Accounting for book value of fixed assets demolished for expansion purpose.
Facts:
A company is an infrastructure company, which is developing, constructing, operating and maintaining an international airport. The company has in its Fixed Assets Register (FAR), various assets, which include buildings and other infrastructure assets used for the airport operations. Depreciation is provided on straight line method (SLM) based on the useful life of the assets in line with the rates prescribed under Schedule XIV to the Companies Act,1956 which are considered as the minimum rates.
The company has stated that after three years of commencement of operations, the company is planning to expand the existing terminal building in order to cater to the increase in passenger traffic movement. Due to this, portion/part of the existing building and other infrastructure assets may have to be demolished. The book value of those assets are of material amounts. Net realisable values arising from disposal of those assets are not material. This demolition is required exclusively for the expansion of the terminal building. Kind of assets demolished includes : (a) part of building, (b) escalators, (c) furniture and fittings and (d) electrical installations.
Query:
On the basis of the above, the company has sought the opinion of Expert Advisory Committee on the treatment of the above value of assets in the books of the company?
Opinion:
The Committee notes that in the company’s case, the fixed assets register is being maintained wherein the details of various assets, viz., buildings, escalators, etc. are being recorded separately and , therefore, the assets which are being demolished can be identified separately. Further, it is understood from the Facts of the Case that the existing assets are being demolished and there is no intention to refurbish such assets. Further, these assets will not be used in future.
The Committee is also of the view that there could be the possibility of a time gap between the time when these assets are retired from their active use and the time when these are demolished/ disposed off. The Committee, considering AS 10
“Accounting for Fixed Assets”, is of the view that a fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal. Further, as per the requirements of AS 10, when an already existing fixed asset is demolished for constructing a new asset, it is the derecognition principles of AS 10, which are to be first applied to the existing asset before recognition of a new asset, irrespective of the purpose for which it has been demolished/ disposed off. Accordingly, the Committee is of the view that on disposal/demolition of the existing fixed assets, the carrying amounts of the portion/items of the fixed assets demolished/disposed off, should be eliminated from the financial statements and the gain or loss on derecognition, i.e., the difference between the net disposal proceeds (if any) and the net book value of such fixed assets, should be recognised in the statement of profit and loss.
As regards capitalisation of book value of the demolished asset to the cost of new asset to be constructed, the Committee is of the view that although demolition/disposal of the existing asset may be necessary for the construction of new asset, the demolished asset is not part of the construction activity and accordingly, can not be said to be directly related to the specific asset or attributable to the construction activity in general. Therefore, the book value of the demolished/disposal of asset should not be capitalised as part of the cost of the new asset.
