Valuation of fixed assets in special cases.
Para 15 of
Accounting Standard 10 on “Accounting for Fixed Assets” states the following
provisions regarding valuation of fixed assets in special cases :
1.
In
the case of fixed assets acquired on hire purchase terms, although legal
ownership does not vest in the enterprise, such assets are recorded at their
cash value, which if not readily available, is calculated by assuming an
appropriate rate of interest. They are shown in the balance sheet with an
appropriate narration to indicate that the enterprise does not have full
ownership thereof.
2.
Where
an enterprise owns fixed assets jointly with others (otherwise than as a
partner in a firm), the extent of its share in such assets, and the proportion
in the original cost, accumulated depreciation and written down value are
stated in the balance sheet. Alternatively, the pro-rata cost of such jointly
owned assets is grouped together with similar fully owned assets. Details of
such jointly owned assets are indicated separately in the fixed assets
register.
3.
Where
several assets are purchased for a consolidated price, the consideration is
apportioned to the various assets on a fair basis as determined by competent
valuers.
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Events
Occurring after the Balance Sheet Date and their disclosure requirements.
Events
occurring after the balance sheet date are those significant events, both
favourable and unfavourable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Board of Directors
in the case of a company and in the case of any other entity by the
corresponding approving authority.
Assets and liabilities should be adjusted for events occurring
after the balance sheet date that provide additional evidence to assist the
estimation of amounts relating to conditions existing at the balance sheet date
or that indicate that the fundamental accounting assumption of going concern
(i.e. the continuance of existence or substratum of the enterprise) is not
appropriate. However, assets and liabilities should not be adjusted for but
disclosure should be made in the report of the approving authority of events
occurring after the balance sheet date that represent material changes and
commitments affecting the financial position of the enterprise.
(ii)
Disclosure regarding events occurring
after the balance sheet date :
(a)
The nature of the event;
(b)
An estimate of the financial effect, or a
statement that such an estimate cannot be made.
Prior-Period
items.
When
income or expenses arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one or more prior
periods, the said incomes or expenses have to be classified as prior period
items. The errors may occur as a result of mathematical mistakes, mistakes in
applying accounting policies, misinterpretation of facts or oversight.
Pre–incorporation expenses.
Pre–incorporation expenses denote expenses
incurred by the promoters for the purposes of the company before its
incorporation.
Broadly,
these include expenses in connection with:
(a)
preliminary analysis of the conceived
idea,
(b)
detailed
investigation in terms of technical feasibility and commercial viability to
establish the soundness of the proposition,
(c)
preparation
of ‘project report’ or ‘feasibility report’ and its verification through
independent appraisal authority (before giving final approval to the
proposition) and
(d)
organisation
of funds, property and managerial ability and assembling of other business
elements.
These expenses should be properly capitalised and shown in the
balance sheet under the heading “Miscellaneous Expenditure”. There is no legal
requirement to write–off these expenses to profit and loss account
within any specified period of time nor is there any rigid accounting
convention in regard to this matter. However, good corporate practice
recognises the need to write off these expenses to profit and loss account
whtin a period of 3 to 5 years.
Provisions
contained in the Accounting Standard in respect of Revaluation of fixed assets.
(i)
Revaluation of
fixed Assts
(a) When fixed assets are revalued in
financial statements, the basis of selection should be an entire class of
assets or the selection should be done on a systematic basis. The basis of
selection should be disclosed.
(b) The revaluation of any class of assets
should not result in the net book value of that class being greater than the
recoverable amount of that class of assets.
(c)
The accumulated depreciation should not be
credited to profit and loss account.
(d)
The net increase in book value should be
credited to a revaluation reserve account.
(e)
On
disposal of a previously revalued item of fixed asset, the difference between
net disposal proceeds and the net book value should be charged or credited to
the profit and loss account except that to the extent to which such a loss is
related to an increase and which has not been subsequently reversed or utilised
may be charged directly to that account.
The
difference between actual expense or income and the estimated expense or income
as accounted for in earlier years’ accounts, does not necessarily constitue the
item to be a prior period item comment.
The statement given in the question is
correct and is in accordance with the Accounting Standard (AS) 5 (Revised) “NetProfit or Loss for the Period. Prior Period Items and Changes in AccountingPolicies’’.
The
use of reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability. An estimate may
have to be revised if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information or subsequent
developments. The revision of the estimate, by its nature, does not bring the
adjustments within the definition of an extraordinary item or a prior period
item.
When
can revenue be recognised in the case of transaction of sale of goods?
As
per AS 9 Revenue Recognition, revenue from sales transactions should be
recognised when the following requirements as to performance are satisfied,
provided that at the time of performance it is not unreasonable to expect
ultimate collection :
(i)
The
seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership; and
(ii)
No
significant uncertainty exists regarding the amount of the consideration that
will be derived from the sale of goods.
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