Capitalisation of lifts

Dear Sreenivasulu,

You have interpreted the case in a right way. As far as my opinion is concerned, you have to rework the depreciation on the lifts in 08-09 and give the effects to the accounts accordingly and disclose the same under change in accounting policies. 

CA Anand Patankar

Everything depends upon how you interpret the word integral part of it. For example, a building has to be serviced by let us say, electrical lines. They will not be considered as integral part of building, but as electrical installation. Similarly, though a lift may be servicing the building, yet it is an appliance and has to be treated as such. For, a building can exist independent of the appliance.

Dear S.Srinivasaghavan, Buliding can exist independently but lift cant. Here question is of lift as a integral part. Can a lift work without a building Dear CFO Sahab....

Notwithstanding the original capitalisation, I feel that charging the expenditure on new lifts to repairs and maintainance is incorrect. Instead it should be capitalised since the new lifts are going to give enduring benefit and the WDV of Original lifts should be written off to Profit and Loss Account. If the expenditure on new lift is debited to profit and loss account it may not be allowed as an deduction under Section 37(1) of Income Tax Act, 1961.

Since there is considerable time gap between the period in which original lifts were capitalised (November 1985) and new lifts are installed (November 2007), the WDV of original lifts would hardly have remained any significant amount. The charge of depreciation in respect of new lift would be determined according to its useful life. It would not be wrong to say that though lift is an integral part of the building, its useful life is relatively less than that of building. It may therefore be depreciated at a higher rate.

Mr. Subhankar, Under the component asset accounting as per IFRS you are correct. As you visulised the original lifts net block value is zero. When we are going by the creation of asset, within the asset some components may not have the same life of the asset even then we are capitalising the same. For example in a printer a ribbon catridge is having a small life. But you are not giving separate life for that. We cannot adopt a different accouting merely because of high values involved. Kindly offer your comments.

Dear Mr. Sreenivasulu,

I accord with your views as far as the example cited by you is concerned, that printer ribbon is not to be recognised as separate asset. I also agree that principle shall prevail over the value of transaction.

However the lifts in question require a different consideration. The printer ribbons are essentially in nature of inventory of items of stationary.

As stated in paragraph 12 of Accounting Standard 10 - Accounting for Fixed Assets issued by Institute of Chartered Accountants of India 

12.1 Frequently, it is difficult to determinewhether subsequent expenditure related to fixed asset represents improvements that ought to be added to the gross book value or repairs that ought to be charged to the profit and loss statement. Only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity.

12.2 The cost of an addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is usually added to its gross book value. Any addition or extension,which has a separate identity and is capable of being used after the existing asset is disposed of, is accounted for separately.

Installation of new lifts entails the future benefit in the sense that they would provide such a service for a long period which is not possible to be obtained though currently installed lifts.
Replacement of equipments of lift is generally very irregular and rare event as opposed to the example of printer ribbons, which are replaced very frequently. The old lifts that were capitalised at the time of their installation should be written off to profit and loss account as that asset has ceased to exist or it has been impaired.

Therefore it will be clear from above paragraphs, it is expedient that the installation of new lifts be capitalised.

Kindly cite the references from International Financial Reporting Standards you referred to in your post. Further a company to which provisions of Companies Act, 1956 are applicable may take a view that it is not mandatory for it to follow International Financial Reporting Standards.
 

Dear Mr. Sreenivasulu,

I accord with your views as far as the example cited by you is concerned, that printer ribbon is not to be recognised as separate asset. I also agree that principle shall prevail over the value of transaction.

However the lifts in question require a different consideration. The printer ribbons are essentially in nature of inventory of items of stationary.

As stated in paragraph 12 of Accounting Standard 10 - Accounting for Fixed Assets issued by Institute of Chartered Accountants of India 

12.1 Frequently, it is difficult to determinewhether subsequent expenditure related to fixed asset represents improvements that ought to be added to the gross book value or repairs that ought to be charged to the profit and loss statement. Only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity.

12.2 The cost of an addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is usually added to its gross book value. Any addition or extension,which has a separate identity and is capable of being used after the existing asset is disposed of, is accounted for separately.

Installation of new lifts entails the future benefit in the sense that they would provide such a service for a long period which is not possible to be obtained though currently installed lifts.  Replacement of equipments of lift is generally very irregular and rare event as opposed to the example of printer ribbons, which are replaced very frequently. The old lifts that were capitalised at the time of their installation should be written off to profit and loss account as that asset has ceased to exist or it has been impaired.

Therefore it will be clear from above paragraphs, it is expedient that the installation of new lifts be capitalised.

Kindly cite the references from International Financial Reporting Standards you referred to in your post. Further a company to which provisions of Companies Act, 1956 are applicable may take a view that it is not mandatory for it to follow International Financial Reporting Standards.