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Query on Machinery Replaced !!!

Posted by Radhika Jalan in May 13th   

Dear Fellow Members

I have a query on which i seek your expert opinion.

Facts of Case

One of my client got a machinery installed and there was a clause of performance gurantee in the contract with vendor.Now after 3 years the performance was not meeting the guranteed performance and the vendor replaced the machinery with brand new machinery.

The amount of machinery is material Rs. in crores.

Query

What should be the accounting treatment in the books of accounts of the client considering all applicable Accounting Standards and ICAI Pronouncements.
Kindly give the reference of Any Accounting Standard or pronouncement if applicable.

–
Thanks and Regards

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4 Comments

Akash Said,
May 13th, 2006 @8:08 pm  

Hi Radhika,
As per the provided details, in my opinion the Net book value of the Old machine is to be treated as the Book Value of the replaced machine(which is apparently to be of the similar nature).
This treatment can get covered under AS-10 which deals with the same situation in case of Exchange assets.
This is my opinion.
ciao,
Bye

mygif
Shashank Said,
May 14th, 2006 @9:27 am  

this is good to learn that vendor honored the commitment after 3 years. ;)

mygif
Varun Jain Said,
May 14th, 2006 @8:46 pm  

Hi All,

This was my query…. and in search of the answer asked this from many of my learned collegues… and what they say…

As per Indian GAAP (AS-10) the asset is recorded at the historical cost.. not at the fair market value…
though there is a clause of revaluation of assets but that is for either
a) True and Fair pictue of accounts,or
b) To show in the books at the Replacement cost.

what can be done , considering the AS aplicability… we cn record the asset at the historical amount only but at the same time we can revalue that replaced asset .
Now, My Depreciation expense (Hitting the P/L A/c) will be the same, also the replaced value is reflected.

A disclosure should be given in the notes.

mygif
shashank Said,
May 15th, 2006 @5:39 pm  

Dear All,
As per AS-10 point no.11.1
11.1 When a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. It may be appropriate to consider also the fair market value of the asset acquired if this is more clearly evident. An alternative accounting treatment that is sometimes used for an exchange of assets, particularly when the assets exchanged are similar, is to record the asset acquired at the net book value of the asset given up in each case an adjustment is made for any balancing receipt or payment of cash or other consideration.

mygif

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