Fixed assets are things that a company owns for long-term use, like land, buildings, machinery, or furniture. Valuing these assets correctly is important for keeping financial records accurate, following legal rules, and making smart business decisions. In India, fixed asset valuation is guided by three main areas: accounting standards (Ind AS 16), company laws (Companies Act, 2013), and tax laws (Income Tax Act, 1961). Each has its own purpose and rules, and this explanation will break them down clearly to help you understand how they work together.
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Accounting Standards in Valuation of Fixed Assets
In India, companies that follow Indian Accounting Standards (Ind AS) use a rule called Ind AS 16 to value their fixed assets, like buildings, machinery, or equipment. This rule, set by the Ministry of Corporate Affairs (MCA), explains how to recognize, measure and report these assets in financial statements.
How Are Fixed Assets Recognized?
A fixed asset is recorded in the company’s books if:
It’s likely to bring economic benefits (like generating income or helping operations) in the future.
Its cost can be measured accurately.
The cost of a fixed asset includes:
The purchase price, including any import duties or non-refundable taxes, after subtracting any discounts or rebates.
Costs directly related to getting the asset ready for use, like transportation or installation.
Initial estimates of costs for dismantling or removing the asset, or restoring the site where it’s located, if applicable.
How Are Fixed Assets Measured After They’re Recorded?
Once a fixed asset is recorded, companies must choose one of two ways to value it over time. This choice must be applied consistently to all similar assets (e.g., all buildings or all machinery):
Cost Model: The asset is valued at its original cost minus any accumulated depreciation (the reduction in value due to wear and tear) and any impairment losses (if the asset’s value drops significantly). This is a simple method that shows how much the company originally paid for the asset, adjusted for its age and condition.
Revaluation Model:The asset is valued at its fair value (what it’s worth in the market today) at the time of revaluation, minus any depreciation or impairment losses that happen afterward.
Fair value is usually determined by professional valuers, especially for things like land or buildings. For machinery or equipment, the market value is preferred, but if there’s no clear market value (e.g., for specialized equipment), other methods like the income approach (based on future earnings) or depreciated replacement cost (cost to replace the asset today, adjusted for age) may be used.
Revaluations must be done regularly to ensure the asset’s recorded value stays close to its fair value. For assets with prices that change a lot, this might be done every year. For more stable assets, it could be every 3–5 years.
How Are Changes in Revaluation Handled?
When an asset’s value is revalued:
If the value increases, the extra amount is recorded in a special account called revaluation surplus (part of the company’s equity) under other comprehensive income. However, if the increase reverses a previous decrease that was recorded as a loss, it goes to the profit and loss statement instead.
If the value decreases, it’s recorded as a loss in the profit and loss statement. But if there’s already a revaluation surplus for that asset, the decrease can be taken from that surplus instead of being recorded as a loss.
When the asset is sold or no longer used, the revaluation surplus can be moved to retained earnings (another part of equity), reflecting the difference between depreciation based on the revalued amount and the original cost.
Depreciation and Impairment
Depreciation is when fixed assets lose value over time due to use or aging. This loss is spread out over the asset’s useful life (how long it’s expected to be useful). If an asset has major parts (like a machine’s engine), each part may be depreciated separately. Companies must review the asset’s useful life, residual value (what it’s worth at the end of its life), and depreciation method every year.
Impairment happens If an asset’s value drops significantly (e.g., due to damage or obsolescence), this loss is subtracted from its recorded value.
What Information Must Companies Share?
For each type of fixed asset, companies must report:
Whether they’re using the cost model or revaluation model.
The depreciation method (e.g., straight-line) and the asset’s useful life or depreciation rate.
The total value of the asset and its accumulated depreciation at the start and end of the financial period.
Any restrictions on owning the asset (e.g., if it’s used as collateral for a loan) or commitments to buy new assets.
Read to learn more about Merger and Acquisition Process
Legal Frameworks for Valuation of Fixed Assets: Companies Act, 2013
Apart from accounting, Indian law requires fixed asset valuations for certain legal purposes, like mergers, acquisitions, or deals with related parties. The Companies Act, 2013, particularly Section 247, sets rules for these valuations and introduced the concept of a registered valuer to ensure fairness and transparency.
When Is Valuation Needed?
The Companies Act requires valuation for things like property, stocks, shares, goodwill, or other assets (including fixed assets) during specific transactions, such as:
Mergers or acquisitions.
Deals between related parties.
Calculating a company’s net worth or liabilities.
Who Can Do the Valuation?
Since January 31, 2019, valuations under the Companies Act must be done by a registered valuer, as per the Companies (Registered Valuers and Valuation) Third Amendment Rules, 2018. A registered valuer must:
Be registered with the Insolvency and Bankruptcy Board of India (IBBI) under the Insolvency and Bankruptcy Code, 2016.
Have the required qualifications and experience, as outlined in the Companies (Registered Valuers and Valuation) Rules, 2017.
Be appointed by the company’s audit committee or, if there’s no audit committee, by the Board of Directors.
What Does a Registered Valuer Do?
A registered valuer must provide a fair and unbiased valuation, follow the rules carefully and use due diligence and avoid conflicts of interest, like valuing assets they have a personal stake in.
What Standards Do Valuers Follow?
Until the Indian government sets specific valuation standards, registered valuers can use:
Internationally accepted valuation methods.
Standards from professional valuation organizations.
Rules set by bodies like the Reserve Bank of India (RBI) or Securities and Exchange Board of India (SEBI).
This system ensures that valuations are trustworthy and protect everyone involved in major transactions.
Learn about the Principles of Corporate Governance.
Tax Laws for Valuation of Fixed Assets: Income Tax Act, 1961
When it comes to taxes, the Income Tax Act, 1961 focuses more on depreciation than valuation. However, valuation can still matter in some cases.
Depreciation for Tax Purposes
For tax purposes, fixed assets are usually valued at their historical cost (what the company paid for them).
Depreciation is calculated using the written-down value (WDV) method, where the asset’s value is reduced each year based on specific rates set for different types of assets (e.g., buildings, machinery, furniture).
This depreciation reduces the company’s taxable income.
When Is Fair Market Value Used?
In some cases, tax laws require the fair market value (FMV) of an asset, such as:
Related-party transactions: If assets are transferred between related parties, the tax authorities may require a valuation to ensure the transaction is fair.
Mergers or acquisitions: FMV may be needed to calculate taxes.
Capital gains: When selling an asset, the sale price is used to calculate capital gains tax, but the original cost (adjusted for inflation) or FMV may come into play.
In these cases, a registered valuer’s report may be required to determine the FMV.
Summary
In India, fixed asset valuation follows three frameworks: accounting, legal, and tax. Under Ind AS 16, companies use the cost model (original cost minus depreciation) or revaluation model (fair market value) for financial reporting. The Companies Act, 2013, requires registered valuers for transactions like mergers to ensure fairness. For taxes, the Income Tax Act, 1961, uses historical cost for depreciation, with fair market value needed for specific cases. These rules ensure transparent, compliant valuations for financial, legal, and tax purposes.
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Valuation of Fixed Assets: FAQs
Q1. How to do valuation of fixed assets?
Determine the asset's cost, depreciation, and market conditions. Use methods like cost, market, or income approaches, considering asset condition and useful life.
Q2. How do you calculate fixed asset value?
Fixed asset value = Original cost - Accumulated depreciation. Adjust for impairments or market value if needed.
Q3. What is the formula for asset valuation?
No single formula; depends on method. Common formula: Net Book Value = Cost - Accumulated Depreciation. Market or income approaches use different calculations.
Q4. What is the valuation model of fixed assets?
Common models include cost approach (historical cost minus depreciation), market approach (comparable sales), and income approach (future cash flows discounted).
Q5. What are the five methods of valuation?
Cost Approach: Based on original cost minus depreciation; Market Approach: Based on comparable market sales; Income Approach: Based on discounted future cash flows; Replacement Cost: Cost to replace the asset today & Liquidation Value: Value of asset is sold quickly.
