Should a demo machine be treated as Fixed Asset or Inventory

This query is : Resolved

Neha L. Jain (Querist)
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24 May 2008 X company is dealing in software & Technologies. They have a Demo machine manufactured in house and is considered as Fixed Asset. This machine is being sent to clients for trials in order to grab orders from the clients(sales promotion). Moreover it is not held for sale in the ordinary course of business. Now the query is that what should be the treatment of Demo machine in the book of the company.Should it be considered as inventory or fixed asset?

Satish K Sekhar.ACCA

Satish K Sekhar.ACCA (Expert)
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24 May 2008
It is your fixed asset as you are recieving business benefits from the asset over a long period of time. Therefore it is not revenue in nature and to be capitalized. Depreciation to be charged at the prevailing rates, which \i hope you may be aware of.

mayur

mayur (Expert)
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24 May 2008 hi neha,
to constitute an fixed aseet it must fulfill criteria as per accunting standard 10(fixed asses),
criteria are:-
1)that assest must have limited life, 2)used in procuction of manufacture of product or used in providing services,and 3)use for more than one accounting period
now as per ur query,
as my personal opinion that demo machine does not fulfiling 2nd criteria as it used to marketing of product and not in production or manufacture or providing services, therefore it shall not be treated as fixed assets as well as inventory but classified under current asses with proper heading and systematically amortised over useful life of an asset,i think case is similar to coldrinks glass bootles as there are returned to manufacturing company and gas cylinders for petrolium companies.

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S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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25 May 2008 This is no doubt a fixed asset used for carrying on the business, having life extending beyond one year.

Satish K Sekhar.ACCA

Satish K Sekhar.ACCA (Expert)
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27 May 2008 I beg to differ with the opinion of Mr. Mayur on following grounds:-

1. No tangible assets can be calssified under current assets and apply amortization method to it.
2.You view on the demo machine does not fulfilling the creteria as it is not directly used in the production or manufacturing or providing services, is in my opinion a conclusion as a result of plain reading of clause no.6 Defenitions of IAS 10.

"The said definition says an asset held with the intention of being used for the purpose of producing or providing goods or services AND IS NOT HELD FOR SALE."

If we go with the plain intrepretation of this defenition then other than factory building, plant & machinery no company will have any other fixed assets to show in thier books of accounts. In my opinion this defenition must be intrepretted as all assets, which has a reasonable life beyond a year, of a company being used to conduct the normal course of thier business and not held for sale are to be treated as fixed assets and must be charged depreciation.

It is also necesary to read this defenition with clause No.8, Identification of Fixed Assets. In this case it is proved beyond doubt of the existence of a tangible asset which is used for marketing purpose of the company and can be traceable against the normal course of business.