A Private Limited Co. has purchased a dog for security purposes...
Should it be capitalised as a fixed asset?
Should it be debited to Profit & Loss Account as Security Charges?
Should it be treated as Deferred Revenue Expenditure?
Sumit B Choksi (CA Final) (422 Points)
12 July 2011
vipul patel
(Ahmedabad)
(320 Points)
Replied 12 July 2011
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 12 July 2011
Dear,
Animals are included in the definition of biological assets as per IAS 41. Biological assets are required to be stated in balance sheet at fair value.
Any gain/loss resulting from a fair valuation has to be refelected in profit and loss account.
Therefore, at the balance sheet date you will ascertain the fair value of the animal and incorporate the fair valuation in the balance sheet. Any increase or decrease from last fair valuation will be taken to profit and loss account as current period's gain or loss.
Bilogical asset could be categorized as long-term asset or short term asset in accordance with the management's intention to hold it or due to the nature of the asset. For example trees, if not intended to be sold are long term biological assets while trees, if intended to be sold are short term biological assets. But the crops which normally take only six months to mature (except sugarcane) are the short term bilogical asset.
For further clarity i would suggest you to go through IAS 41.
Best Regards,
Desperado.
Fixed Asset / Expenditure / Deferred Revenue Expenditure:-
1. Whether a Fixed Asset :- First Step : - At First checking if it is an asset at all ! : - An asset is a resource embodying economic value, which is in the control of the Entity. - As it meets out all the requriements, it is an asset.
Secondly :- Checking if it is a Fixed Asset ! :- As per AS 10, Fixed Assets are those assets held for use in production of goods, rendering of services or for adminstration prupose. :- The dog can be said to be used for administration purpose, it may be classifed as Fixed Asset.
2. Whether an Expenditure ? :- Now, why can the amount incurred on purchase of Dog not be debited to P&L account :- (1) The benefit out of the Expense is reasonably expected to be available for more than one accounting period. (2) Dogs employed in security works, don't come at insignificant cost, so as to apply the convention of materiality and omit it from recording as asset.
3. Whether a Deferred Revenue Expenditure ? :-Now, the problem with recording it as DRE:----- The Term "Deferred Revenue Expenditure" means an expenditure which is of revenue in nature, but from which benefit is expected to be available for more than one accouting period, and so we defer it. All the expenditures from which benefit for more than one accounting period is available are not 'Deferred Revenue Expenditure". To Qualify any exp. as DRE, it must be Revenue in Nature. The Amount incurred on purchase of Dogs not being revenue in nature can not be classified as DRE.
VIPIN KUTUMBALE
(TAX CONSULTANT)
(410 Points)
Replied 12 July 2011
ARE IT IS VERY SIMPLE, kutta APNE KO KATE TO PROFIT & Loss me aur kutta Chor ko kate to Fixed Assets. so wait till . ha ha
praveen
(Chartered Accountant)
(6971 Points)
Replied 13 July 2011
I think it will be best to write it off as expenditure.
RAJEEV
(article)
(156 Points)
Replied 13 July 2011
as per incometax act, no purchasing cost debited in p&lL a/c, but when animal discarded or dead then whole expenses is allowed and can be debited to profit & loss a/c.
thanks
Vikash
(Practitioner)
(21 Points)
Replied 13 July 2011
The above Expenditure cannot be capitalised because it does not increases the production capacity of the plant. Hence it has to be necessary charged to P&L A/C.
Mihir
(Wealth Manager)
(5293 Points)
Replied 13 July 2011
What about the food to be given to the Dog, and the vet expenses? Where will you debit that expenses? Purchase of dog should be an expenses.
MAHSHAD
(IPCC)
(42 Points)
Replied 13 July 2011
GOOD QUESTION SUMIT. THANK YOU .
WE SHOW A WATCH MAN WAGE/SALARY IN P & L A/C SIMILARLY WE SHOW THE DOG EXPENSE IN P & L A/C AS BOTH ARE FOR THE SAME PURPOSE.BUT THE DIFFERENCE IS WE CAN OWN A DOG BUT WE CANT OWN A WATCH MAN (ONLY WE CAN GET THE SERVICE OF A WATCH MAN).SO THE PURCHASE PRICE OF THE DOG CAN BE SHOWN AS ASSET AND ALSO IT SHOULD BE WRITTEN OF YEARLY CONSIDERING ITS NORMAL LIFE TIME.
ITS MY OPENION,IF THERE IS ANY MISTAKE IN IT PLEASE TELL ME. BECAUSE I AM JUST A LEARNER.
Desperado
(Cost And Management Accountant)
(129 Points)
Replied 13 July 2011
Dears,
There could be no "TWO WAYS", that is, It can neither be expensed out nor it could be regarded as a Fixed asset.
The aforesaid responses clearly indicate our unawareness from the IFRS, which is just to be applied.
Under the International Financial Reporting Standards (IFRSs), the animals are dealt with by International Accounting Standard (IAS)-41 'AGRICULTURE'.
IAS-41 includes the trees and animals in the definition of 'Biological Assets' and lays down complete guidance as to how these can be recognized, measured or derecognized.
The following is the verbatim quote from the IAS-41, where para 10 states;
QUOTE:
"An entity should recognise a biological asset or agriculture produce only when the entity controls the asset as a result of past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the asset can be measured reliably"
UNQUOTE:
Obviously, trees and animals are not part of Property, Plant and Equipment (fixed assets) as defined in IAS-16. However, there is a complete solution for their accounting treatement as assets (biological assets) for which readers are recommend to go through the IAS-41.
I am still stand on my earlier response, if you need clarification, let me know.
Best Regards,
Desperado.
GSTR 9 and 9C for FY 23-24 as amended by Notification 12/2024 dated 10th July 2024(with recording)
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