Fixed asset schedule is the detailed document/supporting document that discloses the total fixed assets of the company. In IGAAP the fixed assets were shown as fixed assets in non-current assets shown in below snapshot.
In IND-As now it is reflected as “Plant, property and equipment” shown in below snapshot.
Like every line item in a financial statement detailed disclosure about how the numbers have been calculated to be reported on the balance sheet is provided through footnotes.
We have taken 1 example of Plant, Property & Equipment footnote below.
You’ll find 3 main headings in the schedule (shown in below snapshot)
1) Gross block/ Deemed cost of asset.
2) Depreciation/ Amortization
3) Net Block: Net block = Gross – Depreciation.
As per accounting standard assets are reported on the balance sheet on “Closing Net Values”.
Closing Net Value is also called as “Closing Net Block” = Closing Gross Block - Accumulated Depreciation till date.
So see how this works look at how footnotes and reported line items on the balance sheet get connected in the below snapshot.
Now if we move forward there are three critical things in asset schedule
1) How is the closing gross block calculated?
2) What is Depreciation & Accumulated Depreciation?
3) How is Closing Accumulated Depreciation Calculated?
Let’s focus on the first thing that is understanding calculation of closing gross block value in the footnote. We will once again use the above snapshot
If you look properly into above snapshot you’ll see the gross block contains 4 sub headings +
1) Two Openings Value of every asset individually (Deemed cost of the asset)
As per Accounting standards company has to provide book value of asset a.k.a purchase price of an carrying asset of previous 2 years like shown in the above snapshot. For example in the above snapshot as the closing year is FY 19 the following two opening balances will be indirectly closing balances of FY 18 and FY 17.
But as an analyst our keen focus should be on Just current Years’ opening which will be nothing but closing balance of FY 18. In cera that is 30933.22 Lakh for Plant & Equipment.
Additions means how much the company's assets have increased during the year. Additions column increases due to 4 factors:
a) If CWIP has been completed and asset is ready to use then it will transfer from CWIP to additions.
b) Asset whose construction started and got completed during current year itself.
c) If the company has purchased some ready made asset during the year.
d) Any accounting standard impact due to which asset got revalued on the upside (this does not represent any cash inflow or outflow it’s just an accounting entry).
But to identifying whether a company has purchased an asset or it has been re-valued then you need to check company’s CFI (cash flow from investing) as purchasing entry would be there and if the any asset has been revalued then the entry will directly go to OCI (other comprehensive income) or P&L which will balance the Asset = Liability + Equity equation.
Note: Additions in assets is not always equal to cash outflow shown in CFI, Many times assets may have got transferred from CWIP to Addition if they are ready to use.
3) Disposal/Adjustments: This will include two things
a) Gross Value of any asset sold during the year.
b) Any fair value adjustment done in the value of assets (this does not represent any cash inflow or outflow it’s just an accounting entry).
One important thing to note is the deletion number shown in the above gross block is the purchase value of that asset sold, not the selling value. No matter whether an asset has been sold on gain/ loss, gross block deletion will only depict its cost price.
Let us understand the above statement using numbers. Imagine a company who’s gross block is worth 100 crore. And the company sold one of it’s asset and the detail for that asset is:
Purchase Price for that asset: 10 crore
Accumulated Depreciation of that asset till date: 6 crores
Net Block: 4 crore (Purchase price - Accumulated depreciation)
Selling price for that asset: 2 crore.
What do you think after selling this asset the gross block looks like? In the deletion subheading what will the company report 2 crore? 4 crore? 6 crore or 10 crore?
Deletion section would contain the cost price of the asset which has been sold i.e. 10 crore. To identify how much cash was actually generated after selling the asset rather than looking at Footnote we will have to read CFI section of cash flow statement where “Sale of Asset” are reported by company and this value is the actual sales prices.
So in conclusion
Closing gross block becomes = opening gross block + additions -deletions/adjustments. Let us try to calculate from the above snapshot for one asset - Plant & Equipment.
Opening Gross Block for plant and equipment (31st March 2018) = 30933.22
Additions in Plant and equipment during the year = 1188.34
Disposal/ adjustment during the year = (726.64)
So Closing gross block for the year (31st March 2019) = 31394.92 (30933.22 + 1188.34 + (726.64).
Read our next blog on Decoding Fixed asset schedule part 2