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Income Computation & Disclosure Standards for Tangible Fixed Assets

Income Computation & Disclosure Standards for Tangible Fixed Assets

Knowing how the income computation and measurement of asset value for fixed assets as per prevailing accounting standards is critical for companies to be able to extract maximum economic value for these assets. Here is a short summary of the various terms and clauses that apply to the reporting for Fixed Assets in companies.

As per the provisions of the Income Tax Act of 1961, the following definitions are applicable:

  1. Tangible Fixed Asset stands for any asset held by the business with the intention of being used for the purpose of producing goods or services and not for sale or trade in the normal course of business

  2. Fair Value of an asset is the amount for which that asset could be exchanged between two knowledgeable willing parties in an arm’s length transaction, i.e. an unbiased transaction

In case of a tangible asset, the definition provided in the Act is sufficient to define a tangible fixed asset. However, any and all materials and equipment supporting the functioning of the tangible asset is also to be capitalized as a part of that asset. Spares required regularly are to be charged to the revenue only on usage and not at time of purchase. If the spares are deemed exclusive to that tangible asset and their use is irregular, those spares can be capitalized as part of the tangible asset.

As per the Income Tax act of 1961, the actual cost of an acquired tangible asset includes:

  • Purchase price plus non-refundable taxes and duties applicable

  • Any costs required to set up the machinery to its full working condition

It cannot include:

  • Discounts and rebates (which have to be deducted)

  • Administrative costs and other general expenses related to the asset, viz. overhead.

The cost can also change in the lifetime of the asset, if there are changes in the taxation rules or duties, or the exchange rate applicable (should the asset value be recorded in foreign currency)

If the asset is exchanged during the course of its usable life, fair value of the acquired asset shall be considered as actual cost.

If any improvements, repairs or alterations are made to the asset which results in performance increase, and therefore its future benefits, this cost can be capitalized as part of the actual cost of the asset.

In case of joint ownership of an asset, the cost is to be apportioned in the ratio of contribution between the various owners. In case a group of assets is purchased together leading to a rebate or discount, each asset will be assigned a consideration in proportion of their respective fair values.

A Tangible fixed asset register is to be maintained containing the following details:

(a) Description of asset

(b) Location and identification of asset

(c) Actual cost including adjustments on account of:

  1. Central Value Added Tax credit claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994,

  2. Change in rate of exchange of currency, and

  3. Subsidy or grant or reimbursement, by whatever name called.

(d) Date on which the asset is first put to use

When disclosing the details of the asset, following points need to be noted:

  1. Description of asset or block of assets;

  2. Rate of depreciation;

  3. Actual cost or written down value, as the case may be;

(e) Depreciation Allowable; and

(f) Written down value at the end of year.

Tracking and maintaining the register with the details of all the fixed assets in a company can be a daunting task, and therefore solutions like Tracet Fixed Asset Management provide an easy answer to the statutory requirements and compliances laid down. To know more, connect with us at info@tracet.in or fill out the form below.

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