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Accounting Standard 6
and
Accounting Standard 10
Session overview
Continuing our discussion on the
Accounting Standards, during this session
we will discuss two more Accounting
Standards applicable while preparing and
presenting Financial Statements. These
are:
AS 6 relating to Depreciation
Accounting; and
As 10 relating to Accounting for
Fixed Assets
Learning Objective
At the end of this session, the learner will
be able to apply the concepts contained in
the Accounting Standard 6 Depreciation
ii.
iii.
iv.
goodwill;
v.
live stock.
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ii.
iii.
(ii)
Accounting Standard
i.
ii.
obsolescence; and
iii.
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ii.
iii.
ii.
Explanation
Depreciation has a significant effect in
determining and presenting the financial
position and results of operations of an
enterprise. Depreciation is charged in each
accounting period by reference to the
extent of the depreciable amount,
irrespective of an increase in the market
value of the assets.
Assessment of depreciation and the
amount to be charged in respect thereof in
an accounting period are usually based on
the following three factors:
i.
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pre-determined by legal or
contractual limits, such as the
expiry dates of related leases;
ii.
iii.
iv.
technological changes;
b.
improvement in production
methods;
c.
d.
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ii.
iii.
iv.
livestock.
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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 statement
except that to the extent that such
a loss is related to an increase
which was previously recorded as
a credit to revaluation reserve and
which has not been subsequently
reversed or utilized, it may be
charged directly to that account.
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Disclosure
i.
ii.
iii.
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Explanation
Fixed assets often comprise a significant
portion of the total assets of an enterprise,
and therefore are important in the
presentation of financial position.
Furthermore, the determination of whether
an expenditure represents an asset or an
expense can have a material effect on an
enterprises reported results of operations.
Identification of Fixed Assets
The definition of fixed assets (given
above) gives criteria for determining
whether items are to be classified as fixed
assets. Judgment is required in applying
the criteria to specific circumstances or
specific types of enterprises. It may be
appropriate to aggregate individually
insignificant items, and to apply the
criteria to the aggregate value. An
enterprise may decide to expense an item,
which could otherwise have been included
as fixed asset, because the amount of the
expenditure is not material.
Stand-by equipment and servicing
equipment are normally capitalized.
Machinery spares are usually charged to
the profit and loss statement as and when
consumed. However, if such spares can be
used only in connection with an item of
fixed asset and their use is expected to be
irregular, it may be appropriate to allocate
the total cost on a systematic basis over a
period not exceeding the useful life of the
principal item.
In certain circumstances, the accounting
for an item of fixed asset may be improved
if the total expenditure thereon is allocated
to its component parts, provided they are
in practice separable, and estimates are
made of the useful lives of these
components. For example, rather than treat
an aircraft and its engines as one unit, it
may be better to treat the engines as a
separate unit if it is likely that their useful
site preparation;
ii.
iii.
iv.
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Non-monetary Consideration
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relating to manufacturing
processes; and
ii.
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ii.
iii.
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