Standard Prepared by: Harshit

Operating Jain
Procedures
for Fixed
Assets
Management

ABC SUGAR MILLS LTD.

1
PURPOSE:
THIS POLICY DOCUMENT ESTABLISHES POLICY & PROCEDURES FOR
ACCOUNTING OF FIXED ASSETS AS PER RELEVANT ACCOUNTING
STANDARDS.
IT STANDARDIZES THE PROCUREMENT OF FIXED ASSETS IN
ACCORDANCE WITH THE CAPITAL PURCHASE BUDGET.
IT EMPHASIZES ON THE IDENTIFICATION OF FIXED ASSETS AND ITS
RECORDING IN FIXED ASSETS REGISTER & ITS PERIODICAL PHYSICAL
VERIFICATION.

SCOPE:
This policy document will apply to the assets managed by the
company at all its units.
It would also emphasize on the additions and deletions made to the
fixed assets.
It also focuses on the proper documentation of these assets.

ABC Sugar Mills Ltd

2
 Fixed Assets Budget Procedure:
Budget
Budget Planning
Planning
Budget:
Budget:
Modification Cost
Cost Benefit
Benefit Analysis
Analysis
1.
1. Modification
2.
2. Acquisition
Acquisition
Budget
Budget
Activity
Activity Wise
Wise
Preparation
Preparation

Budget
Budget Approval
Approval by
by ::
Asset
Asset Classification:
Classification:

MD
MD
1)
1) Land
Land
ED
ED
2) Building
CFO
CFO
2) Building
Plant
Unit
Unit Head
Head
Plant &
& Machinery
3)
3) Machinery Technical
Furniture

Technical Head
Head
4)
4) Furniture &
& Fixtures
Fixtures
Power
Power Deptt.
Deptt. Head
Head
5)
5) Office Equipment
Office Equipment
6)
6) Vehicles
Vehicles
7)
7) Others
Others Post
Post Budget
Budget Activity:
Activity:
8)
8) Intangibles
Intangibles Comparison
Comparison with
with
Actual
Actual

ABC Sugar Mills Ltd

3
Acquisition
Acquisition Process
Process of
of Capital
Capital Assets:
Assets:

1.) Indenting : 2.) Purchasing : 3.) Receipt:

Receipt
Receipt at
at Unit
Unit
Unit
Unit Analysis
Analysis of
of Indent
Indent
Gate
Gate Officials
Officials verify
verify
Specific Asset as per documents
Asset as per documents
Specific &
Deptt. Invite & make
make Entry
Entry in
in Gate
Gate
Deptt. Invite Quotations
Quotations (at
(at Inward Register
least three) Inward Register
least three)
Raises
Raises Indent
Indent to
to Stores
Stores Receive
Receive Asset,
Asset,
Stores
Stores verifies
verifies Bill & arrange for
Bill & arrange for
Prepare
Prepare Comparative
Comparative inspection of Asset by the
inspection of Asset by the
Authorized Chart
Chart User
Authorized by
by User
respective Deptt
respective Deptt
Head
Head Inspection
Inspection of
of Asset
Asset by
by the
the
Selection
Selection of
of Vendor
Vendor User
User
Stores
Stores check
check
availability
availability &
& ensures
ensures
that
that indent is within
indent is within Preparation
In
In case
case of
of Single
Single Preparation of
of MRN
MRN
capital budget
capital budget Quotation
Quotation check
check
reasonability
reasonability of
of terms
terms
Nett
Nett Req.
Req. sent
sent to
to MRN
MRN along
along with
with PO
PO &
&
Centralized Purchase
Centralized Purchase Invoice sent to Accounts
Invoice sent to Accounts
Deptt.
Deptt.
Raise
Raise PO
PO
Posting
Posting in
in Accounts
Accounts
4 ABC Sugar Mills Ltd Deptt.
Deptt.
Accounting Treatment :

1.)
1.) Acquisition
Acquisition

DATE
DATE VALUE
VALUE

Asset
Asset does
does not
not 1) Purchase
Asset 1) Purchase Price
Price
require
require Asset requires
requires 2) Duties
Installation/Inspectio 2) Duties & Taxes (non-
& Taxes (non-
Installation/Inspecti
Installation/Inspecti Installation/Inspectio recoverable)
n recoverable)
on
on n 3) Freight
3) Freight
4)
4) Borrowing
Borrowing CostCost (As
(As per
per AS
AS
Capitalization & Capitalization & 16)
16)
Accounting Entry Accounting Entry 5)
5) Installation
Installation Charges
Charges
on the Date of on the Date of 6)
6) Insurance
Insurance Exp.Exp.
Receipt of Asset Receipt of 7)
7) Forex
Forex Fluctuations
Fluctuations (As(As per
per AS
AS
Commissioning 11)
11)
Certificate from 8)
8) Less
Less Govt
Govt Grants
Grants (as
(as per
per AS
AS
the Technical 12)
12)
Deptt. 9)
9) Less
Less Trade
Trade Discounts
Discounts &&
Till such date, Rebate, if any
Rebate, if any
asset shown as
Capital Work In
Progress (CWIP)
5 ABC Sugar Mills Ltd
 2.)
2.)
Depreciation
Depreciation

Definition :: A
Definition Ass per
per AS-6,
AS-6, itit is
is a
a measure
measure of
of loss
loss in
in value
value of
of an
an asset
asset arising
arising from
from use,
use, passage
passage of
of time,
time,
obsolescence due to change in technology & market conditions.
obsolescence due to change in technology & market conditions.

Historical
Historical Value
Value or
or Revalued
Revalued Value
Value
Depreciation
Depreciation depends
depends upon
upon ::
Useful
Useful Life
Life of
of the
the Asset
Asset

Estimated
Estimated Residual
Residual Value
Value
Depreciable
Depreciable Amount
Amount =
= Historical
Historical Value
Value or
or Revalued
Revalued Value
Value Expected
Expected Residual
Residual
Value
Value
Addition/Extension
Addition/Extension to
to
Asset
Asset forms
forms an
an integral
integral part
part of
of the
the
Addition/Extension
Addition/Extension of
of Asset
Asset :: main asset
main asset No
be
be depreciated
depreciated
separately
separately
Yes
Addition/Extension
Addition/Extension toto be
be
depreciated
depreciated as per same rate
as per same rate
& over same life
& over same life
Where
Where thethe historical
historical cost
cost undergoes
undergoes a a change
change duedue to
to fluctuation
fluctuation in
in exchange
exchange rate,
rate, price
price
adjustment
adjustment etc. depreciation on the revised unamortized amount should be provided over
etc. depreciation on the revised unamortized amount should be provided over the
the
balance
balance useful
useful life
life of
of the
the asset.
asset.
Useful
Useful life
life may
may bebe reviewed
reviewed periodically
periodically after
after taking
taking into
into consideration
consideration thethe expected
expected physical
physical
wear
wear and tear, obsolescence and legal or other limits on the use of the asset. In case of change
and tear, obsolescence and legal or other limits on the use of the asset. In case of change inin
useful life, depreciation should be provided taking into consideration the revised useful
useful life, depreciation should be provided taking into consideration the revised useful life over life over
the
the remaining
remaining no. no. of
of years.
years.
6 ABC Sugar Mills Ltd
 Depreciation as per Sch. 14 of Companies Act:
As per Sec. 350 of the Companies Act, a company is required to provide depreciation as
per rates specified in Sch. 14 given below. However in case the management expects the
useful life of the asset to be higher, depreciation at lower rates can be provided with proper
justification for the same. Although Higher Rates can be provided.
General
General
Rates
Rates
Asset Block WDV Rate SLM Rate
Factory Building 10% 3.34%
Non Factory Buildings (Offices, Godowns, Employees Quarters Etc.) 5% 1.63%
Plant & Machinery (continuous process plants) 15.33% 5.28%
Motor-cars, motor cycles, scooters & other mopeds 25.89% 9.5%
Motor Buses 30% 11.31%
Data processing machines including computers 40% 16.21%
Gas cylinders including valves & regulators 40% 16.21%
Sugar Works Rollers 100% 100%
Furniture & Fittings 18.1% 6.33%
Notwithstanding anything mentioned in this Schedule depreciation on assets, whose actual
cost does not exceed five thousand rupees, shall be provided depreciation at the rate of
hundred per cent. However, if the aggregate value of assets purchased exceeds 10% of the
existing value of its block than such assets should be capitalized.

Intangibles should be amortized as per AS 26.

7 ABC Sugar Mills Ltd

 3.)
3.) Sale
Sale &
& Discard
Discard of
of Fixed
Fixed Asset
Asset ::

SALE Discard
Discard
SALE

Date Value
Value
Date
Date
Date Value
Value
Asset to be
Date on which valued at
Date on which the the asset is lesser of Net
right over the asset Invoice Value retired from its Book Value or
is sacrificed i.e. active use Net Realizable
Invoice Date Value
Profit & Loss to
be routed Profit & Loss to
through P/L be routed
through P/L

4.)
4.) Capital
Capital Work
Work In
In Progress
Progress (CWIP)
(CWIP) ::

It is an asset which is not completed to be used. All expenses in relation to the CWIP should be debited
to CWIP A/c. When the asset is completed & ready to be used then Amount should be transferred to the
Respective Asset A/c. Quarterly review should be done in order to ensure that expense in relation to CWIP
is debited to CWIP A/c & not in the respective expense A/c.

8 ABC Sugar Mills Ltd

 5.)
5.) Revaluation
Revaluation of
of an
an Asset
Asset ::

Assets
Assets are
are valued
valued at
at Historical
Historical Cost
Cost in
in the
the books
books ofof accounts.
accounts. In
In the
the subsequent
subsequent years
years
the
the value
value of
of asset
asset could
could be
be higher
higher or
or lower
lower than
than its
its present
present book
book value
value due
due to
to the
the inflationary
inflationary conditions
conditions
of the economy.
of the economy.

Net UPWARD
Net Book
Book Related
Related to
to previous
previous NO
Value
Value decrease
decrease
YES
DOWNWARD

Related NO Credit
Credit to
to P/L
P/L A/c
A/c to
to
Related to
to previous
previous
increase the extent already
the extent already
increase
charged
charged to
to P/L
P/L A/c
A/c &&
YES the excess if any, to
the excess if any, to
Revaluation
Revaluation Reserve
Reserve
Debit
Debit toto
Revaluation
Revaluation
Reserve
Reserve toto the
the Charge
Charge the
the Credit
Credit the
the difference
difference
extent
extent available &
available & difference
difference to
to P/L
P/L to Revaluation
to Revaluation
charge the balance
charge the balance A/c
A/c Reserve
Reserve
to
to P/L
P/L A/c
A/c

Note
Note:: No
No means
means first
first time
time revaluation.
revaluation. Yes
Yes means
means second
second and
and subsequent
subsequent
revaluations
revaluations

9 ABC Sugar Mills Ltd

 6.)
6.) Impairment
Impairment of
of an
an Asset
Asset ::

As per AS 28 , an organization should make an assessment of the recoverable value of all its fixed assets
at every balance sheet date to find whether an asset needs to be impaired based on the factors given below :
Factors causing
Impairment

Internal External
External
Internal

Significant
Significant Carrying
Carrying Amt
Amt of
of
Decline
Decline in
in the Decline Assets > Market
Physical
Physical
the Decline in
in Assets > Market
Economic Capitalization
Damage
Damage to
to an
an
Economic Market Value
Market Value Capitalization of
of
Performance
Performance ofof Organization
Asset
Asset Organization
Asset
Asset Change
Change in in
Earlier
Earlier Disposal
Disposal Market Interest
Market Interest
of
of an Asset
an Asset Rate
Rate

As per AS - 28, if the Recoverable Value of an Asset is less than its Carrying Value than the asset should
be revalued at the Recoverable amount by charging the difference to P & L Account known as Impairment
Loss.
Recoverable
Recoverable
Carrying Amount
Amount ::
Carrying Amount
Amount :: Impairment
Impairment Loss
Loss ::

Net
Net Book
Book Value
Value of
of
LESS
Net
Higher
Higher ofof = To
To be
be debited
debited to
to
an Asset
an Asset Net Selling Price
Selling Price P & L A/c
P & L A/c
or
or
Value
Value inin Use
Use
10 ABC Sugar Mills Ltd
Fixed Assets Tagging & Coding Process:
The process of scientifically numbering fixed assets is called tagging. The purpose of Tagging
assets is to track the movement of assets from one place to another place. A tag (bar code or
unique number) helps in verification of the existence of assets and their location, aids in
maintenance, provides a common ground for communication between the Accounts
Department and the end-users and recording the net book value of asset in case of sale /
scrapping. All fixed assets must be tagged except land, building etc.

Fixed
Fixed Asset
Asset
Receipt
Receipt

Inspection
Inspection

Accounting
Accounting

Recording
Recording the
the
Code
Code generated
generated Code
Code in FAR if
in FAR if
either
either through
through generated
generated
system
system or manually
or manually manually
manually

Tagging
Tagging of
of such
such code
code
on Fixed Asset
on Fixed Asset

11 ABC Sugar Mills Ltd

Fixed Assets Register (FAR) :
What
What is
is FAR
FAR ?
?

It
It is
is a
a register
register showing
showing all
all the
the permanent
permanent assets
assets owned
owned by
by the
the company.
company. It
It shows
shows the
the qty,
qty,
value
value & location of these assets. Any deletion and addition to/of assets are also recorded in
& location of these assets. Any deletion and addition to/of assets are also recorded in
this register.
this register.

FAR V/s Stock Register

Stock Register FAR
To keep record of goods received & issued To exercise effective control over the Fixed
Assets held by the company

Used for items which are not permanent Used for assets which are permanent in
nature
Contains low value items Contains relatively high value items

Significance
:

Provides
Provides final
final Value
Value of
of
Effective
Effective Control
Control CARO
CARO Compliance
Compliance FA for financial
FA for financial
statements
statements

12 ABC Sugar Mills Ltd

 Contents
Contents of
of FAR
FAR

Asset
Asset Location
Location
Code
Code
Asset
Asset
Descriptio Quantity
Quantity
Descriptio
n
n
Asset
Asset Invoice
Invoice
Category
Category No.
No.
Supplier
Supplier
Cost
Cost Depreciatio
Depreciatio s
s Name
Name
n
n

Duties
Duties Forex
Forex
Basic
Basic Installatio
Installatio Interest
Interest
&
& Freight
Freight Insurance
Insurance Fluctuation
Fluctuation
Value
Value n
n Charges
Charges Cost
Cost
Taxes
Taxes s
s

13 ABC Sugar Mills Ltd

 FAR Alteration
FAR will be updated once in a quarter or six months if it is maintained manually or
simultaneously if it is system generated. It will be updated for the following reasons :

Sale Providing
Providing
Sale ,, Inter
Inter Unit
Unit
Discarding Depreciation
Depreciation ::
Discarding ,, Asset
Asset
Addition
Addition of
of Demolition
Demolition of
of Depreciation Transfer
Transfer ::
an
an Asset
Asset :: Asset Depreciation
Asset :: Rate
Rate Location
Location
Depreciation
Depreciation
All
All Fields
Fields All
All Fields
Fields Additional
Additional
Amt.
Amt. duty
duty &
& taxes
taxes

FAR must be Yearly reviewed for ensuring its accuracy by an appropriate authority in the
Finance Deptt.

14 ABC Sugar Mills Ltd

 Physical Verification :
Objective: To verify the actual existence of the book assets,
check their condition & provide for adjustments (short/excess, if
any) of fixed assets found during physical.

Physical
Physical
Verification
Verification
Policy
Policy

Team
Team Members:
Members:

Stores Physical
Stores Personnel
Personnel Physical Adjustments
Adjustments
Expert Tenure: Verification
Expert from
from Technical
Technical Tenure: Verification relating
relating to
to
Deptt Once
Once in
in three
three Report
Report signed
signed
Deptt Excess/Shortag
Excess/Shortag
Personnel years by Team
Personnel from
from User
User years by Team e
e by
by the
the
Deptt Members
Members & &
Deptt Finance
Finance Head
Head
Personnel Unit Head
Personnel from
from Accounts
Accounts Unit Head
Deptt
Deptt
Finance
Finance Personnel
Personnel from
from
HO
HO
Internal
Internal Auditor
Auditor

15 ABC Sugar Mills Ltd

 Physical
Physical Verification
Verification
Process
Process
Intimation
Intimation by
by HO
HO personnel
personnel to
to unit
unit head
head via
via mail
mail regarding
regarding Phy.
Phy.
Verification Program showing its date, team members,
Verification Program showing its date, team members,
procedure
procedure etc.
etc.
GM
GM forwards
forwards the
the mail
mail to
to stores
stores &
& engg
engg
deptt.
deptt.

Physical
Physical Verification
Verification conducted
conducted onon the
the decided
decided date
date by
by the
the
respective team
respective team
Based
Based on
on the
the Physical,
Physical, a
a Taking
Taking Report
Report must
must be
be prepared
prepared signed
signed by
by the
the team
team
members and unit head
members and unit head

Such
Such Report
Report must
must be
be compared
compared with
with the
the FAR
FAR and
and differences
differences noted
noted along
along
with reasons
with reasons

Based
Based on
on differences
differences a
a Reconciliation
Reconciliation Statement
Statement must
must be
be prepared
prepared

Such
Such Statement
Statement must
must be
be presented
presented before
before higher
higher authority
authority
like CFO & ED
like CFO & ED

After
After their
their approval
approval necessary
necessary actions
actions to
to be
be taken
taken &
&
adjustments to be made in books
adjustments to be made in books
16 ABC Sugar Mills Ltd
 Physical
Physical
Report
V/s FAR
FAR
Report

Differences
Differences in
in FAR
FAR &
& Physical
Physical Verification
Verification ::

Found
Found in
in Found
Found in
in
FAR
FAR but not
but not Physical
Physical but
but
in
in Physical
Physical not
not in
in FAR
FAR

Acquisition
Acquisition
Misappropriat
Misappropriat entry
entry not
not
ion
ion of
of Asset
Asset done
done in
in FAR
FAR
Asset
Asset sent
sent Installation/
Installation/
out
out on
on Inspection
Inspection
Wrong returnable Pending
Wrong Entry
Entry returnable
Asset Pending
or basis Asset recd.
recd.
or Double
Double basis
Through
Entry Through
Entry In
In FAR
FAR inappropriate
inappropriate
Asset procedure
Asset has
has Sale/
Sale/ Transfer
Transfer procedure Asset
Asset recd
recd via
via
been
been entry
entry omitted
omitted inter unit
inter unit
Scrapped
Scrapped in
in FAR
FAR transfer
transfer

17 ABC Sugar Mills Ltd

 AS
AS 6
6 Accounting
Accounting for
for
Depreciation
Depreciation

AS
AS 10
10 Accounting
Accounting for
for Fixed
Fixed
Assets
Assets

AS
AS 11
11 Accounting
Accounting for
for effects
effects
of change in Foreign
of change in Foreign
Exchange
Exchange Rates
Rates
Accounting
Accounting
Standards
Standards
related
related to
to Fixed
Fixed AS
AS 16
16
Borrowing
Borrowing Cost
Cost
Assets
Assets

AS
AS 26
26 Intangible
Intangible Assets
Assets

AS
AS 28
28 Impairment
Impairment of
of Assets
Assets

18 ABC Sugar Mills Ltd

 Companies
Companies (Auditors
(Auditors Report)
Report) Order
Order (CARO),
(CARO), 2003
2003

As
As per
per paragraph
paragraph 4(I)
4(I) of
of this
this order,
order, an
an auditor
auditor is
is required
required to
to comment
comment on on
proper
proper maintenance,
maintenance, physical
physical verification
verification and
and major
major disposal
disposal in
in relation
relation to
to fixed
fixed
assets
assets during the financial year. Therefore CARO 2003, requires a Company to
during the financial year. Therefore CARO 2003, requires a Company to ::

Maintenance
Maintenance of
of proper
proper Major
records showing: Physical
Physical verification
verification Major Disposal
Disposal of
of
records showing: Fixed
Fixed Assets
Assets

Description
Description of
of Asset
Asset
Categorization 1.
1. At
At Regular
Regular
Categorization &
& Location
Location Intervals Proper
Proper Accounting
Intervals (at
(at least
least 1.
1. Accounting
of
of Asset
Asset once
once in
in three
three 2.
2. As
As per AS 1,
per AS 1, if
if this
this
years)
years) affects going
affects going
Purchase
Purchase Details
Details 2.
2. Report
Report preparation
preparation concern
concern then
then its
its
Depreciation
Depreciation Details
Details showing
showing material
material proper
proper expression
expression in in
discrepancies
discrepancies financial statements
financial statements
Revaluation/Impairment
Revaluation/Impairment 3.
3. Proper
Proper adjustment
adjustment is
is necessary.
necessary.
Details
Details of
of these in
these in the
the
Details
Details regards
regards Sale,
Sale, books
books
Discarding
Discarding & Destruction of
& Destruction of
Asset
Asset
19 ABC Sugar Mills Ltd
Activity Wise Responsibility Chart
What ? How ? Who ? Authorized By ? Reviewed By? Review Period ?
Budget Refer Slide Finance Chief Financial Executive Once in Three
Preparation No. 4 Deptt Officer (CFO) Director Years
Budget v/s
Refer Slide Finance Chief Financial Executive At the end of
Actual
No. 4 Deptt Officer (CFO) Director year
Comparison
Refer Slide Purchase Chief Financial Executive
Acquisition Yearly
No. 5 Deptt. Officer (CFO) Director
Refer Unit
Accounting Slides 6 Accounts Deptt. Head Unit Head (GM) Quarterly
11 Deptt
Asset Unit
Refer Slide
Tagging & Accounts Deptt. Head Unit Head (GM) Yearly
No. 12
Coding Deptt
Refer Unit
FAR Finance
Slides 13- Accounts Deptt. Head Yearly
Updating Manager
15 Deptt
Refer Physical
Physical Chief Financial Once in Three
Slides 16- Verification Unit Head
Verification Officer (CFO) Years
18 Team
CARO & AS Refer Slide Accounts HO Accounts Chief Financial
Yearly
Compliance 19 & 20 Deptt. Deptt. Officer (CFO)

20 ABC Sugar Mills Ltd