Whether to treat LPG cylinder as a fixed asset or stock item
This query is : Open
19 January 2011
I am writing with respect to gas filling company which brings LPG gas from third country and sell LPG gas in cylinders (cooking purpose). Cylinders are treated as fixed asset as per Income Tax Act. But as per International Accounting Standard Plant, Property and equipment, LPG cylinder neither falls in criteria of definition. So my firm's view is to treat it as stock item and charge impairment loss over its life (apparently 15 years) from the date of use.
So I want opinions of expert in this regard.
So I want opinions of expert in this regard.
19 January 2011
As per Indian standards AS-10 has to be followed till IFRS is implemented.If this observation is acceptable, pl read the opinion in http://www.knowledgebible.com/forum/showthread.php/5141-Accounting-and-auditing-practices-Volume-19-Query-No.-29-Depreciation-on-low-cost-items-as-per-Schedule-XIV-to-the-Companies-Act-1956
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19 January 2011
agrred with the expert. few part of the link above are "\
Points Considered by the Committee
8. The Committee takes note of the requirement of Schedule XIV that where the aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less constitutes more than 10 per cent of total actual cost of plant and machinery, the rates of depreciation specified in item II of the Schedule should be applied to such items.
9. The Committee also notes that Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, requires (paragraph 25) that “fixed asset should be eliminated from financial statements on disposal or when no further benefit is expected from its use and disposal.” The above requirement of AS 10 implies that a fixed asset which is in use should continue to appear in the books of account and financial statements even if depreciation thereon has been provided at the rate of 100 per cent.
10. Considering the above, the Committee is of the view that the expression ‘aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less’ used in Note no. 8 of Schedule XIV should be construed to mean the aggregate cost of such items (i.e., those costing Rs. 5000 or less individually) as appearing in the books of account. As already stated in paragraph 9 above, the aforesaid figure would also include those low-cost items purchased and fully depreciated in earlier years which are still in use. The expression ‘total actual cost of plant and machinery’ should also be construed in a like-wise manner. If, in a year, the aggregate cost of low-cost items of plant and machinery works out to 10 per cent or less of the total actual cost of plant and machinery (both figures computed in the manner described earlier in this paragraph and including the low-cost items acquired during the year), depreciation in respect of low-cost items of plant and machinery acquired during the year should be provided at 100 per cent. If the threshold limit of 10 per cent is exceeded, the applicable rate of depreciation in respect of the aforesaid items would be the rate specified in Item II of Schedule XIV, i.e., 16.21 per cent on straight line basis in the instant case.
11. Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, requires (paragraph 24) that “all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed”. Accordingly, the Committee is of the view that the company should disclose its accounting policy relating to depreciation in respect of LPG equipment.
Points Considered by the Committee
8. The Committee takes note of the requirement of Schedule XIV that where the aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less constitutes more than 10 per cent of total actual cost of plant and machinery, the rates of depreciation specified in item II of the Schedule should be applied to such items.
9. The Committee also notes that Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, requires (paragraph 25) that “fixed asset should be eliminated from financial statements on disposal or when no further benefit is expected from its use and disposal.” The above requirement of AS 10 implies that a fixed asset which is in use should continue to appear in the books of account and financial statements even if depreciation thereon has been provided at the rate of 100 per cent.
10. Considering the above, the Committee is of the view that the expression ‘aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less’ used in Note no. 8 of Schedule XIV should be construed to mean the aggregate cost of such items (i.e., those costing Rs. 5000 or less individually) as appearing in the books of account. As already stated in paragraph 9 above, the aforesaid figure would also include those low-cost items purchased and fully depreciated in earlier years which are still in use. The expression ‘total actual cost of plant and machinery’ should also be construed in a like-wise manner. If, in a year, the aggregate cost of low-cost items of plant and machinery works out to 10 per cent or less of the total actual cost of plant and machinery (both figures computed in the manner described earlier in this paragraph and including the low-cost items acquired during the year), depreciation in respect of low-cost items of plant and machinery acquired during the year should be provided at 100 per cent. If the threshold limit of 10 per cent is exceeded, the applicable rate of depreciation in respect of the aforesaid items would be the rate specified in Item II of Schedule XIV, i.e., 16.21 per cent on straight line basis in the instant case.
11. Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, requires (paragraph 24) that “all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed”. Accordingly, the Committee is of the view that the company should disclose its accounting policy relating to depreciation in respect of LPG equipment.
20 January 2011
@ B.Chackrapani Warrier Yes I have read your link but I was just thinking out of the box what if we prepare financial statements as per IFRS, will it be appropriate to treat LPG cylinder as inventories and deposit received for those cylinder as current liabilities. Again here point to be noted is if we treat cylinder as fixed asset as per Income Tax Act can we treat related deposit as current liabilities. This is the question
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