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Fixed assets capitalization

Nitika mehta (article) (50 Points)

11 September 2013

Dear All,

Is it allowed to capitalize Assets having working life of around 6 months if they are highly expensive items & huge quantity is purchased (Toatal cost being 70 lacs approx). Request you all to share relevant provisions in detail.

Thanks

Regards,

Nitika Mehta

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7 Replies

Ankit (CA, CS) (3064 Points)
Replied 11 September 2013

Dear Nikita,

Ideally, the capitalization should be done when the life of the incoming asset exceeds 1 year. Hence, the factors deciding whether an asset should be capitalized or no, is not the amount of the expense, but whether it increases the life of the asset or, the profitability of the company.

Since in your case, the life itself is 6 months, I don’t think it will be correct capitalize the same.

Ankit

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Ramanuj (Accountant.) (834 Points)
Replied 11 September 2013

yes agree with Mr.ankit

Rajesh (Service ) (7576 Points)
Replied 11 September 2013

If the firm getting benefits from this machines in subsequent year than you can charge this amount as deferred revenue expenses.

Harsh (article) (23 Points)
Replied 11 September 2013

What will be the treatment if we purchase a tool of rupe 5000 for a exitng machine that tool increase the effciency of the machine. Wil be capitalise it or nt

Ganesh - ACA, LCS (-) (183 Points)
Replied 11 September 2013

Originally posted by : Nitika mehta
	Dear All, Is it allowed to capitalize Assets having working life of around 6 months if they are highly expensive items & huge quantity is purchased (Toatal cost being 70 lacs approx). Request you all to share relevant provisions in detail. Thanks Regards, Nitika Mehta

Dear Nikita,

My opinion is as follows:

any money paid/expensed can be capitalised only if, it increases the existing capacity of the asset & provides tangible future benefits to the company.

So, the amount spent on purchase is immaterial & irrelevant for the purpose of deciding whether to capitalise the expense or not.

Since the asset itself has a life of 6 months, it can be very well presumed that the benefits accruing from it shall certainly not last beyond its useful working life.

So the question of capitalisation does not arise at all, in this case.

Regards.

ganesh shanbhag