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Servicing Equipments

ankur pisolkar (student) (26 Points)

20 August 2009

Servicing equipments are normally capitalised in Indian GAAP whereas in IFRS they are carried as inventory and recognised in income statement as consumed.

Can anybody give me an example of a servicing equipments of such kind?

Also would appreciate if anyone can share differences he/she knows between IFRS and Indian GAAP regarding inventory valuation, i.e. AS2

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3 Replies

C.A Rohit Gambhir (C.A) (275 Points)
Replied 20 August 2009

A Comparision between various GAAPs'

Inventories

Definition

All four frameworks define inventories as those: held for sale in the ordinary course of business; in the process of production or for sale in the form of

materials; or supplies to be consumed in the production process or in the rendering of services.

Measurement

IAS

Carried at the lower of cost or net realisable value (being sale proceeds less all further costs to bring the inventories to completion). Reversal

US GAAP

replacement cost subject to an upper limit of net realisable value and a lower limit of net realisable value less a normal profit margin.

Reversal of a write down is prohibited.
Broadly consistent with IAS, in that the lower of cost and market value is used to value inventories. Market value is defined as being current
UK GAAP
Similar to IAS.
Indian GAAP

Formula for determining cost

Method IAS US GAAP UK GAAP INDIAN GAAP
Similar to IAS.
LIFO.

FIFO.
Ö (i) Ö Not permitted Not permittedÖ Ö Ö Ö
Weighted average

cost.
Ö Ö Ö Ö
GAAP differences

Comparison of GAAP requirements under IAS, US, UK and India

(i) Allowed alternative : Where an entity values inventory using LIFO, it must quantify and disclose the difference between that method and either the lower

of : the benchmark treatment (either FIFO or weighted average) and net realiasable value; or the lower of current cost at the balance sheet date and

NRV.

Consistency of the cost formula for similar inventories

ssets

IAS
Requires that an entity must use the same cost formula for all inventories having a similar nature and use to the entity.
US GAAP
Similar to IAS.
UK GAAP
Not specified, but consistency is a fundamental principle.
Indian GAAP

Allocation of fixed overheads

IAS
Similar to UK GAAP.Any allocation of fixed production overheads is based on normal capacity levels, with unallocated overheads expensed as incurred.
US GAAP
In limited circumstances idle capacity costs may also be absorbed into inventory costs.
UK GAAP
Similar to IAS.
Indian GAAP
Similar to IAS.
REFERENCES: IAS:
IAS 2, SIC-1. US GAAP: ARB 43. UK GAAP: SSAP 9. Indian GAAP: AS 2

is required for a subsequent increase in value of inventory previously written down.

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C.A Rohit Gambhir (C.A) (275 Points)
Replied 20 August 2009

Regarding Servicing Equipment :

If the cost of servicing equipment is significant in relaion to the Cost of PPE only then Servicing Equipment needs to be capitalised otherwise you may book these under inventory and charge off to P&L as and when consumed.

Example :

In case of Oil filling Machine you may capitalised this but small servicing equipment like screew drivers, etc. No need to capitalised take these to inventory and charge off as and when consumed.

Regards