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(40)-VALUATION OF FIXED ASSETS

Wednesday, December 2, 2009

Valuation of Fixed Assets

Where an asset is purchased, its cost is simply the purchase price plus any expenses incidental to its acquisition.

Where an asset is produced by a company for its own use, its production cost must include the cost of row materials, consumables and other attribute direct costs such as labour cost. Production cost may additionally include a reasonable proportion of indirect costs, together with the interest on any capital borrowed to finance production of the asset.

The cost of any fixed asset having a limited economic life, whether purchase price or production cost, must reduced by provisions for depreciation calculated to write off the cost, less any residual value, systematically over the period of the assets useful life. This very general requirement is supplemented by the more detailed provisions of financial reporting standards.

Provision for a permanent reducing in value of a fixed asset must be made in the profit and loss account and the asset should be disclosed at the reduced amount in the balance sheet. Any such provision should be disclosed on the face of the profit and loss account or by way of note. Where a provision becomes no longer necessary, because the conditions giving rise to it have altered, it should be written back, and again disclosed should be made.

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