ACCOUNTING FOR FIXED ASSETS (A CASE STUDY OF COCA-COCA BOTTLING COMPANY PLC 9TH MILE CORNER)
The importance of fixed assets to any business organization could not be under rated. This is impossible. Fixed assets are normally acquired for use and not for sale in any producing company. Hence, the SAS 13 defines.
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Fixed assets as “property, land and equipment etc that have been acquired or constructed and held for use in the production or supply of goods and services and may include those held for maintenance or repairs of such assets and are not intended for sale in the ordinary course of business. Also lease holds rights over assets which meet the above criteria may also be treated as property, plant and equipment in certain circumstances. However, the foregoing definition is provided as a more guide only.
The SAS generally refers as fixed assets as those tangible resources of an enterprise which are employed in its operation. In many enterprises, these assets are coupled into various categories such as land and building, plant and machinery, equipment, furniture, fixtures and fittings vehicles etc.
Moreover, according to the SAS and its states that he accounting for property; plant and equipment can be done sign the historical cost concept and the revaluation of specific items of property, plant and equipment. It does not deal with the effect of changing prices in accounting for those assets.
A production or service life longer than one accounting period separates on item of plant and equipment from an item of supplies. An item of supplies may be consumed in a single accounting period and is consumed its cost is charged to the period of consumption. The productive life of an assets on the other hand is always longer than one period and as a result of the matching principles, its cost must be allocated to those periods in a systematic and rational manners.
- COMPONENTS OF ACQUISITION COSTS:
In general, the cost of an item of property, plant an equipment comprises its purchase price, including import and non-recurring levies (e.g. development levies consorts fee etc) and any directly attributable cost of bringing the asset to its intended sue. Any trade discounts and rebates are deducted in arriving at the purchase price.
The following are examples of elements of cost of different of property, plant and equipment.
2.1.1 LAND AND IMPROVEMENT
- Original purchase price
- Brokers of estate agent commissions
- Legal fees for examining recording and recurring tittle
- Cost of survey
- Cost of obtaining vacant possession.
- Payment of non-recurring levies on the land at date of purchase if payable by the purchaser
Moreover, the cost of demolishing any old structure (net of salvage) is sometimes added to the cost of land and sometimes to the cost of the building on the site. Also some additional costs may be incurred subsequent to purchase in order to improve the land for the infaded purpose.
Such costs which are often capitalized include the following;
- Filling and draining
- Clearing
- Hand scraping
- Grading and sub-dividing
- Access road etc.
BUILDINGS:
- Original Purchase price or cost of construction
- Cost of remodeling, reconditioning, or altering a building ot render it suitable for its intended use.
- Cost of excavating or filing of land for the specific building
- Foundation costs such as rock blasting pilling and retaining of cannot or underground stream.
- Cost of building parents
- Payment of development levies on the building at the date of purchase if payable by the purchase.
- Professional fees for design, supervision and management of the construction.
- Cost of temporary building used during the construction period less disposal proceeds.
At times, the cost of ancillary building plants such as lifts and air conditioning system etc are sometimes recorded separately form the cost of the building
PLANT AND EQUIPMENT
- Original purchase price or cost of construction
- Freight, import duties and handling charge
- Interest insurance changed
- Taxes and levies
- Cost of preparation of foundation insulation protective and other special levies.
- Commission including testing and running in costs in preparation for use
- If the dam is a second hand, one, the cost of republishing it for the intended use.
- RECOGNITION OF INTEREST ON DEFERRED PAYMENT CONTRACTS.
The acquisition of items property, plant and equipment may involve the deferent of payment and such future payment usually include an element of interest. However, interest accruing before the item of property, plant and equipment is put to use in added to the cost of the item. Other subsequent interest accruing before the item of property, plant and equipment is put to use is added to the cost of the item. Other subsequent interest expenses.
- COMPONENTS OF COST OF SELF-CONSTRUCTED PROPERTY.
Enterprises sometimes self construct, for their own use, building, plant and equipment, furniture fixtures and fitting usually save cost and meet unique specifications or utilize idle capacity.
The cost of elements of item of self constructed property plant and equipment are cost of materials, labour and overhead that are directly attributable to the construction less any trade discounts, rebates or internal profits.
Interest costs which are attributable to the period of contracting the item, are sometimes added to its cost. Other cost including costs of inefficiency in production of self.
Constructed items of property, plant and equipment such as idle. Capacity, industrial, industrial dispute and similar costs are expensed in the period in which they arise.
- CONSIDERATION OTHER THAN CASH
When an item of property, plant and equipment is acquired in exchange for another item of property plant and equipment, its cost is usually determined by reference to the value of the consideration given.
It may be appropriate to consider also the fair value of the item of property, plant and equipment. Particularly when the items exchanged are similar, is to record the item of property, plan and equipment at he net book value of the item given up. In each case, and adjustment is made for any braining receipts or payment of cash or other consideration.
When an item of property, plant and equipment is acquired interchanged for share, or other securities in the enterprise, if it’s usually recorded at its fair value or the fair value of the seniorities issued which ever is the more richly as certainable.
EXPENDITURE SUBSEQUENT TO ACQUISITION
Expenditure incurred subsequent to the acquisition of an items of property, plant and equipment is either capitalized or deemed to;
- Prolong the expected useful life of the item of property, plant and equipment.
- Improve significantly the performance of the item or enhance the quality of the output of the item
The type of expenditure that are usually capitalized because they meet any or all the criteria in the first paragraph, are:
- Major additions to existing items of property, plant and equipment and
- Major improvement
Any other expenditure is changed to the profit and loss account.
- AMOUNT SUBSTITUTED FOR HISTORICAL COST.
Sometimes, financial statements that are otherwise pampered on a historical cost basis include part or all of the property, plant and equipment at a valuation in substitution for historical cost and depreciation is calculated accordingly.
Such financial statements are to be distinguished from financial statement, prepared on a basis interned to reflect comprehensively the effects of changing priced.
“A commonly, accepted method of restating normally undertaken by professionally qualified values. Other methods sometimes added are indication and references of current pries”.
In practice, there are two methods of presenting revalued amounts of property, plant and equipment in financial statements. In the first method, both the gross account and the accumulated depreciated are restated in order to give a net book value equal to the amount revalued. Under the second method, the accumulated depreciation is eliminated while the gross book valve is adjusted to the newly established value.
When the second method is used, the accumulated depreciation is often eliminated by a credit either to revaluation surplus account or to income account. This later treatment is unacceptable because an improved revelation does not provide a basis for crediting to an income.
Account the accumulated depreciation scatting at the date of revaluation.
Different bases of valuation are sometimes used in the same financial statements to determine the net book value of the separate items within each of the categories of property, plant and equipment. In these cases it is useful to disclose the gross book value included in each basis.
Any surplus arising from a revaluation of an item of property, plant and equipment is usually credited to revaluation surplus account.
Revaluation deficits are usually charged to income the depreciation charge based on the new value of an item of property, plant and equipment is sometimes allocated between the historical of the item and the surplus arising on the revaluation of the item and are charged to income and the revaluation surplus accounts respectively. This practice is however, not generally accepted.
- RETIREMENT AND DISPOSAL
Items of property, plant and equipment that have been retired from active use or held for disposal are usually stated at the lower of their net book values or net realizable values. Any anticipated loss is immediately charged to income for the period.
When an item property plan and equipment is disposed of or released, it is eliminated from property, plant and equipment, and any gain or on the new value are changed to income.
It was equally changed that an asset should be recorded at the fear market value of what is given up to acquire it or at its own fair market value which ever is more clearly evident.
