in good condition and can serve well, are valued at cost. 2. 2nd, the cost, as calculated above, is compared with the opening balance and the difference is charged as depreciation. 3. 3rd, purchases of asset are debited to asset account in a normal manner. It is very important to note that under this method the total amount to be written off as depreciation is directly credited to asset account (not an accumulated depreciation account) #### V. Depletion Unit Method This method is specially suited to mines, oil wells, quarries, sandpits and similar assets of a wasting character. The cost of the natural resources is the price paid for its acquisition plus price paid for the development of such asset in order to bring it to a state suitable for production. The periodic depletion is better not calculated in terms of year. Rather it is better to calculate the cost per unit and then multiply the cost of units produced in that particular year. Depletion for each unit extracted is determined as follows : Depletion per unit (U) = $\frac{Acquisition cost (C) - Residual value (S)}{Estimated life in terms of production units (n)}$ ### 3.9 PROVISION FOR DEPRECIATION ACCOUNT Provision of depreciation is the collected value of all depreciation. Provision of depreciation account is the account of provision of depreciation. With making of this account we are not credited depreciation in asset account. But transfer every year depreciation to provision of depreciation account. Every year we adopt this procedure and when assets are sold we will transfer sold asset 'total depreciation' to credit side of asset account, for calculating correct profit or loss on fixed asset. This provision uses with any method of calculating depreciation. There are following features of provision for depreciation account : 1. Fixed asset is made on its original cost and every year depreciation is not transfer to fixed asset account. 2. Provision of depreciation account is Conglomerated value of all old depreciation. This system can be used both in straight line and diminishing method of providing depreciation. The journal entries will be : - **For purchase of asset** Asset's A/c Dr. To Cash/Bank A/c - **For providing depreciation at end of year** Depreciation A/c Dr. To Provision for depreciation A/c - **For sale of assets** Cash/Bank A/c Dr. To Asset Sales A/c - **Cost of assets sold transferred from Assets Account to Sale of Assets Account.** Assets Sales A/c Dr. To Asset's A/c. - **Total depreciation on asset sold transferred from provision for depreciation account.** Provision for depreciation A/c Dr. To Asset Sales A/c - **Profit or loss on sale of assets will be transferred from asset sale account to Profit or Loss Account.** ### 3.10 DISPOSAL OF AN ASSET When an asset is sold because of obsolescence or inadequacy or any other reason, the cost of the asset is transferred to a separate account called “Asset Disposal Account”. The following entries are to be made: 1. **When the cost of the asset is transferred:** Asset Disposal A/c Dr. To, Asset A/c (original cost) 2. **When depreciation provided on the asset is transferred:** Provision for Depreciation A/c Dr. To, Asset Disposal A/c 3. **For charging depreciation for the year of sale:** Depreciation A/c Dr. To, Asset Disposal A/c 4. **When cash received on sale of asset:** Bank/Cash A/c Dr. To, Asset Disposal A/c 5. **When loss on disposal is transferred to Profit & Loss A/c:** Profit & Loss A/c Dr. To, Asset Disposal A/c 6. **When profit on disposal is transferred to Profit & Loss A/c:** Asset Disposal A/c Dr. To, Profit & Loss A/c ### 3.11. PROFIT OR LOSS ON SALE OF ASSETS - METHOD OF DEPRECIATION CALCULATION Sometimes an asset is sold before the completion of its useful life for some unavoidable circumstances (due to obsolescence etc.) including a part of the asset which is no longer required in future. If the sale price is less than the WDV, there will be loss, and vice versa. The profit & loss on sale of asset is adjusted in the year of Sale in Profit & Loss Account. **Accounting Treatment** **a. Where no provision for depreciation account is maintained:** WDV of the amount sold will be transferred to 'Assets Disposal Account'. The entries will be as follows: 1. WDV of asset has been transferred to Asset Disposal A/c-- Asset Disposal A/c Dr. To Asset A/c 2. In case of Sale of an Asset--- Cash/Bank A/c Dr. To Asset Disposal A/c 3. For depreciaion (if any)--- Depreciation (P & L A/c) Dr. To Asset Disposal A/c 4. In case of Profit on Sale of Asset Asset Disposal A/c Dr. To Profit & Loss A/c 5. In case of Loss on Sale of Asset Profit & Loss A/c Dr. To Asset Disposal A/c **b. Alternative Approach** In this situations, all adjustments are to be prepared through the assets account. The entries are as follows: 1. In case of Assets sold Cash/Bank A/c Dr. To Assets A/c 2. In case of Depreciation Depreciation (Profit & Loss) A/c Dr. To Assets A/c 3. In case of Profit on Sale Assets A/c Dr. To Profit & Loss 4. In case of Loss on Sale Profit & Loss A/c Dr. To Assets A/c ### 3.12. CHANGE OF METHOD - PROSPECTIVE AND RETROSPECTIVE As per AS-6, the depreciation method selected should be applied consistently from period to period. Change in depreciation method should be made only in the following situations : 1. For compliance of statute. 2. For compliance of accounting standards. 3. For more appropriate presentation of the financial statement. The change in method may be made possible in two ways : 1. With prospective effect, and 2. With retrospective effect **(i) With prospective effect -** Under this method, the change in method is to be taken into consideration for the rest of the useful life of the asset commencing from the year in which such change is effected and not from the beginning of the year. **(ii) With retrospective effect** **Procedure to be followed in this case :** 1. Depreciation should be recalculated applying the new method from the date of its acquisition/ installation till the date of change of method. 2. Difference between the total depreciation under the new method and the accumulated depreciation under previous method till the date of change may be surplus/ deficiency. 3. The said surplus is credited to Profit & Loss account under the head "depreciation written Back". 4. Deficiency is charged to profit & Loss account. 5. The journal entries will be : **(a) If old value is less** Profit and Loss A/c. Dr. To, Assets A/c. **(b) If old value is more** Asset A/c. Dr. To, Profit and Loss A/c. 6. The above change of depreciation method should be treated as change in accounting policy and its post effect should be disclosed and quantified. ### 3.13. APPLICATION OF AS 6- DEPRECIATION ACCOUNTING “Depreciation Accounting” (AS 6) (Revised) The Accounting Standard regarding depreciation was issued at first in 1982. But it was revised in 1994. The revised standard (AS 6) is now mandatorily applicable to all concerns in India for accounting periods commencing on or after 1.4.1995. The important matters to be noted from (AS 6) are : **What is Depreciation as per AS-6?** Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use and passage of time. Depreciation is nothing but distribution of total cost of assets over its useful life. "Depreciable Assets" are the assets which : - (a) are expected to be used for more than one accounting period; (b) have limited useful life; (c) are held by an enterprise for use in production or supply of goods and services, for rental to others or for administrative purposes but not for sale in the ordinary course of business. **AS-6 is not applicable to the following assets:** - Forests, Plantations - Wasting Assets, Minerals and Natural Gas - Expenditure on research and development - Goodwill - Live stock - Cattle, Animal Husbandry. **How to calculate Depreciation?** Following are required to ascertain the depreciation of a Depreciable Asset - Historical cost or other amount in place of historical cost like revalued amount - Estimated useful life of depreciable assets - Estimated residual or scrap value of depreciable assets **Computation of Depreciation:** $\frac{Cost (Residual Value of the end of useful life}{Estimated useful in No. of years}$ **How to ascertain the cost of depreciable assets?** Cost of depreciable assets is the total cost spent in connection with the acquisition; installation and commissioning of the assets as well as for add item or improvement of the depreciable assets. “Useful Life” of a depreciable asset is the period over which the assets are expected to be used by the enterprise, which is generally shorter than the physical life. Useful Life of a Depreciable asset depends on the following factors - - Predetermined by legal contractual limits - Depends upon the number of shifts for which the asset is to be used - Repair and Maintenance policy of enterprise - The theological obsolescence - Innovation/improvement in the production method - Change in demand of output - Legal or other restrictions. **Estimated residual or scrap value:** This is the estimated value of a depreciable asset at the end of its useful life. **Change in Method of Depreciation:** The method selected for charging depreciation should be consistently followed. However, if situations demand (like change of statute, compliance with Accounting Standard, etc.) a change of method may be made, that would result in change in accounting policy (which may be required by statute or for compliance with an Accounting Standards or for more appropriate presentation of financial statement), In that case - 1. if the change affects the state of affairs of Balance Sheet and Profit and Loss account of the current period or the Financial Statements of later period, then such change must be disclosed in financial statement. The amount, by which the financial statement is affected, should be disclosed to the extent it is ascertainable. 2. the depreciation should be recalculated under the new method with effect from the date of the asset coming into use till the date of change of method, that is, with retrospective effect. Difference between the total depreciation under new method and the accumulated depreciation under the old method till the date of change of method should be computed first. Then the resultant surplus or deficiency is to be charged to credit and debit side of the Profit and Loss A/c respectively. **Change in Useful Life:** If there is a change in useful life of an asset, outstanding depreciable amount on the date of change in estimated useful life of asset is required to be allocated over the revised remaining useful life. Any addition or extension essential for an existing asset, should be depreciated over the remaining life of the asset. If the historical cost of an asset changes due to exchange fluctuations, price adjustments, etc. the depreciation on the revised unamortized depreciable amount should be provided prospectively for the rest of the life of the asset. For any asset revalued, the provision for depreciation should be made on the revalued amount for the remaining useful life of the asset. In the financial statements, the matters to be disclosed are- 1. The historical cost or any amount substituting it; 2. Total depreciation for the period for each 3. The related accumulated depreciation. The method of charging depreciation should also be disclosed. ### 3.14. APPLICATION OF AS 10- ACCOUNTING FOR FIXED ASSET Accounting Standard for Fixed Assets (AS 10) Accounting Standard 10 is related with accounting of Fixed Assets. The important matters to be noted from (AS 10) are : **Fixed asset is an asset** - which is held with an intention of being used for the purpose of producing and providing goods and services - which is not held for sale in the normal course of business - which is expected to be used for more than one accounting period **Examples of Fixed Assets are-** - Land - Building- Freehold/Leasehold - Plant and Machinery - Furniture & Fitting etc. This accounting standard is applicable to all assets except the following: - Forest, plantations and similar regenerative natural resource. - Wasting assets like minerals,oil and natural gas - Expenditure on real estate development - Live stock Fixed assets shall be shown in financial statement either at historical cost or revalued price. **(a)** The gross book value of a fixed asset should be either historical cost or a revaluation computed in accordance with the Accounting Standard. [Set out in paragraphs 20 to 26 and 27 to 32 of the Standards] **Historical cost of a Fixed Asset: It consist of the following:** - Purchase price - Import duties and other taxes which is non-refundable in nature - Any cost which is directly attributable to bring the asset to the working condition for its intended use. In case of any self-constructed assets costs attributable to its construction and allocable to it, should be included in its value. Items fixed assets retired from active use and held for disposal should be shown separately in the financial statements and stated at net book value or realizable value, whichever is lower. If any subsequent expenditure causes an addition to the already expected future benefits of an asset, such expenditure should be added with the value of the asset. **Cost of assets acquired in exchange of existing assets:** - Fixed assets exchanged not similar In case a new asset is acquired in part exchange of an old asset the exchange price should be recorded at fair market value of the asset acquired or at fair market value of the asset given up, if it is more clearly evident. - Fixed assets exchanged are similar In case a new asset is acquired in part exchange of an old asset the exchange price should be recorded at fair market value of the asset acquired or at fair market value of the asset given up, if it is more clearly evident or net book value of the old asset. - Fixed asset acquired in exchange of shares, etc. should be recorded at its fair market value or the fair market value of the shares, etc. whichever is more clearly available. Any loss or gain on the retirement or disposal of any fixed asset carried at cost should be recognized in the profit and loss account if the value of any asset increases on revaluation, its accumulated depreciation should not be debited to Profit & Loss Account. The depreciation on such revalued amount should be adjusted against Revaluation Reserves. **Disclosure requirements as per Accounting Standard 10:** - Gross and the net book values of fixed assets at the beginning and at the end of the accounting period showing there in any additions, disposal, acquisition and other movement. - Expenditure incurred on account of fixed assets in the course of construction or acquisition. - Revalued amount which is substituted for historical cost of the fixed asset, method adopted to compute the revalued amount, and whether an external valuer has valued the fixed assets, in case where fixed assets are stated at revalued amount.